RBI & Policy — Set 7

Correct Answer: C. Buying securities to increase money supply

• **Quantitative Easing — buying securities to increase money supply** = QE is an unconventional monetary policy where the central bank purchases large quantities of financial assets to inject liquidity and lower long-term interest rates. • **Used when policy rate near zero** — QE is deployed when traditional tools are exhausted; it directly increases bank reserves, aiming to stimulate borrowing, investment, and economic activity. • 💡 Wrong-option analysis: [Option A] Reducing the budget deficit: a fiscal action by the government, not a central bank monetary tool; [Option B] Selling securities: the opposite of QE — it absorbs liquidity and is contractionary; [Option D] Increasing interest rates: rate hikes are the opposite of QE, which aims to lower rates.

Correct Answer: A. It must be accepted for the discharge of debt

• **Legal Tender — must be accepted for payment of debt** = legal tender status means courts recognize currency as valid payment for any monetary obligation, and creditors cannot legally refuse it. • **Nationwide acceptance in India** — RBI-issued notes are legal tender throughout India; refusing valid legal tender for settlement of a debt is generally prohibited by law. • 💡 Wrong-option analysis: [Option B] It can be used for any legal purpose: while broadly true, the precise legal meaning is mandatory acceptance for debt discharge; [Option C] It can only be used in banks: legal tender is usable anywhere, not only in banks; [Option D] It is made of special paper: the physical composition relates to security features, not to the concept of legal tender status.

Correct Answer: B. Department of Regulation

• **Department of Regulation (DoR) oversees NBFCs** = the DoR frames prudential guidelines and regulations for banks and NBFCs to protect depositors and maintain financial system integrity. • **Increased NBFC oversight recently** — due to growing systemic importance of NBFCs and high-profile failures, the RBI has substantially strengthened regulatory oversight of the NBFC sector. • 💡 Wrong-option analysis: [Option A] Department of Supervision: conducts on-site and off-site inspections but does not frame the rules — rule-making is DoR's role; [Option C] External Investments Department: manages the RBI's overseas investments and reserves, not domestic NBFC regulation; [Option D] Financial Inclusion Department: promotes access to financial services for the unbanked, not NBFC regulation.

Correct Answer: C. Weighted average adjusted for inflation

• **REER — inflation-adjusted weighted average exchange rate** = the Real Effective Exchange Rate is a weighted average of India's currency against a basket of trading partner currencies, adjusted for relative inflation differences. • **Measures price competitiveness** — a rising REER signals that Indian exports are becoming more expensive relative to foreign goods, indicating a loss of international price competitiveness. • 💡 Wrong-option analysis: [Option A] Rate for NRI deposits: set by individual banks under RBI guidelines, unrelated to REER; [Option B] Simple exchange rate: nominal exchange rate is not adjusted for inflation or trade weights; REER adds both dimensions; [Option D] Rate for gold imports: gold import pricing is set by international commodity markets, not REER.

Correct Answer: B. Redressing customer grievances against banks

• **RBI Ombudsman Scheme — for customer grievances against banks** = the Banking Ombudsman Scheme provides a free, quasi-judicial mechanism for bank customers to resolve complaints about banking service deficiencies. • **Covers ATM errors to unauthorized transactions** — the scheme was later integrated into the 'RBI Integrated Ombudsman Scheme' (2021), covering banks, NBFCs, and payment service providers under a single window. • 💡 Wrong-option analysis: [Option A] Government debt management: a separate RBI function handled by the internal debt management team; [Option C] Inter-bank loan settlements: settled through RBI payment systems like LAF and RTGS; [Option D] Employee disputes: handled through internal HR and labor law mechanisms.

Correct Answer: B. Hilton Young Commission

• **Hilton Young Commission designed RBI's regional structure** = the commission envisioned the RBI as a centralized monetary authority with regional boards to manage India's diverse financial landscape uniformly. • **Goal: uniform monetary policy across provinces** — the structure of a central authority with local advisory boards was designed to ensure consistent monetary policy while accommodating regional financial realities. • 💡 Wrong-option analysis: [Option A] Purshottamdas Thakurdas Committee: focused on industrial planning, not the RBI's structural design; [Option C] Narasimham Committee: set up for banking sector reform in 1991 and 1998, not the RBI's original structure; [Option D] Acworth Committee: focused on Indian railways in 1920–21, unrelated to monetary institutions.

Correct Answer: B. Offsetting the impact of forex intervention on money supply

• **Sterilization — offsetting forex intervention's impact on money supply** = when the RBI buys foreign currency to prevent rupee appreciation, it releases rupees into the market; sterilization involves selling government bonds to absorb this extra liquidity. • **Keeps domestic money supply stable** — sterilization allows the RBI to manage the exchange rate without causing domestic inflation from the rupees released during dollar purchases. • 💡 Wrong-option analysis: [Option A] Cleaning currency notes: refers to the Clean Note Policy, a completely different concept; [Option C] Reducing the number of bank branches: a banking rationalization decision, unrelated to monetary sterilization; [Option D] Stopping gold imports: managed through customs duties and RBI guidelines, not sterilization operations.

Correct Answer: D. Section 22 of BR Act

• **Section 22 of BR Act licenses Small Finance Banks** = the power to grant licenses to all types of banks, including Small Finance Banks, comes from Section 22 of the Banking Regulation Act, 1949, not the RBI Act. • **SFBs for financial inclusion** — Small Finance Banks were introduced to provide basic banking services to small businesses, marginal farmers, and the unorganized sector; they must meet specific capital and lending norms. • 💡 Wrong-option analysis: [Option A] Section 42: of the RBI Act deals with CRR requirements for scheduled banks, not licensing; [Option B] Section 45: of the RBI Act pertains to NBFC regulation, not bank licensing; [Option C] Section 17: of the RBI Act describes business activities the RBI can conduct, not the licensing of commercial banks.

Correct Answer: B. RBI's IT subsidiary

• **ReBIT — RBI's IT and cybersecurity subsidiary** = the Reserve Bank Information Technology Private Limited was set up by the RBI to manage its IT infrastructure, cybersecurity needs, and to conduct IT audits of regulated entities. • **Strengthens financial sector cyber resilience** — ReBIT helps build defenses against cyber threats across the banking system and performs IT audits of banks and other regulated entities. • 💡 Wrong-option analysis: [Option A] A private bank: ReBIT is a wholly-owned RBI technology subsidiary, not a banking entity; [Option C] A government news channel: ReBIT has no media function — it is purely technology and cybersecurity; [Option D] A software for stocks: stock market technology platforms are overseen by SEBI and exchanges, not ReBIT.

Correct Answer: D. Currency with public + Demand deposits

• **M1 = Currency with public + Demand deposits** = M1, the narrowest measure of money supply, comprises currency in circulation plus demand deposits (current and savings accounts) with banks. • **Most liquid form of money** — M1 represents money immediately usable for transactions; fixed deposits and other time deposits are excluded and counted in broader measures like M3. • 💡 Wrong-option analysis: [Option A] Gold reserves: a financial asset held by the RBI, not counted in any M-measure of money supply; [Option B] Post office savings: counted in M4 (the broadest measure), not M1; [Option C] Fixed Deposits: time deposits included in M3 (broad money), not in narrow M1.