RBI Functions — Set 7

Correct Answer: C. Managing the government's bank accounts

• **Managing the government's bank accounts** = The RBI acts as the official banker and financial agent for both the Central and all State Governments, maintaining their accounts for revenue and expenditure. • **Legal basis** — Section 20 of the RBI Act, 1934 makes it compulsory for the RBI to transact the government's banking business; this includes extending Ways and Means Advances (WMA) — short-term credit — to bridge temporary revenue shortfalls. • This role ensures that government finances are managed by an autonomous central institution rather than a commercial bank, preserving fiscal discipline. • 💡 Option A (Collecting income tax) is wrong because tax collection is the job of the Income Tax Department under the Ministry of Finance, not the RBI. Option B (Paying salaries of all citizens) is wrong because the RBI never directly disburses salaries to individuals; that is handled by individual employers or treasury offices. Option D (Giving advice on personal investments) is wrong because advising private citizens on investments falls under SEBI and licensed financial advisors, not the RBI.

Correct Answer: B. Commercial Banks

• **Commercial Banks** = As Lender of Last Resort, the RBI provides emergency liquidity to commercial banks that cannot raise funds from any other source, thereby preventing bank failures and protecting depositors. • **Rate and mechanism** — The RBI extends this facility at the Bank Rate (the penal rate), which is higher than the regular Repo Rate, signalling it is a crisis measure and not routine borrowing. • This function is critical for systemic stability: it stops a liquidity crisis at one bank from triggering a system-wide bank run and mass panic among depositors. • 💡 Option A (Foreign governments) is wrong because the RBI has no mandate to lend to foreign sovereigns; that is the domain of international institutions like the IMF. Option C (General public) is wrong because the RBI is a banker's bank and does not lend directly to individuals or households. Option D (Insurance companies) is wrong because insurance firms are regulated by IRDAI, not the RBI, and they do not access RBI's emergency lending windows.

Correct Answer: D. Shaktikanta Das

• **Shaktikanta Das** = Shaktikanta Das is the 25th Governor of the Reserve Bank of India — an IAS officer of the Tamil Nadu cadre (1980 batch) and a former Economic Affairs Secretary who steered monetary policy through multiple economic crises. • **December 2018** — He was appointed on 11 December 2018 following Urjit Patel's sudden resignation; his term was extended twice, making him one of the longest-serving recent RBI governors. • During his tenure he navigated the COVID-19 pandemic with emergency rate cuts and liquidity measures, and oversaw the launch of India's digital rupee (e-₹) pilot in 2022. • 💡 Option A (Urjit Patel) is wrong because Patel was the 24th Governor who resigned in December 2018, just before Das took over. Option B (Raghuram Rajan) is wrong because Rajan was the 23rd Governor (2013–2016) and is now a professor at the University of Chicago Booth School of Business. Option C (Bimal Jalan) is wrong because Jalan served as the 20th Governor from 1997 to 2003, more than two decades before this question's reference period.

Correct Answer: D. To regulate the liquidity in the banking system

• **To regulate the liquidity in the banking system** = CRR is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that it must hold as cash with the RBI, directly controlling how much money banks can lend into the economy. • **Monetary policy tool** — The RBI earns no interest on CRR balances and banks earn no return on them either; this makes CRR a powerful immediate tool: raising CRR drains liquidity and raises loan costs, while lowering CRR injects money into the economy. • Under the RBI Act, CRR can be set anywhere between 3% and 15% of NDTL; in recent years it has been maintained at 4%, though temporarily reduced during COVID-19 to boost lending. • 💡 Option A (To increase bank profits) is wrong because locking funds with the RBI earns no interest, which actually reduces bank income rather than raising profits. Option B (To provide loans to poor people) is wrong because CRR funds are idle reserves held with the RBI and are never disbursed as loans to any segment of society. Option C (To pay interest to depositors) is wrong because banks pay depositor interest from their lending income, not from CRR reserves.

Correct Answer: D. Repo Rate

• **Repo Rate** = Repo (Repurchase Agreement) Rate is the short-term benchmark interest rate at which the RBI lends money to commercial banks overnight, with banks pledging government securities as collateral. • **Core LAF tool** — The Repo Rate is the primary instrument of the Liquidity Adjustment Facility (LAF); a hike signals monetary tightening to curb inflation, while a cut signals easing to boost growth — every basis-point change ripples through all other lending rates in the economy. • The word 'Repo' stands for repurchase agreement: the bank sells securities to the RBI and agrees to buy them back the next day at a slightly higher price, with the difference being the effective interest (the Repo Rate). • 💡 Option A (Bank Rate) is wrong because the Bank Rate is the rate at which the RBI lends long-term funds without collateral, used mainly as a penal rate and not as a daily short-term liquidity tool. Option B (Reverse Repo Rate) is wrong because the Reverse Repo is the rate at which the RBI borrows from banks — the opposite lending direction from this question. Option C (Savings Rate) is wrong because there is no RBI policy instrument called the Savings Rate; it refers to the interest commercial banks pay on savings accounts, set independently by each bank.

Correct Answer: A. Foreign currencies, Gold, and SDRs

• **Foreign currencies, Gold, and SDRs** = India's Foreign Exchange Reserves consist of four components: Foreign Currency Assets (FCA — mainly USD, Euro, GBP), Gold reserves, Special Drawing Rights (SDRs) allocated by the IMF, and the Reserve Tranche Position at the IMF. • **Scale** — India's forex reserves exceeded $650 billion in 2024, making India one of the world's top five reserve holders; these reserves defend the rupee's exchange rate and fund imports during trade deficits. • SDRs are not a currency but an international reserve asset created by the IMF in 1969, whose value is based on a basket of five currencies: US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound. • 💡 Option B (Only Indian Rupees) is wrong because the rupee is the domestic currency; holding it does not constitute a foreign exchange reserve, which by definition must comprise foreign or internationally accepted assets. Option C (Only Gold) is wrong because gold is just one component; Foreign Currency Assets (FCA) are actually the largest component by value. Option D (Only Silver) is wrong because silver is not held as part of India's official foreign exchange reserves by the RBI.

Correct Answer: D. Pune

• **Pune** = The College of Agricultural Banking (CAB) is a premier RBI training institution established in 1969 in Pune, specialising in training bankers in rural credit, agricultural finance, and microfinance. • **Significance** — CAB trains officers from commercial banks, cooperative banks, Regional Rural Banks (RRBs), and NABARD to serve India's vast agricultural sector, which employs over 40% of the workforce and requires specialised lending knowledge. • CAB also conducts international training programmes for central bankers and rural finance officials from developing countries across Asia and Africa. • 💡 Option A (Mumbai) is wrong because Mumbai houses the RBI's main headquarters and the Bankers' Training College (BTC) — these are distinct institutions with different mandates, and neither is the CAB. Option B (Chennai) is wrong because Chennai has an RBI regional office but the College of Agricultural Banking is specifically located in Pune. Option C (Hyderabad) is wrong because Hyderabad hosts the Institute for Development and Research in Banking Technology (IDRBT), which is a separate body, not the College of Agricultural Banking.

Correct Answer: D. Cash, Gold, or Government Securities with themselves

• **Cash, Gold, or Government Securities with themselves** = SLR is the minimum percentage of a bank's NDTL that it must maintain in liquid assets — specifically cash in hand, gold, or approved government securities — held by the bank itself, not deposited with the RBI. • **Current rate** — SLR has been progressively reduced from a historical high of 38.5% to 18% in recent years; this reduction frees up more funds for banks to lend to the private sector and stimulate economic growth. • Unlike CRR (which must be kept as cash with the RBI and earns no interest), SLR assets remain on the bank's own balance sheet, and government securities in the SLR portfolio earn interest income for the bank. • 💡 Option A (Only cash with RBI) is wrong because that description matches CRR, not SLR; SLR can be held in gold or government securities too, and crucially it stays with the bank, not the RBI. Option B (Foreign currency with themselves) is wrong because foreign currency is not an approved SLR asset; SLR must be in rupee-denominated cash, gold, or approved domestic securities only. Option C (Only gold with RBI) is wrong on both counts — SLR is not restricted to gold alone, and it is held by the bank itself, not deposited with the RBI.

Correct Answer: A. Mumbai

• **Mumbai** = The Reserve Bank of India was established on 1 April 1935 with its central office initially in Kolkata (then Calcutta); the headquarters was permanently transferred to Mumbai (then Bombay) in 1937 to be closer to India's primary commercial and financial hub. • **Location** — The RBI's Central Office stands on Mint Road (Shahid Bhagat Singh Marg) in the Fort area of South Mumbai, in an Art Deco building completed in 1939 that remains one of the city's most iconic structures. • Mumbai's stature as India's financial capital — home to BSE, NSE, and the headquarters of most major banks — made it the logical choice for the RBI's permanent base. • 💡 Option B (Delhi) is wrong because Delhi is the political capital; the RBI has a regional office there but deliberately placed its headquarters apart from the seat of government to ensure operational independence. Option C (Bangalore) is wrong because Bengaluru is India's technology hub with an RBI regional office, but it was never a candidate for the RBI's central headquarters in 1937. Option D (Ahmedabad) is wrong because while Ahmedabad has a strong commercial history and an RBI regional office, the shift was specifically to Mumbai, not Ahmedabad.

Correct Answer: D. Borrowing for banks becomes expensive

• **Borrowing for banks becomes expensive** = When the RBI raises the Repo Rate, the cost at which commercial banks borrow overnight funds from the RBI rises; banks then immediately pass this higher cost to borrowers by increasing their own lending rates. • **Chain effect** — Higher lending rates reduce loan demand from businesses and consumers, contracting the money supply in the economy and cooling inflationary pressure — which is the primary purpose of a rate hike. • Repo Rate hikes are a contractionary monetary policy tool: they slow spending and investment, reduce aggregate demand, and over time bring down inflation, though with a time lag of several months. • 💡 Option A (Inflation always increases) is wrong because the opposite is intended — rate hikes are specifically designed to reduce inflation by making credit expensive and curbing excess spending. Option B (Money supply increases) is wrong because more expensive borrowing discourages lending, which contracts rather than expands the money supply. Option C (Loans become cheaper) is wrong because when the RBI's own lending rate rises, banks raise their loan rates to protect margins, making loans more expensive for customers, not cheaper.