Money, banking & monetary policy

Answer: (c) 1 and 3 only

Everything in this question comes from the Reserve Bank of India Act, 1934, not from the Constitution. The Act lets the Centre appoint the Governor and give the RBI directions in the public interest, and it is also the source of the Governor's own powers. So only statement 2 is wrong.

• ✓ 1. Section 8(1)(a) of the RBI Act provides that the Governor and the Deputy Governors (not more than four) are appointed by the Central Government.
• ✗ 2. The Constitution contains no such provision. The power to direct the RBI is statutory: Section 7(1) of the RBI Act lets the Centre, after consulting the Governor, issue directions it considers necessary in the public interest.
• ✓ 3. Section 7(3) of the RBI Act gives the Governor powers of general superintendence and direction of the Bank's affairs and business, subject to regulations made by the Central Board.

Remember · RBI Act, 1934: Section 7 lets the Centre direct the RBI in public interest after consulting the Governor; Section 8 has the Centre appoint the Governor and Deputy Governors.

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 2 and 3 only

Urban cooperative banks (UCBs) are under dual control: the RBI regulates and supervises their banking functions, while the Registrar of Cooperative Societies handles registration and management. There are no 'local boards' of the State for this. They came under the Banking Regulation Act from 1 March 1966 and can raise capital through shares, including preference shares.

• ✗ 1. The RBI (through its Urban Banks Department) regulates and supervises UCBs' banking functions under the Banking Regulation Act, 1949 (AACS); the State's role is through the Registrar of Cooperative Societies, not local boards.
• ✓ 2. UCBs raise share capital by issuing shares to members, and the RBI also permits them to issue preference shares and certain debt instruments to strengthen their capital.
• ✓ 3. Cooperative banks were brought under the Banking Regulation Act, 1949 with effect from 1 March 1966, which began the dual control of RBI and the Registrar.

Remember · UCBs: dual control since 1 March 1966 — RBI for banking functions (BR Act, 1949 AACS), Registrar of Cooperative Societies for registration, management and audit.

Question and answer: UPSC's official GS Paper I (2021, 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

A bond's yield moves opposite to its price, and the RBI lists all three as forces that move the prices of Indian government securities (G-secs): interest rates and expected inflation at home, RBI policy actions, and developments in US Treasuries, which follow the Federal Reserve.

• ✓ 1. When the US Federal Reserve raises rates, US Treasury yields rise and foreign money can leave Indian bonds, pushing Indian yields up; the RBI notes that US Treasury developments affect G-sec prices.
• ✓ 2. RBI actions such as changing the repo rate or CRR, or buying and selling bonds in open market operations, change G-sec prices and therefore yields.
• ✓ 3. Investors demand a higher yield when expected inflation or short-term rates rise, so G-sec prices fall and yields go up.

Remember · Bond price and yield move in opposite directions. Indian G-sec yields respond to domestic inflation and interest rates, RBI policy, and global (especially US) yields.

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (c) Increase in the banking habit of the people

Banks create money by lending out deposits, which come back to the banking system as fresh deposits and are lent again. The more of their money people keep in banks rather than as cash, the more rounds of lending take place, so the multiplier rises. Higher reserve ratios do the opposite.

• ✓ (c) A stronger banking habit lowers the share of money held as cash, so more of each loan returns as a deposit and supports further lending.
• ✗ (a) A higher CRR forces banks to keep a larger share of deposits as reserves with the RBI, leaving less to lend and shrinking the multiplier.
• ✗ (b) A higher SLR likewise locks more deposits into liquid assets such as government securities, reducing the funds available for lending.

Remember · Money multiplier rises when people hold less cash and more deposits; it falls when CRR or SLR is raised.

📘 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 (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 1 and 2

Retail investors can bid for Treasury Bills and dated government bonds in RBI's primary auctions through the non-competitive route, using stock exchanges as aggregators and holding the securities in demat form. NDS-OM is RBI's electronic trading platform for government securities. CDSL was sponsored by the Bombay Stock Exchange and Bank of India; the RBI is not a promoter.

• ✓ 1. Specified stock exchanges act as aggregators in RBI's primary auctions, submitting consolidated non-competitive bids for their clients and transferring the allotted securities to them, so a demat account holder can buy in the primary market.
• ✓ 2. The RBI introduced the Negotiated Dealing System-Order Matching (NDS-OM), an anonymous screen-based order matching system for secondary-market trading in government securities, in August 2005.
• ✗ 3. SEBI's 1998 registration release says CDSL is sponsored by the Bombay Stock Exchange (BSE) and Bank of India. The RBI is not a promoter, and the depository is regulated by SEBI.

Remember · NDS-OM: RBI's screen-based G-sec trading platform (2005). Depositories: NSDL and CDSL (CDSL sponsored by BSE and Bank of India), both regulated by SEBI.

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (b) 2 only

'Lender of last resort' describes the RBI's readiness to lend to banks at all times, so that a bank short of cash in a crisis does not collapse and trigger a run. Lending to firms is the job of commercial banks, and lending to governments is part of the RBI's separate role as banker to the government.

• ✗ 1. The RBI does not lend to trade and industry; businesses borrow from banks and markets.
• ✓ 2. When a bank faces a temporary liquidity crisis and cannot raise funds elsewhere, the RBI stands ready to lend to it; this is the lender-of-last-resort role.
• ✗ 3. Short-term advances to the Centre and States come under the RBI's function as banker to the government, not as lender of last resort.

Remember · Lender of last resort = the central bank's promise to supply liquidity to banks in distress, protecting depositors and the financial system.

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

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error