Money, banking & monetary policy

Answer: (b) 2 and 3 only

When the RBI buys government securities it pays out money and raises the money supply, which would feed inflation, so statement 1 is wrong. Selling dollars supports a falling rupee, and a fall in US or EU interest rates draws funds into India, which the RBI soaks up by buying dollars.

• ✗ 1. Buying bonds in open market operations adds reserves to the banking system and expands money supply. To fight high inflation the RBI would do the opposite and sell securities to absorb money.
• ✓ 2. Under India's managed float the RBI intervenes in the currency market. Selling dollars from its reserves raises the supply of dollars and eases the pressure on a rapidly weakening rupee.
• ✓ 3. Funds move to where returns are higher. Lower rates in the USA or EU make Indian assets more attractive, dollars flow in and the rupee tends to rise; the RBI buys those dollars to smooth the rise and add to reserves.

Remember · RBI buys bonds = injects money (not an anti-inflation step). RBI sells dollars = defends a falling rupee. Capital inflows = RBI buys dollars.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (c) Both 1 and 2

The government borrows at home from the public — directly through small savings schemes and indirectly through banks, insurers and provident funds that hold household money — so part of household savings finances it. Most of the Centre's internal debt is in dated securities sold at auctions.

• ✓ 1. Household deposits in small savings schemes are lent to the Centre through the National Small Savings Fund, and bank deposits flow into government bonds that banks must hold under the SLR.
• ✓ 2. At end-March 2022, dated securities alone made up 66.5 per cent of the Centre's public debt, most of which is internal debt; they are sold through auctions at market-determined yields.

Remember · Centre's internal debt: dominated by auctioned dated securities (about two-thirds of public debt, 2022); household savings reach the government via small savings (NSSF) and banks' SLR holdings.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

UPSC dropped this question from evaluation in its final answer key.

UPSC dropped this question from evaluation in its final answer key. The facts it tests: tighter US monetary policy can pull capital out of emerging economies (statement 1), and a weaker domestic currency raises, not lowers, the currency risk on foreign-currency borrowing (statement 3 is wrong).

• ✓ 1. When the US Federal Reserve tightens, spillovers to emerging market economies can trigger capital outflows and currency depreciation, as the RBI's Financial Stability Report of June 2022 noted.
• • 2. Arguable, which is probably why the question was dropped. Capital flight weakens the rupee and raises risk premia, so servicing dollar loans costs more in rupee terms; whether the interest cost itself rises depends on whether the loan carries a floating rate.
• ✗ 3. Most ECBs are in US dollars, so a fall in the rupee raises the rupee cost of interest and principal. That increases the currency risk unless the borrower has hedged; about 56 per cent of ECB loans were hedged in 2022.

Remember · Fed tightening can trigger capital flight from emerging markets; a weaker rupee makes unhedged dollar borrowing (ECB) costlier to repay, so currency risk rises.

Question and answer: UPSC's official GS Paper I (2022, 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

The Banks Board Bureau recommended who should head public sector banks and helped them with strategy and capital-raising plans, so statements 2 and 3 are correct. Its chairman was not the RBI Governor: the first Chairman was Vinod Rai, former CAG, and the RBI was represented only by a Deputy Governor as ex-officio member.

• ✗ 1. The Bureau was chaired by Vinod Rai, a former Comptroller and Auditor General. The RBI's seat was that of a Deputy Governor, an ex-officio member.
• ✓ 2. The Bureau was set up to recommend the selection of heads of public sector banks and financial institutions.
• ✓ 3. It was also mandated to help banks develop strategies and capital-raising plans.

Remember · Banks Board Bureau (from 1 April 2016): recommends PSB heads and helps with strategy and capital raising; Chairman Vinod Rai; RBI Deputy Governor an ex-officio member.

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (d) Reserve Bank of India

The Reserve Bank of India is responsible for price stability and for keeping inflation on target. Its Monetary Policy Committee sets the policy rate to meet the inflation target that the Central Government notifies.

• ✓ (d) Under the RBI Act, 1934 the primary objective of monetary policy is price stability, keeping growth in mind. The Act gives a statutory basis to flexible inflation targeting, and the RBI controls money supply through the bank rate, open market operations and reserve ratios.
• ✗ (a) The Department of Consumer Affairs is a government department and has no power over money supply or the policy rate, so it cannot be the body that controls inflation through monetary policy.
• ✗ (c) The Financial Stability and Development Council is a coordination forum for financial-sector regulators; the inflation target and policy rate are the RBI's job.

Remember · Price stability and the inflation target (4 per cent CPI, with a 2-6 per cent band) are the RBI's mandate, delivered by its six-member Monetary Policy Committee.

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

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error