RBI & Policy — Set 4

Correct Answer: C. Pune

• **College of Agricultural Banking (CAB) is in Pune** = the RBI's premier training institute for rural and agricultural finance is located in Pune, Maharashtra. • **Trains bank and cooperative officers** — CAB trains personnel from commercial banks, cooperative banks, and NABARD in agricultural lending, rural finance, and financial inclusion. • 💡 Wrong-option analysis: [Option A] Hyderabad: hosts IDRBT (banking technology research), not CAB; [Option B] Chennai: has the RBI Staff College but not CAB; [Option D] Mumbai: home to RBI headquarters and IGIDR, but not CAB.

Correct Answer: C. RBI Governor

• **RBI Governor signs all notes except ₹1** = all Indian currency notes from ₹2 upward bear the signature of the RBI Governor as a guarantee of the RBI's promise to pay the bearer. • **₹1 note carries Finance Secretary's signature** — only the one-rupee note, issued by the Ministry of Finance, carries the Finance Secretary's signature instead of the Governor's. • 💡 Wrong-option analysis: [Option A] President of India: does not sign currency notes; [Option B] Finance Secretary: signs only the ₹1 note, not the ₹20 or other RBI-issued denominations; [Option D] Prime Minister: has no role in signing or issuing currency notes.

Correct Answer: D. Repo and Reverse Repo

• **LAF operates through Repo and Reverse Repo** = the Liquidity Adjustment Facility allows banks to borrow from the RBI (repo) or lend to the RBI (reverse repo) on a daily basis using government securities as collateral. • **Introduced in 2000 on Narasimham Committee recommendation** — LAF helps the RBI keep the call money rate anchored close to the repo rate, maintaining orderly short-term money markets. • 💡 Wrong-option analysis: [Option A] MSF and Bank Rate: both related to borrowing but MSF is above the LAF corridor and Bank Rate is a penalty rate — not the daily LAF instruments; [Option B] CRR and SLR: reserve ratios, not the instruments through which LAF operates; [Option C] WMA and OMO: WMA is for governments; OMO involves open-market securities transactions — both separate from LAF.

Correct Answer: B. Providing emergency liquidity to banks facing a crisis

• **Lender of Last Resort — emergency liquidity to crisis-hit banks** = when a commercial bank cannot meet short-term obligations from any other source, the RBI provides emergency funds to prevent bank failure. • **MSF is the key channel** — banks access emergency liquidity through the Marginal Standing Facility (MSF) or special repo operations; this assures depositors that their bank has a reliable backstop. • 💡 Wrong-option analysis: [Option A] Issuing new currency notes: routine monetary function, distinct from emergency lending; [Option C] Setting income tax rates for banks: set by the Finance Ministry and Parliament, not the RBI; [Option D] Auditing bank balance sheets annually: done by external statutory auditors, not the lender-of-last-resort function.

Correct Answer: D. BRBNMPL

• **BRBNMPL prints currency notes** = Bharatiya Reserve Bank Note Mudran Private Limited, the RBI's subsidiary, operates printing presses in Mysuru (Karnataka) and Salboni (West Bengal) for Indian currency note production. • **Established in 1995** — BRBNMPL was set up to boost India's note production capacity; the RBI also uses government-owned presses at Nashik and Dewas for additional production. • 💡 Wrong-option analysis: [Option A] NABARD: the apex development bank for agriculture, not a currency printing entity; [Option B] DICGC: the deposit insurance arm of the RBI, unrelated to note printing; [Option C] NHB: provides refinancing for housing loans, not involved in currency production.

Correct Answer: C. Foreign Currency Assets (FCA)

• **Foreign Currency Assets (FCA) — largest forex reserve component** = FCA typically accounts for over 90% of India's total foreign exchange reserves, held in major currencies like USD, Euro, GBP, and JPY. • **Over 90% share** — FCA is used to stabilize the rupee exchange rate and meet international payment obligations; the other components are gold, SDRs, and the IMF Reserve Tranche Position. • 💡 Wrong-option analysis: [Option A] Gold Reserves: significant but forms a far smaller share than FCA; [Option B] SDRs: Special Drawing Rights are a minor component of India's total reserves; [Option D] Reserve Tranche Position in IMF: the smallest component of India's forex reserves.

Correct Answer: D. Minimum Reserve System

• **Minimum Reserve System** = since 1956, the RBI issues currency notes under the Minimum Reserve System, requiring a minimum reserve of ₹200 crore in gold and foreign securities. • **Adopted in 1956; ₹115 crore in gold required** — this replaced the Proportional Reserve System and allows more flexibility in note issuance as the economy grows, without maintaining proportional gold backing. • 💡 Wrong-option analysis: [Option A] Maximum Fiduciary System: sets an upper limit on unbacked note issuance used in some countries, not adopted in India; [Option B] Fixed Fiduciary System: used in the UK historically, not adopted by India; [Option C] Proportional Reserve System: India used this before 1956, requiring a fixed percentage of gold against notes issued.

Correct Answer: D. DICGC

• **DICGC insures bank deposits** = the Deposit Insurance and Credit Guarantee Corporation, a wholly-owned RBI subsidiary, insures each depositor's funds up to ₹5 lakh per bank. • **₹5 lakh coverage (raised in 2020)** — this insurance covers both principal and interest in case of a bank failure, protecting small savers from loss of their entire savings. • 💡 Wrong-option analysis: [Option A] SEBI: regulates securities markets with no role in deposit insurance; [Option B] LIC: provides life insurance, not bank deposit insurance; [Option C] RBI: the parent body, but the specific deposit insurance function is performed by DICGC.

Correct Answer: A. It decreases

• **Money supply decreases when CRR is raised** = an increase in the Cash Reserve Ratio forces banks to lock more cash with the RBI, directly reducing the funds available for lending. • **Credit multiplier effect** — less lendable money shrinks the credit multiplier, reducing the overall money supply in the economy and helping curb inflation. • 💡 Wrong-option analysis: [Option B] It increases: raising CRR tightens liquidity, causing a decrease, not increase, in money supply; [Option C] It becomes unpredictable: the effect of raising CRR is predictable — it always contracts the money supply; [Option D] It remains the same: any change in CRR directly impacts lending capacity and hence money supply.

Correct Answer: D. Penalty rate for reserve defaults

• **Bank Rate = Penalty Rate for Reserve Defaults** = in the current context, the Bank Rate is aligned with the MSF rate and serves as a penal rate charged when banks fail to maintain required CRR or SLR. • **Aligned with MSF rate** — the Bank Rate no longer functions as the primary liquidity injection tool; the Repo Rate has taken that role, while the Bank Rate serves as a penalty benchmark. • 💡 Wrong-option analysis: [Option A] Deposit rate for public: commercial banks set their own deposit rates; the Bank Rate is not a public deposit rate; [Option B] Daily lending rate: daily lending to banks is governed by the Repo Rate through the LAF; [Option C] Rate for discounting bills: while historically used for rediscounting, this role is now obsolete in favor of the Repo Rate.