RBI & Policy — Set 12

Correct Answer: A. Central Government

• **Central Government appoints RBI Governor** = the Governor and Deputy Governors of the RBI are appointed by the Central Government of India for three to five year terms. • **FSRASC shortlists candidates** — the Financial Sector Regulatory Appointments Search Committee shortlists candidates for the Governor's post before the government makes the final appointment. • 💡 Wrong-option analysis: [Option B] President of India: the President signs many government appointments, but the RBI Governor appointment is a Central Government prerogative; [Option C] Parliament: does not directly appoint the RBI Governor; [Option D] Supreme Court: the apex judicial body with no role in appointing RBI officials.

Correct Answer: C. All currency notes

• **RBI Governor signs all currency notes except ₹1** = all Indian currency notes bear the Governor's signature as the RBI's promise to pay the bearer the stated sum. • **₹1 carries Finance Secretary's signature** — the one-rupee note is the only exception; the phrase 'I promise to pay the bearer' appears on all RBI-issued notes above ₹1. • 💡 Wrong-option analysis: [Option A] ₹1 note: carries the Finance Secretary's signature, not the RBI Governor's; [Option B] Only ₹500 notes: the Governor signs all denominations from ₹2 upward, not just ₹500; [Option D] ₹10 note: the Governor does sign ₹10 notes, but so do all denominations above ₹1 — the correct answer is 'all currency notes'.

Correct Answer: C. Hilton Young Commission

• **Hilton Young Commission recommended creating the RBI** = the Royal Commission on Indian Currency and Finance recommended in 1926 that India needed an independent central bank to separate monetary control from the government. • **1926 recommendation → RBI Act, 1934** — the commission argued an independent central bank was essential for monetary stability; its report directly led to the RBI Act, 1934 and the bank's launch in 1935. • 💡 Wrong-option analysis: [Option A] Malegam Committee: examined NBFC-MFI regulation and microfinance; unrelated to the RBI's creation; [Option B] Narasimham Committee: dealt with banking sector reforms in 1991 and 1998; [Option D] Urjit Patel Committee: recommended the MPC framework in 2014, not the creation of the RBI.

Correct Answer: C. Marginal Standing Facility (MSF)

• **Marginal Standing Facility (MSF) — overnight emergency lending above Repo Rate** = MSF is an emergency overnight window created in 2011 through which scheduled commercial banks can borrow from the RBI at a rate typically 25 basis points above the repo rate. • **Created in 2011; 25 bps above Repo** — banks use MSF only after exhausting their LAF borrowing limits; the premium rate discourages overuse, reserving it as a genuine last-resort liquidity tool. • 💡 Wrong-option analysis: [Option A] Repo Rate: the standard overnight LAF lending rate; MSF is a separate additional emergency window above the repo rate; [Option B] Reverse Repo Rate: the rate at which banks park funds with the RBI, not a borrowing facility; [Option D] CRR: a reserve requirement (percentage of deposits), not a lending facility.

Correct Answer: C. 4

• **Maximum 4 Deputy Governors** = the RBI Act permits a maximum of four Deputy Governors; typically two are promoted internally and two are external experts. • **Four support the Governor** — each Deputy Governor oversees specific domains such as monetary policy, regulation, supervision, and currency management. • 💡 Wrong-option analysis: [Option A] 6: the MPC has 6 members, but the maximum number of Deputy Governors is 4; [Option B] 2: the minimum sometimes seen in practice, not the statutory maximum; [Option D] 1: one is insufficient for the RBI's diverse operational needs; the Act provides for up to four.

Correct Answer: D. 1949

• **Banking Regulation Act passed in 1949** = the Banking Regulation Act, 1949 was enacted the same year as the RBI's nationalization, giving the RBI powers to license, supervise, and regulate commercial banks. • **Pillar of bank regulation** — this Act defines the prudential norms banks must follow and grants the RBI wide supervisory authority; it is the cornerstone of banking law in India. • 💡 Wrong-option analysis: [Option A] 1955: the year the Imperial Bank was nationalized to form SBI; the BR Act came earlier; [Option B] 1934: the RBI Act was passed in 1934; the Banking Regulation Act came 15 years later; [Option C] 1969: the year 14 major commercial banks were nationalized, not the passage of the BR Act.

Correct Answer: D. Margin Requirements

• **Margin Requirements — qualitative credit control tool** = margin requirements specify the gap between collateral value and loan amount, targeting credit flows to specific sensitive sectors without affecting overall money supply. • **Sector-specific control** — by changing margin requirements for specific sectors (e.g., real estate, equity markets), the RBI can restrict or loosen credit selectively. • 💡 Wrong-option analysis: [Option A] Open Market Operations: a quantitative tool involving securities transactions to regulate overall liquidity; [Option B] CRR: a quantitative reserve requirement applied uniformly to all banks; [Option C] Bank Rate: a quantitative interest rate tool affecting the broad cost of borrowing.

Correct Answer: C. 2% to 6%

• **Inflation target band: 2% to 6%** = the government has set a flexible inflation targeting mandate for the RBI with a central target of 4% and a ±2% tolerance band, keeping CPI between 2% and 6%. • **4% is the central target** — if inflation breaches the band for three consecutive quarters, the RBI must submit a written explanation to the government; this ensures accountability in monetary policy. • 💡 Wrong-option analysis: [Option A] 1% to 3%: too narrow and too low for India's growth-inflation dynamics; [Option B] Zero percent: deflationary territory that can harm economic growth; [Option D] 4% to 8%: 8% represents uncomfortably high inflation; the upper limit is 6%.

Correct Answer: D. RBI lends to banks

• **Repo Rate — RBI lends to banks** = the Repo Rate is the interest rate at which the RBI provides short-term liquidity to commercial banks against government securities as collateral. • **Drives consumer loan rates** — an increase in the Repo Rate makes borrowing costlier for banks, who then raise interest rates on home loans, car loans, and personal loans. • 💡 Wrong-option analysis: [Option A] Public deposits in RBI: the RBI does not accept deposits from the general public; that is retail banking; [Option B] RBI borrows from banks: when the RBI borrows from banks, it pays the Reverse Repo Rate, not the Repo Rate; [Option C] Banks lend to public: banks set their own retail lending rates based on MCLR or external benchmarks, not the Repo Rate directly.

Correct Answer: B. Currency Management

• **Department of Currency Management distributes coins** = while the Government of India mints coins, the RBI's Department of Currency Management manages their distribution under the Coinage Act. • **RBI acts as government distribution agent** — the RBI distributes coins through its currency chest network on behalf of the government; it does not mint coins but ensures their availability. • 💡 Wrong-option analysis: [Option A] Issue Department: specifically handles the issue and management of currency notes, not coins; [Option C] Government Accounts: manages government cash balances and public debt, not coin distribution; [Option D] None of these: the Department of Currency Management specifically handles coin distribution.