RBI Functions — Set 6

Correct Answer: A. Repurchase Agreements (Repo)

• **Repurchase Agreements (Repo)** = Under the Liquidity Adjustment Facility (LAF), banks borrow short-term funds from the RBI by selling government securities to the RBI with an agreement to repurchase them at a slightly higher price — this is a Repo transaction. • **Two-way facility** — LAF also works in reverse: banks can lend surplus funds to the RBI via Reverse Repo, where the RBI sells securities to banks and buys them back later; this two-way mechanism lets the RBI fine-tune daily liquidity. • LAF was introduced in India in 2000 and is the RBI's primary tool for day-to-day liquidity management in the banking system. • 💡 "Selling gold to the RBI" is wrong because LAF operates through government securities (G-secs), not gold transactions; "Taking fixed deposits from RBI" is wrong because the RBI does not offer fixed deposit products to commercial banks; "Issuing new shares" is wrong because equity issuance is a capital market activity and has no role in the RBI's liquidity management mechanism.

Correct Answer: B. Digital payment systems like NEFT, RTGS, and UPI

• **Digital payment systems like NEFT, RTGS, and UPI** = The Department of Payment and Settlement Systems (DPSS) of the RBI regulates and oversees all retail and large-value payment systems in India, ensuring they are safe, efficient, interoperable, and accessible. • **Payment and Settlement Systems Act, 2007** — DPSS derives its regulatory authority from this Act, which requires all payment system operators to obtain RBI authorisation; it covers NEFT, RTGS, UPI, credit cards, mobile wallets, and PPIs. • DPSS also publishes the Payment System Vision document, outlining the RBI's roadmap for the digital payments ecosystem. • 💡 "Individual bank salaries" is wrong because employee compensation is an HR function of each bank, not a regulatory matter for DPSS; "The export of spices" is wrong because agricultural commodity exports are overseen by APEDA and commerce ministries, not the RBI's payment department; "The construction of roads" is wrong because infrastructure development falls under NHAI and the Ministry of Road Transport, completely outside the RBI's domain.

Correct Answer: A. Ensuring banks have cash to pay depositors and controlling money supply

• **Ensuring banks have cash to pay depositors and controlling money supply** = CRR serves a dual purpose: as a safety buffer ensuring banks maintain sufficient liquid reserves to meet depositor withdrawals, and as a macroeconomic tool through which the RBI expands or contracts the money supply in the economy. • **Money multiplier effect** — By raising CRR, the RBI reduces the money multiplier, shrinking the amount of credit banks can create from each rupee of deposits; by cutting CRR, it injects liquidity, expanding credit availability. • CRR is maintained as cash in banks' current accounts with the RBI and earns no interest, making it a powerful but costly instrument. • 💡 "Funding the defense budget" is wrong because defense expenditure is financed through the Union Budget via direct tax revenues and borrowings, not CRR; "Paying the interest on national debt" is wrong because debt servicing is handled by the Ministry of Finance through the Consolidated Fund of India; "Providing profit to the RBI" is wrong because CRR-held funds earn no interest and are not a profit source for the RBI.

Correct Answer: A. Monetary Policy Department of the RBI

• **Monetary Policy Department of the RBI** = The Monetary Policy Department (MPD) of the RBI acts as the secretariat for the Monetary Policy Committee (MPC), providing all background research, economic data, inflation forecasts, and analytical support needed for the committee's bi-monthly policy decisions. • **Support role** — The MPD prepares the Monetary Policy Report, coordinates the MPC meetings, and monitors macroeconomic indicators between meetings to detect any need for an emergency rate action. • Separately, the MPD publishes the bi-monthly Monetary Policy Statement after each MPC meeting, communicating the rate decision and rationale to the public. • 💡 "Indian Banks' Association" is wrong because IBA is an industry body representing banks' interests, not a research secretariat for a regulatory committee; "Finance Ministry" is wrong because while the Finance Ministry nominates three of the six MPC members, it does not provide secretariat support; "NITI Aayog" is wrong because NITI Aayog is a policy think-tank for the government, not a functional arm of the RBI or its committees.

Correct Answer: B. The Governor of RBI

• **The Governor of RBI** = Under Section 45ZI of the RBI Act, 1934, each MPC member has one vote, but in the event of an equality of votes (a tie), the Governor of the RBI has a second or casting vote to break the deadlock and ensure a definitive policy decision. • **MPC composition** — The MPC has 6 members: 3 from the RBI (Governor, Deputy Governor in charge of monetary policy, and one RBI official) and 3 external members appointed by the Government; the casting vote provision ensures the Governor can never be outvoted in a tie. • Each member's vote and a written statement of the reasons for the vote are published in the minutes of the MPC meeting. • 💡 "The most senior member" is wrong because seniority is not a basis for a casting vote in the MPC — the Act specifically assigns this right to the Governor; "No one has a casting vote" is wrong because the RBI Act explicitly provides this right to the Governor in Section 45ZI; "The Finance Minister" is wrong because the Finance Minister is not a member of the MPC — the government nominates external members but does not sit on the MPC.

Correct Answer: C. Once every two months

• **Once every two months** = The RBI's Monetary Policy Committee meets bi-monthly — that is, once every two months — to review the monetary policy stance and decide on the Repo Rate and other policy parameters. • **Six meetings a year** — This results in six MPC meetings per financial year, allowing the RBI to respond to evolving macroeconomic data (inflation, GDP growth, global cues) at regular intervals while avoiding overly frequent policy disruptions. • In exceptional cases, the RBI Governor can convene an emergency MPC meeting outside the scheduled bi-monthly cycle, as was done in May 2022 when inflation surged unexpectedly. • 💡 "Twice a month" is wrong because that would mean 24 meetings a year, which is far too frequent for major monetary policy changes; "Once every three months" is wrong because quarterly (every three months) would mean only 4 meetings a year — bi-monthly (every two months) gives 6; "Once every month" is wrong because monthly meetings were the old system before the FIT framework; after 2016 the schedule became bi-monthly.

Correct Answer: D. Coins and One Rupee notes

• **Coins and One Rupee notes** = Coins and the one-rupee note are issued by the Government of India (Ministry of Finance) under the Coinage Act and are not obligations of the RBI; the RBI merely acts as an agent for their distribution across the country. • **Distinct legal status** — Because the RBI does not issue coins or one-rupee notes, it is not required to maintain any reserve (gold or foreign exchange) against them; the obligation to back these with reserves rests with the Government, not the RBI. • All other banknotes (Rs. 2 and above) are issued by the RBI under its Currency and Finance function, backed by the Minimum Reserve System. • 💡 "Rs. 100 notes" is wrong because Rs. 100 notes are issued by the RBI and require reserves to be maintained; "Rs. 500 notes" is wrong because Rs. 500 notes are also RBI-issued currency backed by the Minimum Reserve System; "Foreign currency notes" is wrong because foreign currency assets are part of RBI's reserves, not items against which reserves need to be exempted.

Correct Answer: C. Statutory Liquidity Ratio (SLR)

• **Statutory Liquidity Ratio (SLR)** = SLR is a quantitative instrument because it mandates all banks to maintain a prescribed percentage of their NDTL in specified liquid assets (government and approved securities, cash, or gold), directly controlling the volume of credit that banks can extend to the public. • **Quantitative vs. Qualitative** — Quantitative instruments (CRR, SLR, Repo, OMO) affect the total volume of credit in the economy, while qualitative instruments (margin requirements, credit rationing, direct action, moral suasion) affect the direction or type of credit. • SLR also ensures a captive market for government securities and acts as a buffer of liquidity during stress. • 💡 "Direct Action" is wrong because it is a qualitative tool — the RBI's power to restrict or penalise specific non-compliant banks, not a system-wide volume control; "Margin Requirements" is wrong because they are a qualitative/selective tool — they restrict credit against specific securities or sectors, not the total volume of bank credit; "Moral Suasion" is wrong because it is a qualitative tool that relies on the RBI's persuasive authority to guide banks, not a statutory mandate enforced on the money supply.

Correct Answer: D. Issue currency notes

• **Issue currency notes** = The "Bank of Issue" function means the RBI has the sole authority and monopoly to print and issue currency banknotes in India, as granted under Section 22 of the RBI Act, 1934. • **Uniformity and trust** — Giving the monopoly of currency issuance to one institution ensures that all notes in circulation are uniform in quality, forgery-resistant, and backed by mandated reserves, creating public trust in the currency. • The only exception is the one-rupee note and coins, which are issued by the Government of India, not the RBI. • 💡 "Appoint bank CEOs" is wrong because bank CEO appointments are made by bank boards and the government (for public sector banks) — the RBI has approval rights but not appointment rights as a monopoly function; "Open bank branches" is wrong because branch expansion is decided by individual banks subject to RBI's branch licensing policy, not a monopoly power of RBI; "Sell gold" is wrong because gold sales are managed by the government and international markets — the RBI holds gold as a reserve asset but does not sell it commercially.

Correct Answer: A. Monetary Policy

• **Monetary Policy** = Monetary Policy is the primary tool the RBI uses to control inflation by adjusting key interest rates (Repo Rate) and reserve ratios (CRR, SLR), which regulate the cost and volume of money and credit in the economy. • **Transmission chain** — When the RBI raises the Repo Rate, borrowing becomes costlier for banks, who in turn raise lending rates; this reduces consumption and investment spending, cooling demand-side inflationary pressure. • Since 2016, the RBI formally targets 4% CPI inflation (+/-2%) under the Flexible Inflation Targeting framework, giving monetary policy a legally defined objective. • 💡 "Collection of data" is wrong because data collection (publications like the Handbook of Statistics) supports analysis but does not itself control inflation — it is a supporting, not an active, function; "Auditing of companies" is wrong because corporate auditing is the domain of the Ministry of Corporate Affairs and ICAI, not the RBI; "Custodian of gold" is wrong because holding gold reserves is a balance-sheet function that has no direct mechanism to influence price levels in the domestic economy.