Money, Financial Markets & Financial Inclusion

The earlier chapter on budget and banking introduced the RBI, the repo rate and the Monetary Policy Committee. This one opens the machine. It starts with what money is and how the RBI measures it (M0 to M4), then follows a rupee of policy through the liquidity corridor — repo, the Standing Deposit Facility, the Marginal Standing Facility, open market operations and the reserve ratios — and into the statutory framework of inflation targeting. From there it turns to what happens when loans go bad (NPAs, SARFAESI, the IBC), to the money and capital markets where governments and companies borrow, to insurance and pensions, and finally to the financial-inclusion and digital-payments architecture: Jan Dhan, payments banks, small finance banks, MUDRA, NPCI and UPI. Questions in this area reward precision about who issues what, under which law, and what a facility can and cannot do. Policy rates change at every meeting, so the chapter teaches the mechanism and never quotes a rate as current.

What Money Does and How the RBI Measures It

Barter fails because it needs a double coincidence of wants: the weaver who wants rice must find a farmer who wants cloth. Money removes that requirement by doing four jobs. Two are called primary: it is a medium of exchange and a measure of value (unit of account). Two are secondary or derived: it is a store of value and a standard of deferred payment, which is what lets loans and salaries be written in rupees today for payment later. Modern money is fiat money — it has value because the State declares it legal tender, not because the paper is worth anything — and its value depends on trust that its purchasing power will not be eroded too fast.

Who issues what is a favourite point of confusion. The RBI issues bank notes under the RBI Act, 1934, backed since 1957 by a Minimum Reserve System: it must hold gold and foreign exchange worth at least ₹200 crore, of which at least ₹115 crore must be gold. The one-rupee note and all coins are issued by the Government of India — the one-rupee note carries the signature of the Finance Secretary, not the Governor — and coins are minted by the Government and only put into circulation through the RBI.

The RBI’s classic monetary aggregates
AggregateWhat it containsAlso called
M0Currency in circulation + bankers’ deposits with the RBI + ‘other’ deposits with the RBIReserve money, high-powered money, base money
M1Currency with the public + demand deposits with banks + ‘other’ deposits with the RBINarrow money — the most liquid
M2M1 + savings deposits with post office savings banks—
M3M1 + time deposits with banksBroad money — the aggregate most often tracked
M4M3 + all deposits with post office savings organisations (excluding National Savings Certificates)The least liquid

Liquidity falls as you go down the table, from M1 to M4. The ratio of broad money to reserve money (M3 ÷ M0) is the money multiplier: each rupee of reserve money supports several rupees of deposits because banks lend out what they do not have to hold back. Anything that forces banks to hold more back — a higher CRR, for instance — lowers the multiplier. In 1998 a working group chaired by Y. V. Reddy recommended a further set of "new" monetary aggregates (NM1 to NM3) and liquidity aggregates (L1 to L3), which the RBI also compiles; the classic M0–M4 remain the set to know first.

⚠️ Exam trap
M2 and M3 are both built on M1, not on each other. M2 adds post office savings deposits; M3 adds bank time deposits. So "M3 = M2 + time deposits" is wrong. Also remember that M0 contains bankers’ deposits with the RBI, while M1 contains public’s deposits with banks — the first is the banks’ money at the RBI, the second is your money at the bank.

The Monetary Policy Toolkit: Corridor, Reserves and OMOs

The RBI’s tools fall into two families. Quantitative (general) tools change the overall amount and cost of money: the policy rates, the reserve ratios and open market operations. Qualitative (selective) tools steer credit towards or away from particular uses: margin requirements on loans against commodities or shares, credit ceilings, directions and moral suasion — persuasion without compulsion. Priority-sector lending, met in the chapter on the external sector and institutions, is the largest selective instrument in use.

Day-to-day liquidity is managed through the Liquidity Adjustment Facility (LAF), introduced in 2000. It works as a corridor. In the middle is the policy repo rate, the rate at which the RBI lends to banks against government securities and the rate the MPC sets. The floor is the Standing Deposit Facility (SDF), introduced in April 2022: banks park surplus funds with the RBI without the RBI having to give securities as collateral — a power added to the RBI Act in 2018. The ceiling is the Marginal Standing Facility (MSF), introduced in 2011: a bank short of funds overnight can borrow at a penalty rate by dipping into its SLR securities up to a limit. When the SDF was introduced it was placed 25 basis points below the repo rate and the MSF 25 basis points above it, a corridor 50 basis points wide; the RBI can change these spreads. The Bank Rate, the RBI’s old rediscounting rate, has been aligned with the MSF rate since 2012 and now matters mainly for the penal rates that are linked to it.

The main instruments and which way each moves to fight inflation
InstrumentWhat it doesLegal basis / noteTo tighten (fight inflation)
RepoRBI lends to banks against government securities, with an agreement to repurchasePolicy rate set by the MPCRaise
Reverse repoRBI borrows from banks, giving securities as collateralNo longer the corridor floor since the SDF (2022); used at the RBI’s discretionRaise
SDFAbsorbs surplus liquidity without collateralSection 17 of the RBI Act, amended 2018; floor of the corridorRaise
MSFEmergency overnight borrowing by banks, partly out of SLR holdingsCeiling of the corridorRaise
CRRShare of net demand and time liabilities (NDTL) a bank must keep as cash balance with the RBI; earns no interestSection 42, RBI Act, 1934; the old 3–20% band was removed in 2006Raise
SLRShare of NDTL a bank must keep itself in cash, gold or unencumbered approved securitiesSection 24, Banking Regulation Act, 1949; ceiling 40%, the 25% floor removed in 2007Raise
OMOOutright purchase or sale of government securities — adjusts durable liquidityBuying injects rupees; selling absorbs themSell securities

Two further tools deal with special situations. The Market Stabilisation Scheme (MSS), set up by a 2004 agreement between the Government and the RBI, lets the RBI issue extra treasury bills and dated securities to sterilise — mop up — the rupees created when it buys large foreign-currency inflows. And because a policy-rate change is useless if banks do not pass it on, the RBI has repeatedly changed the lending-rate benchmark: Base Rate (2010), MCLR (2016), and from 1 October 2019 an external benchmark — such as the repo rate or a treasury-bill yield — compulsory for new floating-rate retail and MSE loans.

⚠️ Exam trap
Three pairs that are routinely swapped. (1) CRR is held with the RBI and earns nothing; SLR is held by the bank itself and, in government securities, earns interest. (2) CRR comes from the RBI Act; SLR from the Banking Regulation Act. (3) SDF needs no collateral; reverse repo does. And a direction trap: to fight inflation the RBI sells securities in OMOs — buying them puts money into the system.

The Monetary Policy Committee and Inflation Targeting in Law

India moved to flexible inflation targeting in steps. The Urjit Patel Committee (2014) recommended that CPI inflation be the nominal anchor of policy; a Monetary Policy Framework Agreement between the Government and the RBI followed in February 2015; and the Finance Act, 2016 amended the RBI Act to insert a new chapter that put the framework and the Monetary Policy Committee into law. "Flexible" means the RBI must keep growth in mind while pursuing price stability — it is not told to hit the target at any cost.

  • Who sets the target: the Central Government, in consultation with the RBI, once every five years. The target notified in 2016 — 4% CPI inflation with a tolerance band of 2% to 6% — was retained in 2021 for the five years to March 2026; the next review decides the period after that.
  • Which index: CPI-Combined (rural and urban together), compiled by the National Statistics Office. The WPI, compiled by the Office of the Economic Adviser in DPIIT, is not the target.
  • Who is on the MPC: six members — the Governor (chair), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the Central Government on the recommendation of a search-cum-selection committee chaired by the Cabinet Secretary. External members serve four years and cannot be reappointed.
  • How it decides: at least four meetings a year; quorum of four; one member one vote, with the Governor’s casting vote in a tie; the decision binds the RBI; minutes are published on the fourteenth day after the meeting.
  • What counts as failure: average inflation above the upper or below the lower tolerance level for three consecutive quarters. The RBI must then send the Government a report giving the reasons, the remedial action proposed and the time within which the target will be restored.
⚠️ Exam trap
The MPC sets one thing: the policy repo rate. It does not set the inflation target (the Government does, in consultation with the RBI), and it does not decide the CRR, SLR or OMOs, which remain with the RBI. A failure is three consecutive quarters outside the band, not a single bad month — and the consequence is a report, not a penalty or the Governor’s removal.

Bad Loans: NPAs, SARFAESI and the Insolvency Code

A loan becomes a non-performing asset (NPA) when interest or an instalment of principal remains overdue for more than 90 days. For farm loans the clock is the crop: two crop seasons for short-duration crops and one crop season for long-duration crops. Before that point the RBI asks banks to flag stress early as Special Mention Accounts — SMA-0 (overdue up to 30 days), SMA-1 (31–60 days) and SMA-2 (61–90 days). Once an account is an NPA it ages through three classes: sub-standard (an NPA for up to 12 months), doubtful (sub-standard for 12 months) and loss (identified as uncollectible). Gross NPA is the total of such loans; net NPA is gross NPA minus the provisions already made against it.

How India’s recovery machinery was built
  1. 1993
    Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act — a specialised forum instead of the civil courts
  2. 2002
    SARFAESI Act — secured creditors may take possession of and sell the security without going to court, after a 60-day notice; also the legal basis for asset reconstruction companies (ARCs), registered with the RBI
  3. 2015
    Asset Quality Review by the RBI forces banks to recognise hidden stress — the start of the "twin balance sheet" reckoning of over-leveraged companies and weakened banks
  4. 2016
    Insolvency and Bankruptcy Code — one time-bound law for the insolvency of companies, partnerships and individuals
  5. 2021
    Pre-packaged insolvency for MSMEs added to the IBC; the National Asset Reconstruction Company (NARCL) announced as a government-backed "bad bank" for large stressed loans

The IBC changed who holds the reins. Before it, a defaulting company’s management stayed in charge while recovery dragged on ("debtor in possession"); under the Code, once a petition is admitted an interim resolution professional takes over the company and a Committee of Creditors (CoC), made up of financial creditors, decides its fate ("creditor in control"). A resolution plan needs the approval of creditors holding at least 66% of the voting share (lowered from 75% in 2018). The Corporate Insolvency Resolution Process must finish within 180 days, extendable by 90, with an outer limit of 330 days including litigation (2019 amendment); if no plan is approved, the company goes into liquidation. The NCLT adjudicates for companies and LLPs, the DRT for individuals and partnership firms; appeals go to the NCLAT and then the Supreme Court. Two amendments are frequently asked: Section 29A (2017–18) bars defaulting promoters and other disqualified persons from bidding for their own companies, and homebuyers were recognised as financial creditors in 2018. Since March 2020 a corporate insolvency case can be started only for a default of at least ₹1 crore.

⚠️ Exam trap
Match the remedy to the forum. SARFAESI needs no court — the secured creditor acts directly — but it cannot be used against agricultural land. DRTs date from 1993, not from SARFAESI or the IBC. Under the IBC, companies go to the NCLT, individuals to the DRT. And the IBBI, met in the chapter on institutions, regulates insolvency professionals; it does not decide cases.

The Money Market and the Capital Market

The dividing line is one year. The money market deals in short-term funds — overnight to one year — and is regulated by the RBI; it is where banks square their daily positions and companies and governments cover short gaps. The capital market deals in long-term funds — equity, bonds and debentures of more than a year — and is regulated mainly by SEBI (introduced in the chapter on institutions), with the RBI regulating the government securities market.

Money-market instruments: who issues them and for how long
InstrumentIssued byMaturityPoint to remember
Call / notice / term moneyInter-bank borrowing and lending (banks and primary dealers)Overnight / 2–14 days / 15 days–1 yearUnsecured; the call rate is the most sensitive gauge of daily liquidity
Treasury bill (T-bill)Central Government, through RBI auctions91, 182 and 364 daysZero-coupon: issued at a discount, redeemed at face value
Cash management billCentral GovernmentLess than 91 daysCovers temporary mismatches in the Government’s cash flow
Commercial paper (CP)Companies, NBFCs and financial institutions7 days to 1 yearAn unsecured promissory note; only creditworthy issuers can sell it
Certificate of deposit (CD)Banks (and all-India financial institutions)Banks: 7 days to 1 year; financial institutions: 1 to 3 yearsA negotiable deposit receipt — a bank’s way of raising bulk funds
Repo and tri-party repo (TREPS)Market participants among themselvesMostly overnightCollateralised borrowing against securities

In the capital market the primary market is where securities are first sold — an initial public offer (IPO), a follow-on offer, a rights issue to existing shareholders, a private placement or a qualified institutions placement — and the money goes to the issuer. The secondary market is where already-issued securities are traded among investors on stock exchanges, and the issuer receives nothing. The Bombay Stock Exchange (1875) is Asia’s oldest; the National Stock Exchange was set up in 1992 and introduced screen-based trading. Shares are held electronically in depositories — NSDL (1996) and CDSL (1999) — under the Depositories Act, 1996. The Sensex tracks 30 large BSE stocks (base 1978-79 = 100) and the Nifty 50 tracks 50 NSE stocks. Equity trades have settled on T+1 since January 2023. The commodity-derivatives regulator, the Forward Markets Commission, was merged into SEBI in 2015.

Governments borrow long-term through dated securities (G-secs) for the Centre and State Development Loans for the states; the RBI is the debt manager for both and conducts the auctions. Since November 2021 individuals can open a gilt account with the RBI and buy G-secs directly through RBI Retail Direct. Among bonds worth knowing by design: masala bonds are rupee-denominated bonds issued abroad, so the foreign investor bears the currency risk; green bonds finance environmentally beneficial projects, and the Government issued its first sovereign green bonds in January 2023.

🧠 Memory trick
Read the issuer off the name. Treasury bill and cash management bill — the Treasury, i.e. the Government. Commercial paper — commerce, i.e. companies. Certificate of deposit — only an institution that takes deposits, i.e. a bank (or a financial institution). And anything over one year is capital market, however safe — a 10-year G-sec is not a money-market instrument.

Insurance and Pensions

Insurance in India went through nationalisation and back. Life insurance was nationalised in 1956, when some 245 companies were merged into the Life Insurance Corporation (LIC); general insurance was nationalised in 1972, under the General Insurance Corporation with four subsidiaries (National, New India, Oriental and United India). The Malhotra Committee (1994) recommended reopening the sector, and the IRDA Act, 1999 created the regulator and admitted private insurers. Two ratios measure how deep insurance runs: penetration is premium as a percentage of GDP; density is premium per head of population. The General Insurance Corporation of India (GIC Re) is the national reinsurer — the insurer of insurers.

The social-security schemes launched in 2015 and the pension system
SchemeDesignWho it is for
PM Jeevan Jyoti Bima Yojana (2015)One-year renewable term life cover of ₹2 lakh for death from any cause, through a bank or post office accountAccount holders aged 18–50
PM Suraksha Bima Yojana (2015)One-year renewable accident cover: ₹2 lakh for accidental death or total disability, ₹1 lakh for partial disabilityAccount holders aged 18–70
Atal Pension Yojana (2015)Guaranteed minimum monthly pension of ₹1,000 to ₹5,000 from age 60, depending on contribution; administered by PFRDAMainly unorganised-sector workers joining at 18–40; income-tax payers barred from joining since October 2022
National Pension System (NPS)Defined-contribution, market-linked; two account tiers — the first is the pension account with restricted withdrawal, the second a voluntary account that can be withdrawn; regulated by PFRDACompulsory for Central Government employees (except the armed forces) joining from 1 January 2004; open to all citizens since 2009
Unified Pension Scheme (UPS)An option within NPS, effective 1 April 2025: an assured pension of 50% of the average basic pay of the last twelve months for at least 25 years of service, proportionately less for shorter serviceCentral Government employees covered by NPS who choose it
🎯 Why the move from the old pension mattered
The old pension was defined-benefit: the Government promised a fraction of last pay for life and paid it out of each year’s budget, so the liability grew silently as people lived longer. NPS is defined-contribution: employee and employer put money into an account invested in markets, and the pension depends on what the account earns. That shifts the risk from the taxpayer to the employee — which is exactly the tension the UPS tries to soften by adding an assured floor inside the contributory system.
⚠️ Exam trap
PFRDA regulates NPS and administers APY; it does not regulate the EPFO, which is a statutory body under the Ministry of Labour and Employment. PMJJBY is life cover (death from any cause, up to 50 to join); PMSBY is accident cover (up to 70). The ₹2 lakh is the same in both — the trigger is what differs.

Financial Inclusion and Digital Payments

Financial inclusion means access, at affordable cost, to the basic formal financial services — a savings account, credit, insurance, a pension and a way to make payments — for groups that markets left out. The Rangarajan Committee (2008) framed it for policy. Since 2006 banks have been allowed to reach villages without branches through business correspondents, agents who open accounts and handle cash. The Nachiket Mor Committee (2014) recommended differentiated banks, and the RBI issued guidelines in November 2014 for two new kinds: payments banks and small finance banks. The RBI measures progress with a Financial Inclusion Index (FI-Index), published annually since 2021 on a scale of 0 to 100, weighting access (35%), usage (45%) and quality (20%).

Payments banks and small finance banks compared
FeaturePayments bankSmall finance bank
DepositsDemand deposits only, up to ₹2 lakh per customer (raised from ₹1 lakh in 2021)All kinds of deposits, without a per-customer cap
LendingCannot lend and cannot issue credit cards; may issue debit cardsLends, with 75% of adjusted net bank credit to the priority sector and at least half the loan book in loans up to ₹25 lakh
Where the money goesAt least 75% of demand deposits in government securities and T-bills of up to one year; the rest in deposits with other banksInto loans to small borrowers, farmers and micro enterprises
IdeaSafe deposits and payments for the unbanked, with no credit risk at allCredit for those mainstream banks find too small to serve

Pradhan Mantri Jan Dhan Yojana (PMJDY), launched on 28 August 2014, gave every household a zero-balance basic savings account with a RuPay debit card carrying accident insurance and an overdraft facility (cover and overdraft were enlarged in 2018). Combined with Aadhaar and mobile phones — the JAM trinity — the accounts became the rails for Direct Benefit Transfer, begun in 2013. For credit, MUDRA (Micro Units Development and Refinance Agency), set up in April 2015 as a subsidiary of SIDBI, does not lend directly: it refinances banks, NBFCs and microfinance institutions that give collateral-free loans under the Pradhan Mantri MUDRA Yojana to non-corporate, non-farm micro and small enterprises, in bands named Shishu (up to ₹50,000), Kishore (up to ₹5 lakh), Tarun (up to ₹10 lakh) and, since 2024, Tarun Plus (up to ₹20 lakh, for borrowers who have repaid a Tarun loan).

The payments system rests on the Payment and Settlement Systems Act, 2007, under which the RBI authorises and oversees every system. Two operators matter. The RBI itself runs the large-value and batch systems: RTGS (real-time, gross, for ₹2 lakh and above) and NEFT (batch settlement, no minimum) — available round the clock since December 2019 (NEFT) and December 2020 (RTGS). The National Payments Corporation of India (NPCI), set up in 2008 by the RBI and the Indian Banks’ Association as a not-for-profit company, runs the retail systems: IMPS (2010), RuPay (2012), UPI (2016), BHIM, the Aadhaar-enabled Payment System, NACH, FASTag tolling and Bharat BillPay. UPI links many bank accounts to one mobile app through a virtual payment address, settles instantly and is interoperable across banks and apps; UPI 123PAY (2022) extends it to feature phones. The RBI’s own digital currency, the e-Rupee (e₹), a central bank digital currency, was piloted from November 2022 (wholesale) and December 2022 (retail) after the Finance Act, 2022 widened the definition of bank note to include a digital form.

⚠️ Exam trap
Sort the systems by operator: RTGS and NEFT — RBI; UPI, IMPS, RuPay, AePS, FASTag — NPCI. A payments bank cannot lend, however small the loan. MUDRA is a refinancer, not a lender, and it serves non-farm enterprises — crop loans go through the Kisan Credit Card. And the e-Rupee is legal tender issued by the RBI, not a cryptocurrency and not a UPI balance.

Key takeaways

  • Money: medium of exchange and measure of value (primary), store of value and standard of deferred payment (secondary). RBI issues notes (Minimum Reserve System: ₹200 crore, at least ₹115 crore in gold); the one-rupee note and coins are issued by the Government.
  • M0 = currency in circulation + bankers’ and ‘other’ deposits with the RBI (reserve money). M1 = currency with public + demand deposits + ‘other’ deposits (narrow). M2 = M1 + post office savings deposits. M3 = M1 + bank time deposits (broad). M4 = M3 + all post office deposits. Liquidity falls from M1 to M4.
  • LAF corridor: SDF (floor, 2022, no collateral) — repo (policy rate) — MSF (ceiling, 2011, dips into SLR); Bank Rate aligned to MSF. CRR under RBI Act s.42, with the RBI, no interest; SLR under BR Act s.24, held by the bank, ceiling 40%. To tighten, sell securities in OMOs; MSS (2004) sterilises inflows.
  • Inflation targeting: Urjit Patel Committee (2014) → agreement (2015) → Finance Act 2016 amends the RBI Act. Government sets the target with the RBI every five years (4%, band 2–6%). MPC: 6 members, 3 external (4 years, no reappointment), ≥4 meetings a year, Governor’s casting vote; sets only the repo rate. Failure = three consecutive quarters outside the band → report to Government.
  • NPA = overdue more than 90 days (farm loans: two short or one long crop season); SMA-0/1/2 flag stress first; NPAs age as sub-standard → doubtful → loss. DRT 1993; SARFAESI 2002 (no court, not farm land; ARCs); IBC 2016 (CoC with 66% vote, 180+90 days, 330-day outer limit; NCLT for companies, DRT for individuals; s.29A; ₹1 crore threshold since 2020).
  • Money market (up to 1 year, RBI): call money, T-bills (Centre; 91/182/364 days; zero-coupon), cash management bills, CP (companies, 7 days–1 year), CD (banks), TREPS. Capital market (SEBI): primary (IPO, FPO, rights, QIP) vs secondary (exchanges); NSDL/CDSL; T+1 since 2023; FMC merged into SEBI 2015. RBI manages public debt; masala bonds put currency risk on the foreign investor.
  • Insurance: LIC 1956, general insurance nationalised 1972, Malhotra Committee → IRDA Act 1999; penetration = premium/GDP, density = premium per head. 2015 trio: PMJJBY (life, ₹2 lakh, 18–50), PMSBY (accident, ₹2 lakh, 18–70), APY (guaranteed pension, PFRDA). NPS (defined-contribution) for Central employees from 1 Jan 2004, all citizens from 2009; UPS option from 1 April 2025.
  • Inclusion: business correspondents (2006), PMJDY (28 Aug 2014), JAM + DBT; payments banks (demand deposits up to ₹2 lakh, no lending) and small finance banks (75% priority sector); MUDRA (2015, SIDBI subsidiary, refinancer; Shishu/Kishore/Tarun/Tarun Plus); FI-Index weights 35/45/20. RTGS and NEFT run by the RBI; UPI, IMPS, RuPay by NPCI (2008); e₹ piloted 2022.

Practice questions (16)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

  1. With reference to the monetary aggregates compiled by the Reserve Bank of India, consider the following statements:
    1. M1 includes demand deposits with banks and ‘other’ deposits with the RBI.
    2. M3 is obtained by adding savings deposits with post office savings banks to M1.
    3. M4 is the least liquid of the four aggregates M1 to M4.
    Which of the statements given above are correct?

    1. 1 only
    2. 1 and 3 only
    3. 2 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: B — 1 and 3 only

    Statements 1 and 3 are correct: M1 is currency with the public plus demand deposits plus ‘other’ deposits with the RBI, and liquidity falls from M1 to M4. Statement 2 describes M2, not M3 — M3 adds bank time deposits to M1. The trap is assuming the aggregates are built one on top of the other.

  2. Which one of the following is NOT a component of reserve money (M0)?

    1. Currency in circulation
    2. Bankers’ deposits with the RBI
    3. ‘Other’ deposits with the RBI
    4. Time deposits of the public with commercial banks
    Show answer

    Answer: D — Time deposits of the public with commercial banks

    Reserve money is the RBI’s own monetary liability: currency in circulation, bankers’ deposits with the RBI and ‘other’ deposits with the RBI. Time deposits of the public sit with commercial banks, not with the RBI, and enter only broad money (M3). The tempting slip is to confuse bankers’ deposits with the RBI and the public’s deposits with banks.

  3. Consider the following statements:
    1. Banks earn no interest from the RBI on the balances they maintain to meet the Cash Reserve Ratio.
    2. The Statutory Liquidity Ratio can be maintained in cash, gold or unencumbered approved securities.
    3. The Cash Reserve Ratio is prescribed under the Banking Regulation Act, 1949, and the Statutory Liquidity Ratio under the RBI Act, 1934.
    Which of the statements given above are correct?

    1. 1 and 2 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: A — 1 and 2 only

    Statements 1 and 2 are correct. Statement 3 reverses the two laws: CRR comes from Section 42 of the RBI Act, 1934, and SLR from Section 24 of the Banking Regulation Act, 1949. The pairing is easy to swap because both ratios are applied to the same base, net demand and time liabilities.

  4. Which one of the following best describes the Standing Deposit Facility introduced by the RBI in 2022?

    1. A window for banks to borrow overnight by dipping into their SLR securities
    2. A means for the RBI to absorb surplus liquidity without giving collateral
    3. The rate at which the RBI rediscounts bills of exchange
    4. An issue of special treasury bills to sterilise capital inflows
    Show answer

    Answer: B — A means for the RBI to absorb surplus liquidity without giving collateral

    The SDF is the floor of the liquidity corridor: banks park surplus funds with the RBI, which need not hand over government securities in return, a power added to the RBI Act in 2018. The first option describes the MSF, the third the Bank Rate and the fourth the Market Stabilisation Scheme — each a real instrument, which is what makes them tempting.

  5. If the RBI wishes to absorb durable surplus liquidity from the banking system, which one of the following actions is appropriate?

    1. Purchasing government securities through open market operations
    2. Reducing the Cash Reserve Ratio
    3. Selling government securities through open market operations
    4. Lowering the Marginal Standing Facility rate
    Show answer

    Answer: C — Selling government securities through open market operations

    When the RBI sells securities outright, banks pay for them with rupees, which leave the system — durable liquidity is absorbed. Buying securities does the opposite, and cutting the CRR or the MSF rate both make money more freely available. The trap is the direction: OMO purchases inject liquidity.

  6. With reference to the flexible inflation-targeting framework in India, consider the following statements:
    1. The inflation target is set by the Central Government in consultation with the RBI once every five years.
    2. The external members of the Monetary Policy Committee are eligible for reappointment for one further term.
    3. If average inflation remains outside the tolerance band for three consecutive quarters, the RBI must report to the Government the reasons and the remedial action proposed.
    Which of the statements given above are correct?

    1. 1 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: C — 1 and 3 only

    Statements 1 and 3 are correct: the Government sets the target with the RBI every five years, and three consecutive quarters outside the band oblige the RBI to explain itself in a report. Statement 2 is wrong — external members serve four years and are not eligible for reappointment, a rule meant to protect their independence.

  7. Under the RBI Act as amended in 2016, the Monetary Policy Committee is empowered to determine:

    1. the policy repo rate
    2. the Cash Reserve Ratio and the Statutory Liquidity Ratio
    3. the inflation target and its tolerance band
    4. the size of open market operations
    Show answer

    Answer: A — the policy repo rate

    The MPC’s statutory job is to set the policy repo rate needed to reach the inflation target. The target itself is fixed by the Central Government in consultation with the RBI, and the reserve ratios and OMOs remain the RBI’s own instruments. Option C is the classic trap because the MPC works to the target without setting it.

  8. A term loan given by a bank to a manufacturing company is classified as a non-performing asset when interest or instalment remains overdue for more than:

    1. 30 days
    2. 60 days
    3. 90 days
    4. 180 days
    Show answer

    Answer: C — 90 days

    The norm is more than 90 days overdue. The 30- and 60-day marks are the boundaries of the Special Mention Account categories SMA-0 and SMA-1, which flag stress before an account becomes an NPA; 180 days was the older norm that India replaced to align with international practice.

  9. With reference to the Insolvency and Bankruptcy Code, 2016, consider the following statements:
    1. Insolvency cases of companies are adjudicated by the National Company Law Tribunal.
    2. A resolution plan requires the approval of financial creditors holding at least 66% of the voting share in the Committee of Creditors.
    3. Insolvency cases of individuals and partnership firms are adjudicated by the Debt Recovery Tribunal.
    Which of the statements given above are correct?

    1. 1 only
    2. 1 and 2 only
    3. 2 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: D — 1, 2 and 3

    All three are correct. The Code splits adjudication — NCLT for companies and LLPs, DRT for individuals and partnerships — and the voting threshold for a resolution plan was lowered from 75% to 66% in 2018. The usual slip is to think every IBC case goes to the NCLT.

  10. Which one of the following is a feature of the SARFAESI Act, 2002?

    1. It allows secured creditors to take possession of the security and sell it without the intervention of a court
    2. It created the National Company Law Tribunal
    3. It applies mainly to unsecured loans
    4. It set up the Debt Recovery Tribunals
    Show answer

    Answer: A — It allows secured creditors to take possession of the security and sell it without the intervention of a court

    SARFAESI’s purpose is enforcement without the courts: after a 60-day notice a secured creditor can take over and sell the asset, and the Act also provides for asset reconstruction companies. It works only for secured debt, the NCLT came through company law, and the DRTs date from the 1993 recovery Act — the last is the most common confusion.

  11. Consider the following pairs of money-market instrument and issuer:
    1. Treasury bill — Central Government
    2. Commercial paper — Scheduled commercial banks only
    3. Certificate of deposit — Banks and all-India financial institutions
    4. Cash management bill — State governments
    Which of the pairs given above are correctly matched?

    1. 1 and 2 only
    2. 1 and 3 only
    3. 2 and 4 only
    4. 3 and 4 only
    Show answer

    Answer: B — 1 and 3 only

    Pairs 1 and 3 are correct. Commercial paper is issued by companies, NBFCs and financial institutions — it is the corporate counterpart of a bank’s certificate of deposit — and cash management bills are short instruments of the Central Government, not the states. Reading the issuer off the name (treasury, commerce, deposit) avoids both traps.

  12. Which one of the following is an instrument of the capital market rather than the money market?

    1. A 364-day treasury bill
    2. A certificate of deposit with six months to maturity
    3. A 90-day commercial paper
    4. A 10-year dated government security
    Show answer

    Answer: D — A 10-year dated government security

    The money market covers funds up to one year, so the T-bill, the CD and the CP are all money-market instruments. A dated G-sec with ten years to maturity is long-term borrowing and belongs to the capital market even though it is issued by the Government and regulated by the RBI. The trap is to classify by issuer or safety rather than by maturity.

  13. With reference to payments banks in India, consider the following statements:
    1. They can accept demand deposits subject to a per-customer limit.
    2. They can issue credit cards to their customers.
    3. They can lend to small businesses and farmers.
    How many of the statements given above are correct?

    1. Only one
    2. Only two
    3. All three
    4. None
    Show answer

    Answer: A — Only one

    Only statement 1 is correct: payments banks take demand deposits up to ₹2 lakh per customer. They cannot lend in any form, which also rules out credit cards; lending to small borrowers is the job of small finance banks, licensed under the same 2014 framework — the two are often confused.

  14. Consider the following pairs of payment system and its operator:
    1. Unified Payments Interface — National Payments Corporation of India
    2. National Electronic Funds Transfer — Reserve Bank of India
    3. RuPay — National Payments Corporation of India
    4. Real Time Gross Settlement — National Payments Corporation of India
    How many of the pairs given above are correctly matched?

    1. Only one
    2. Only two
    3. Only three
    4. All four
    Show answer

    Answer: C — Only three

    Pairs 1, 2 and 3 are correct. RTGS, like NEFT, is owned and operated by the RBI; NPCI runs the retail systems such as UPI, IMPS, RuPay and FASTag. Because NPCI dominates everyday payments it is tempting to credit it with RTGS as well.

  15. Which one of the following statements about pension schemes in India is correct?

    1. The National Pension System is a defined-benefit scheme
    2. Atal Pension Yojana guarantees a minimum pension and is run by PFRDA
    3. The Employees’ Provident Fund Organisation is regulated by PFRDA
    4. The National Pension System is open only to employees of the Central and state governments
    Show answer

    Answer: B — Atal Pension Yojana guarantees a minimum pension and is run by PFRDA

    APY guarantees a monthly pension of ₹1,000 to ₹5,000 from age 60 and runs through the NPS architecture under PFRDA. NPS itself is defined-contribution, has been open to all citizens since 2009, and the EPFO is a separate statutory body under the Labour Ministry. The EPFO option tempts because both deal with retirement savings.

  16. Which one of the following correctly describes the role of MUDRA?

    1. It lends directly to micro entrepreneurs through its own branches
    2. It is a payments bank promoted by SIDBI
    3. It is the statutory regulator of microfinance institutions
    4. It refinances banks, NBFCs and microfinance institutions that lend to non-farm micro enterprises
    Show answer

    Answer: D — It refinances banks, NBFCs and microfinance institutions that lend to non-farm micro enterprises

    MUDRA, a SIDBI subsidiary set up in 2015, refinances the lenders who give Shishu, Kishore, Tarun and Tarun Plus loans; it does not lend directly and is not a bank. Microfinance institutions are regulated by the RBI. The first option tempts because the scheme is often described as "MUDRA loans", though the loan comes from a bank or NBFC.