RBI & Policy — Set 1

Correct Answer: C. 1935

• **RBI Established** = the Reserve Bank of India was established on April 1, 1935, under the RBI Act, 1934. • **April 1, 1935** — the bank initially operated as a private shareholders' institution before being nationalized in 1949; this date marks the start of formal central banking in India. • 💡 Wrong-option analysis: [Option A] 1950: the Indian Constitution came into effect in 1950, not the RBI's founding; [Option B] 1949: the year the RBI was nationalized, not established; [Option D] 1947: the year of Indian independence, not the RBI's founding.

Correct Answer: D. Hilton Young Commission

• **Hilton Young Commission** = the Royal Commission on Indian Currency and Finance, popularly called the Hilton Young Commission, recommended the establishment of a central bank for India in 1926. • **1926 recommendation** — the commission's goal was monetary stability; its report directly led to the drafting of the RBI Act, 1934, and the bank's launch in 1935. • 💡 Wrong-option analysis: [Option A] Kothari Commission: dealt with education reforms, not central banking; [Option B] Malegam Commission: examined microfinance and NBFC regulation, formed decades later; [Option C] Simon Commission: appointed to review the Government of India Act and had no role in central banking.

Correct Answer: D. Calcutta

• **Calcutta (Kolkata) — First Headquarters** = the RBI's first central office was established in Calcutta when the bank was founded in April 1935. • **Moved to Mumbai in 1937** — the headquarters was permanently shifted to Mumbai in 1937 to be closer to India's commercial and financial hub; the Governor's office operates from Mumbai. • 💡 Wrong-option analysis: [Option A] Mumbai: became headquarters only after 1937, not the first location; [Option B] Madras: only a regional office was located there; [Option C] New Delhi: the political capital hosts a regional office but was never the first HQ.

Correct Answer: D. 1949

• **Nationalized on January 1, 1949** = the RBI was transferred to public ownership through the RBI (Transfer to Public Ownership) Act, 1948, effective January 1, 1949, making it a fully government-owned central bank. • **Since 1949 — sole monetary authority** — after nationalization, the RBI became the undisputed state monetary authority, free from private shareholder interests. • 💡 Wrong-option analysis: [Option A] 1935: the year of establishment, not nationalization; [Option B] 1955: the year the Imperial Bank was nationalized to form SBI; [Option C] 1947: India's independence year, two years before RBI nationalization.

Correct Answer: A. Sir Osborne Smith

• **Sir Osborne Smith — First Governor** = Sir Osborne Smith was the first Governor of the Reserve Bank of India from its inception in April 1935. • **Resigned before completing term** — Smith brought expertise from the Bank of New South Wales but resigned due to policy differences before completing his full tenure; he was succeeded by James Taylor. • 💡 Wrong-option analysis: [Option B] James Taylor: the second Governor who succeeded Smith; [Option C] C.D. Deshmukh: the first Indian Governor, not the first Governor overall; [Option D] Benegal Rama Rau: served as Governor in the 1950s, much later.

Correct Answer: D. C.D. Deshmukh

• **C.D. Deshmukh — First Indian Governor** = Chintaman Dwarkanath Deshmukh became the first Indian to serve as Governor of the RBI in 1943, during British rule. • **Represented India at Bretton Woods, 1944** — he later became India's Union Finance Minister, reflecting his stature as a premier policymaker and economist. • 💡 Wrong-option analysis: [Option A] Manmohan Singh: served as RBI Governor from 1982–85, decades later; [Option B] R.N. Malhotra: served as Governor in the late 1980s; [Option C] I.G. Patel: served as Governor from 1977–82.

Correct Answer: A. Accepting deposits from public

• **Accepting deposits from public is NOT an RBI function** = the RBI is a central bank that interacts only with the government and commercial banks, not with ordinary citizens. • **3 core functions** — the RBI acts as banker to the government, manages foreign exchange, and is the sole issuer of currency notes; retail deposit-taking belongs to commercial banks. • 💡 Wrong-option analysis: [Option B] Banker to the Government: this is a genuine RBI function; [Option C] Manager of Foreign Exchange: the RBI manages forex under FEMA, 1999 — also a real function; [Option D] Issuer of currency: the RBI is the sole authority for issuing currency — also a real function.

Correct Answer: C. Repo Rate

• **Repo Rate** = the rate at which the RBI lends short-term money to commercial banks against government securities as collateral. • **Key inflation control tool** — raising the repo rate makes borrowing costlier for banks, which in turn raises consumer lending rates and reduces excess liquidity in the economy. • 💡 Wrong-option analysis: [Option A] Bank Rate: a long-term rate used for rediscounting and as a penalty rate, not for short-term daily liquidity; [Option B] MSF Rate: an emergency overnight window above the repo rate; [Option D] Reverse Repo Rate: the rate at which RBI borrows from banks, not lends.

Correct Answer: C. Reverse Repo Rate

• **Reverse Repo Rate** = the interest rate at which the RBI absorbs excess liquidity by borrowing from commercial banks who park their surplus funds with the RBI. • **Controls excess liquidity** — banks earn interest at this rate by depositing surplus funds with the RBI; raising the reverse repo rate makes parking funds more attractive, reducing money available for lending. • 💡 Wrong-option analysis: [Option A] Bank Rate: used for long-term lending and penalty purposes, not liquidity absorption; [Option B] Statutory Liquidity Rate: SLR is a reserve ratio, not a borrowing rate; [Option D] Repo Rate: the rate at which the RBI lends to banks, opposite of Reverse Repo.

Correct Answer: B. CRR

• **CRR (Cash Reserve Ratio)** = the mandatory percentage of a bank's total deposits that must be held as cash with the RBI, with no interest earned on this balance. • **No interest paid on CRR** — this zero-return feature makes CRR a powerful tool to directly shrink the lending capacity of banks and control money supply. • 💡 Wrong-option analysis: [Option A] PLR: the Prime Lending Rate is a benchmark for bank loans, not a reserve kept with the RBI; [Option C] CAR: Capital Adequacy Ratio measures capital against risk-weighted assets, not a cash reserve; [Option D] SLR: requires liquid assets like gold or government securities, not cash with the RBI.