RBI Functions — Set 5

Correct Answer: C. Monetary policy transmission to borrowers

• **Monetary policy transmission to borrowers** = MCLR (Marginal Cost of Funds based Lending Rate) was introduced by the RBI in April 2016 to ensure that when the RBI cuts the Repo Rate, banks pass on the benefit to borrowers promptly and fully, improving monetary policy transmission. • **2016 — replaced Base Rate** — Before MCLR, banks used the Base Rate system introduced in 2010, which was slow to reflect RBI policy changes; MCLR links lending rates more directly to the current cost of funds, making transmission faster. • MCLR is calculated based on marginal cost of funds, operating costs, negative carry on CRR, and a tenor premium. • 💡 "The beauty of currency notes" is wrong because currency design is handled by the RBI's Issue Department and the Security Printing presses, not lending rate policy; "Bank profitability" is wrong because MCLR was designed to benefit borrowers, not to raise bank margins; "Government tax collection" is wrong because tax collection is managed by the Income Tax and GST departments, not the RBI.

Correct Answer: D. DICGC

• **DICGC** = Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the RBI, established under the DICGC Act, 1961, to protect bank depositors against loss of their deposits due to bank failure. • **Rs. 5 lakh cover** — DICGC insures all types of bank deposits (savings, fixed, current, recurring) up to Rs. 5 lakh per depositor per bank; this limit was enhanced from Rs. 1 lakh to Rs. 5 lakh in February 2020. • It charges a premium from insured banks (not from depositors) and settles claims when a bank is liquidated or reconstructed. • 💡 "SIDBI" is wrong because it is the Small Industries Development Bank of India focusing on MSME financing, not deposit insurance; "EXIM Bank" is wrong because it finances exports and imports, not bank deposits; "NABARD" is wrong because it is the National Bank for Agriculture and Rural Development — it refinances rural credit, not insures deposits.

Correct Answer: D. Targeting inflation in monetary policy

• **Targeting inflation in monetary policy** = Since 2016, the RBI uses the Consumer Price Index (CPI-Combined) as the primary measure of inflation for its monetary policy framework under the Flexible Inflation Targeting (FIT) regime, with a target of 4% (+/- 2%). • **CPI replaced WPI** — Earlier, the Wholesale Price Index (WPI) was used as the benchmark, but CPI was adopted because it better captures the prices actually experienced by consumers at the retail level, making it more relevant for household welfare. • The 4% CPI target is formally set by the Government of India in consultation with the RBI and reviewed every five years. • 💡 "Setting gold prices" is wrong because gold prices are determined by international commodity markets and the RBI does not fix them; "Calculating the national area" is wrong because that is a geographic survey function of the Survey of India; "Measuring the depth of the ocean" is wrong because that is a scientific function of the National Institute of Ocean Technology, entirely unrelated to monetary policy.

Correct Answer: B. Currency that has no intrinsic value but is legal tender

• **Currency that has no intrinsic value but is legal tender** = Fiat money is currency declared by the government to be legal tender — valid for settling all debts — even though the notes and coins themselves have little or no intrinsic commodity value. • **Legal tender guarantee** — Each RBI banknote carries the Governor's promise "I promise to pay the bearer a sum of Rs. X," and is backed by the government's authority and public trust, not by gold reserves (India moved off the gold standard fully by 1971). • The value of fiat money depends on the government's monetary discipline and RBI's credibility in controlling inflation. • 💡 "Digital cryptocurrency like Bitcoin" is wrong because Bitcoin is decentralized, not issued by any government, and is not legal tender in India; "Money made of gold" is wrong because gold-backed commodity money is the opposite of fiat — it has intrinsic value; "Money issued by private banks" is wrong because only the RBI (and the Government for coins and one-rupee notes) can issue legal tender in India.

Correct Answer: B. Financial Inclusion and Development Department (FIDD)

• **Financial Inclusion and Development Department (FIDD)** = FIDD is the specialized department within the RBI that focuses on bringing formal banking services to unbanked and underbanked populations, particularly in rural areas. • **Priority Sector Lending** — FIDD administers Priority Sector Lending (PSL) guidelines, which mandate that banks lend a prescribed portion of their credit to agriculture, MSMEs, weaker sections, and other priority areas; it also coordinates with NABARD on rural credit. • FIDD implements programmes like Jan Dhan Yojana's banking element and drives the Business Correspondent (BC) model for last-mile financial access. • 💡 "Legal Department" is wrong because it handles legal matters and litigation for the RBI, not financial inclusion programmes; "Monetary Policy Department" is wrong because it focuses on interest rate policy research and MPC secretariat functions; "Internal Debt Management Department" is wrong because it manages the government's domestic borrowing programme, not outreach to unbanked populations.

Correct Answer: C. It manages and maintains the country's reserves of foreign currencies

• **It manages and maintains the country's reserves of foreign currencies** = As custodian of foreign exchange, the RBI holds and manages India's Foreign Exchange Reserves, which include foreign currency assets, gold, Special Drawing Rights (SDRs), and the reserve tranche position at the IMF. • **FEMA oversight** — The RBI administers the Foreign Exchange Management Act (FEMA), 1999, regulating all foreign exchange transactions in India, and intervenes in the forex market to prevent excessive rupee volatility. • India's forex reserves serve as a buffer against external shocks and help maintain investor confidence in the economy. • 💡 "It determines the price of oil" is wrong because crude oil prices are set by global commodity markets (OPEC+), not the RBI; "It prevents Indians from traveling abroad" is wrong because the RBI regulates forex for economic stability, not to restrict travel; "It stores all the world's gold" is wrong because the RBI only holds India's gold reserves, not the world's — global gold is held by respective central banks.

Correct Answer: A. Central Government (Appointments Committee of the Cabinet)

• **Central Government (Appointments Committee of the Cabinet)** = The RBI Governor and Deputy Governors are appointed by the Central Government through the Appointments Committee of the Cabinet (ACC), which is the highest body for senior government appointments. • **RBI Act, Section 8** — Under Section 8 of the RBI Act, 1934, the Central Board of Directors includes the Governor and Deputy Governors appointed by the Central Government; the Governor's term is typically three years, renewable by re-appointment. • The process involves the Financial Sector Regulatory Appointments Search Committee recommending candidates before the ACC approves. • 💡 "The Supreme Court" is wrong because the judiciary has no role in executive appointments to regulatory bodies; "Prime Minister of India" is wrong because while the PM chairs the ACC, the appointment is made in the name of the Central Government (Cabinet), not the PM personally; "President of India" is wrong because the President's role is largely ceremonial and acts on the advice of the Cabinet — the appointment authority lies with the Cabinet, not the President directly.

Correct Answer: C. Commercial Banks, Co-operative Banks, and NBFCs

• **Commercial Banks, Co-operative Banks, and NBFCs** = The RBI's regulatory and supervisory authority extends across the full spectrum of financial intermediaries: all scheduled and non-scheduled commercial banks, regional rural banks, urban co-operative banks, and Non-Banking Financial Companies (NBFCs). • **Wide coverage** — This broad mandate ensures systemic stability across the entire financial sector; the 2020 amendment to the Banking Regulation Act brought cooperative banks more firmly under RBI oversight. • Stock exchanges and insurance companies are regulated by SEBI and IRDAI respectively, not RBI. • 💡 "Only Private Sector Banks" is wrong because RBI also supervises public sector banks, RRBs, and cooperative banks; "Only the Stock Exchange" is wrong because stock exchanges are regulated by the Securities and Exchange Board of India (SEBI), not the RBI; "Only Public Sector Banks" is wrong because RBI's regulation covers private banks, foreign banks, and NBFCs equally — it is not limited to the public sector.

Correct Answer: A. Rs. 10,000

• **Rs. 10,000** = Under Section 24 of the RBI Act, 1934, the RBI is empowered to issue banknotes in denominations up to Rs. 10,000; any denomination above this would require an amendment to the Act. • **Historical issuance** — Rs. 10,000 notes were issued in 1938 and again in 1954 but were demonetized in 1946 and 1978 respectively; they are the highest denomination ever put in circulation in India. • The Rs. 2,000 note introduced in 2016 is well within this legal ceiling and was itself withdrawn from circulation in 2023. • 💡 "Rs. 2,000" is wrong because while the Rs. 2,000 is the highest denomination currently in existence (being phased out), the Act permits up to Rs. 10,000; "Rs. 20,000" is wrong because it exceeds the statutory limit of Rs. 10,000 and would require an Act amendment; "Rs. 5,000" is wrong because while Rs. 5,000 notes existed historically, they are not the maximum the Act allows — the correct ceiling is Rs. 10,000.

Correct Answer: A. Cash Reserve Ratio (CRR)

• **Cash Reserve Ratio (CRR)** = CRR is classified as a direct (or quantitative direct) instrument of monetary policy because it mandates that banks hold a fixed percentage of their Net Demand and Time Liabilities (NDTL) as reserves with the RBI, directly reducing the funds available for lending. • **Mechanism** — When the RBI raises CRR, banks must park more funds with the RBI, directly shrinking their credit-creation capacity without any market-based price signal; in contrast, Repo and Reverse Repo are indirect instruments working through the price of money. • CRR currently earns no interest for banks, making it a costly compliance requirement that strongly influences lending behaviour. • 💡 "Open Market Operations" is wrong because OMO is an indirect instrument — the RBI buys or sells government securities in the open market, influencing liquidity through market prices; "Repo Rate" is wrong because it is an indirect instrument that works by changing the cost of borrowing, not directly restricting funds; "Reverse Repo Rate" is wrong because it too is an indirect instrument that influences banks' decision to park funds, not a direct mandate on reserves.