Money, banking & monetary policy

Answer: (d) to leave it unchanged

Money supply does not change, because the ₹ 1,00,000 only moves from one part of money supply to another. Demand deposits fall by ₹ 1,00,000 and the currency you hold rises by the same amount.

• ✗ (a) Money supply counts currency held by the public as well as demand deposits. Your deposit falls by ₹ 1,00,000, but your cash in hand rises by ₹ 1,00,000, so the total is unchanged.
• ✗ (c) Cash leaving the bank reduces its reserves, so it cannot start a larger expansion of money. Any later effect would work through banks lending less, not through this withdrawal itself.
• ✓ (d) Narrow money is M1 = currency held by the public + demand deposits. A cash withdrawal only converts one component into the other, so M1 stays the same.

Remember · M1 = currency with the public + demand deposits. Converting a deposit into cash, or the reverse, leaves money supply unchanged.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (d) 1, 2 and 3

Non-financial debt is the debt owed by the non-financial sectors of the economy: households, non-financial companies and the government. Housing loans and credit-card dues are household debt, and Treasury bills are short-term borrowing by the government, so all three count.

• ✓ 1. A housing loan is borrowing by a household. Households are part of the non-financial sector, which is split into non-financial corporations and households (BIS classification).
• ✓ 2. Money outstanding on a credit card is a loan to a household, so it is also household debt.
• ✓ 3. Treasury bills are short-term government securities (maturity under one year) issued by the Central Government; they are debt of the government sector, which is counted within the non-financial sector.

Remember · Non-financial debt = borrowings of households, non-financial companies and the government, i.e. everyone except banks and other financial institutions. Loans, credit-card dues and T-bills all count.

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 2 only

Raising the Marginal Standing Facility (MSF) rate is the one step RBI would not take, because it makes emergency overnight borrowing costlier for banks and so tightens money. An expansionary policy pushes the other way: it cuts reserve requirements such as the SLR and cuts the Bank Rate and repo rate to make credit cheaper.

• ✓ 1. Consistent with an expansionary policy: a lower reserve requirement leaves banks more money to lend, which raises credit and money supply. So RBI would do this.
• ✗ 2. The MSF rate is the penal rate at which banks borrow overnight from RBI against their SLR securities, and the Bank Rate moves with it. Raising it makes borrowing dearer, a tightening step, so RBI would not do this (this is the answer).
• ✓ 3. Consistent with an expansionary policy: NCERT notes that a fall in the bank rate can increase money supply; a lower repo rate likewise makes borrowing from RBI cheaper. So RBI would do this.

Remember · Expansionary policy = cheaper and more plentiful credit: lower SLR, Bank Rate and repo rate. A higher MSF rate (the penal borrowing rate) is a tightening step.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 2 only

Only statement 2 is correct: DCCBs are the middle tier of the short-term cooperative credit structure and channel funds to the village-level Primary Agricultural Credit Societies (PACS). Statement 1 fails because commercial banks, not cooperative banks, supply most crop loans.

• ✗ 1. NABARD's analysis of crop loans puts commercial banks at 65.30 per cent and all cooperative banks together at 17.97 per cent in 2019-20, with Regional Rural Banks at 16.73 per cent. DCCBs are only one part of the cooperative share, so they do not out-deliver Scheduled Commercial Banks.
• ✓ 2. The short-term cooperative credit structure runs State Cooperative Banks, then DCCBs at district level, then PACS at village level. PACS are refinanced through DCCBs and State Cooperative Banks, so DCCBs supply them with funds.

Remember · Short-term cooperative credit flows StCB, then DCCB, then PACS (village). Commercial banks, not cooperative banks, supply most short-term (crop) farm credit.

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (a) 1 and 2 only

The Interest Coverage Ratio (ICR) is a firm's earnings before interest and tax divided by its interest expenses, so a higher ICR means the firm can pay its interest more easily. That makes statement 3 wrong. Banks use ICR to gauge a borrower's current repayment strength and, by tracking it over time, its emerging risk.

• ✓ 1. ICR shows how many times current earnings cover interest due. RBI treats an ICR below unity (below 1) as an indicator of a firm's financial vulnerability, so it shows the borrower's present risk.
• ✓ 2. ICR is worked out period after period. A falling trend warns that repayment strength is eroding before default happens, so it also helps a bank see emerging risk.
• ✗ 3. It is the reverse: a higher ICR means better ability to service debt. RBI describes an improving ICR as a sign of improved debt servicing.

Remember · ICR = EBIT ÷ interest expenses. Higher is safer; below 1 means earnings do not even cover interest.

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 1, 3 and 4 only

The short-term limit under the Kisan Credit Card covers crop cultivation, post-harvest expenses, produce marketing loans, the consumption needs of the farmer's household and working capital for maintaining farm assets. Buying machinery or building assets such as a cold store is investment credit, which forms the separate long-term portion, so only 1, 3 and 4 are correct.

• ✓ 1. Working capital for maintenance of farm assets and allied activities is one of the listed purposes and is part of the short-term limit.
• ✗ 2. Buying combine harvesters, tractors or mini trucks is investment in assets. The KCC's investment credit forms the long-term limit portion, not the short-term one.
• ✓ 3. Consumption requirements of the farmer household are a listed purpose and count in the short-term limit.
• ✓ 4. Post-harvest expenses are a listed purpose and count in the short-term limit.
• ✗ 5. Building a family house is not among the listed purposes, and setting up a cold storage facility is an investment (long-term) need rather than a short-term one.

Remember · KCC short-term limit: crop cultivation, post-harvest expenses, produce marketing loan, household consumption and farm-asset maintenance. Asset purchases fall under the long-term investment component.

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (a) 1 and 2 only

Statements 1 and 2 are correct, and 3 is wrong. Food has a far larger weight in CPI (45.86 per cent in the combined index) than in WPI (24.38 per cent), and WPI tracks goods only, so it misses services that CPI includes. The RBI's inflation target is fixed in terms of CPI, not WPI.

• ✓ 1. In CPI (base 2012, combined) food and beverages carry a weight of 45.86 per cent; the WPI Food Index has a weight of 24.38 per cent.
• ✓ 2. WPI covers commodities, and RBI's expert committee noted that it does not capture price movements in services such as those in the CPI basket (housing, health, transport and communication).
• ✗ 3. Under Section 45ZA of the RBI Act the Central Government sets the inflation target in terms of CPI (4 per cent, with a 2 to 6 per cent band, notified in August 2016), and the RBI works to it.

Remember · CPI measures retail prices, has a heavy food weight, includes services and is the RBI's inflation-target anchor. WPI is wholesale prices of goods only, with a lighter food weight.

Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error