Question 1

Which of the following is NOT a function of the Reserve Bank of India as the banker to the Government of India?

Accepted Answer

As the banker to the Government of India, the RBI performs several functions including managing government accounts, collecting taxes and other revenues, making payments on behalf of the government, managing government securities, and providing short-term credit (Ways and Means advances). However, the RBI does NOT directly collect income tax from individual citizens — this is the function of the Income Tax Department. The RBI's role is to manage the government's accounts and facilitate government transactions, not to act as a tax collection agency. Therefore, the answer is D.

Question 2

The Reserve Bank of India was established in 1935 as a private institution and was nationalised in which year?

Accepted Answer

The Reserve Bank of India was established on April 1, 1935, under the RBI Act, 1934, as a private shareholders' bank. It was nationalised on January 26, 1949, following India's independence. The nationalisation brought the RBI under full government ownership and control, making it the central bank of India. Therefore, the answer is B.

Question 3

Which of the following monetary policy tools is used by the RBI to inject liquidity into the banking system by lending to banks against approved securities?

Accepted Answer

The Repo Rate is the rate at which the RBI lends money to scheduled commercial banks against the pledge of approved securities (typically government securities). When the RBI conducts repo operations, it injects liquidity into the system. This is a key monetary policy tool used to manage short-term liquidity and influence credit availability in the economy. Therefore, the answer is A.

Question 4

Under which Act is the Cash Reserve Ratio (CRR) requirement for scheduled commercial banks prescribed by the RBI?

Accepted Answer

The Cash Reserve Ratio (CRR) is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as cash deposits with the RBI. This requirement is prescribed under Section 42 of the Banking Regulation Act, 1949. The RBI uses CRR as a monetary policy tool to control liquidity in the banking system. Therefore, the answer is C.

Question 5

Which of the following best describes the primary function of the Monetary Policy Committee (MPC) constituted under the RBI Act?

Accepted Answer

The Monetary Policy Committee (MPC) is a six-member body established to determine the policy interest rate (repo rate) and the stance of monetary policy. The MPC meets at least bimonthly to review economic conditions and make decisions aligned with the inflation target of 4% (with a band of ±2%). The composition includes the RBI Governor (Chairperson), Deputy Governor in charge of monetary policy, one RBI official, and three external experts appointed by the Government of India. Therefore, the answer is B.

Question 6

Under the Banking Regulation Act 1949, which section mandates that commercial banks maintain a minimum percentage of their Net Demand and Time Liabilities (NDTL) in the form of liquid assets such as government securities and gold?

Accepted Answer

Section 24 of the Banking Regulation Act 1949 prescribes the Statutory Liquidity Ratio (SLR) requirement. Banks must maintain a minimum percentage of their NDTL in approved liquid assets — primarily government securities (G-secs), treasury bills, gold, and cash. The SLR is set by RBI and is a key monetary policy tool to ensure banks' liquidity and solvency while channeling credit toward government borrowing. As of recent RBI policy, the SLR is maintained at 18% of NDTL. Therefore, the answer is B.

Question 7

Which of the following best describes the primary function of the Monetary Policy Committee (MPC) constituted under the RBI Act 1934?

Accepted Answer

The Monetary Policy Committee (MPC) is a statutory body established to determine the policy interest rate (repo rate) and the stance of monetary policy. The MPC comprises 6 members: 3 from RBI (including the Governor as Chair) and 3 external members appointed by the Government of India. It meets at least bimonthly to review economic conditions and decide on monetary policy measures. The MPC's decisions directly influence inflation control, liquidity management, and credit flow in the economy. Therefore, the answer is B.

Question 8

The RBI was established in 1935 and nationalised in 1949. Which of the following statements correctly identifies the primary regulatory act governing the RBI's functions?

Accepted Answer

The RBI was established on April 1, 1935, under the Reserve Bank of India Act, 1934. It was nationalised on January 1, 1949, following India's independence. The RBI Act, 1934 (as amended, most notably in 2016 for the MPC framework) is the primary legislation governing RBI's functions as the central bank, including its role as banker's bank, government bank, note issuer, and regulator of the banking system. Therefore, the answer is C.

Question 9

The Repo Rate is the rate at which the RBI lends to commercial banks. Which of the following best describes the relationship between Repo Rate and Reverse Repo Rate?

Accepted Answer

The Repo Rate is the rate at which the RBI lends to commercial banks against approved securities. The Reverse Repo Rate is the rate at which the RBI borrows from commercial banks. The Reverse Repo Rate is always lower than the Repo Rate, creating a corridor that helps manage liquidity in the banking system. The difference between them is typically 50 basis points. Therefore, the answer is B.

Question 10

Under which section of the Banking Regulation Act, 1949, is the Cash Reserve Ratio (CRR) prescribed by the RBI?

Accepted Answer

The Cash Reserve Ratio (CRR) is prescribed by the RBI under Section 42 of the Banking Regulation Act, 1949. CRR is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as cash deposits with the RBI. This is a key monetary policy tool used to control money supply in the economy. Therefore, the answer is D.

Question 11

The Monetary Policy Committee (MPC) of the RBI meets at what frequency to review and decide on the policy repo rate?

Accepted Answer

The Monetary Policy Committee (MPC) of the RBI is constituted with 6 members (3 from RBI and 3 external members) and meets bimonthly (once every two months) to review monetary policy and decide on the policy repo rate. This framework was established following the RBI Act Amendment in 2016. Therefore, the answer is C.

Question 12

Which of the following best describes the primary function of the Statutory Liquidity Ratio (SLR) in India's banking system?

Accepted Answer

SLR (Statutory Liquidity Ratio) is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained in the form of liquid assets—primarily government securities, gold, or cash. This is prescribed by RBI under Section 24 of the Banking Regulation Act, 1949. SLR ensures banks maintain adequate liquid assets to meet withdrawal demands and support government borrowing. Therefore, the answer is B.

Question 13

The Monetary Policy Committee (MPC) of the RBI is constituted with how many members, and how frequently does it meet to decide on the policy rate?

Accepted Answer

The MPC comprises 6 members: 3 from the RBI (including the Governor as chairperson) and 3 external members appointed by the Government of India. The committee meets at least 4 times a year (bimonthly or more frequently as required). The primary objective is to determine the repo rate. Therefore, the answer is C.

Question 14

The Monetary Policy Committee (MPC) of the RBI is mandated to meet at least how many times in a financial year, and which of the following is NOT a member category of the MPC as per the RBI Act 1934?

Accepted Answer

The Monetary Policy Committee meets at least 6 times per financial year (bimonthly). The MPC comprises 6 members: (1) RBI Governor (Chairperson), (2) RBI Deputy Governor in charge of monetary policy, (3) One RBI official, and (4–6) Three external members appointed by the Government of India. The external members are typically economists or financial experts, NOT representatives of commercial banks or the Ministry of Finance as voting members. Option D incorrectly suggests a commercial bank representative is a voting member of MPC, which is factually incorrect. The MPC's composition is defined under Section 45ZB of the RBI Act 1934 (inserted via the RBI (Amendment) Act 2016). Therefore, answer is D.

Question 15

Which monetary policy tool involves RBI buying and selling government securities in the open market to influence the money supply and liquidity conditions in the banking system?

Accepted Answer

Open Market Operations (OMO) is the tool through which RBI buys and sells government securities (G-secs) in the secondary market. When RBI buys G-secs, it injects liquidity into the system; when it sells, it absorbs liquidity. OMO is a key instrument for fine-tuning liquidity without changing the policy repo rate. Therefore, the answer is A.

Question 16

The Marginal Standing Facility (MSF) is a liquidity facility provided by RBI to scheduled commercial banks. Which of the following correctly describes the relationship between the MSF rate and the policy repo rate?

Accepted Answer

The MSF rate is set at 100 basis points (1%) above the policy repo rate. It is the rate at which banks can borrow from RBI against approved securities on an overnight basis when they face acute liquidity shortages. The MSF rate acts as a ceiling for the overnight call money market rate. Therefore, the answer is B.

Question 17

Which of the following best describes the transmission mechanism of monetary policy in the Indian banking system?

Accepted Answer

The transmission mechanism is the process through which changes in the RBI's policy repo rate flow through the banking system to affect lending rates, credit growth, investment, and ultimately inflation and economic growth. When RBI raises the repo rate, banks' cost of funds increases, leading to higher lending rates, reduced credit demand, and lower inflation. Therefore, the answer is D.

Question 18

The Monetary Policy Committee (MPC) of the RBI is constituted with how many members, and how frequently does it meet to decide on the policy repo rate?

Accepted Answer

The MPC comprises 6 members: 3 from RBI (including the Governor as chairperson) and 3 external members appointed by the Government of India. The committee meets at least 4 times a year (bimonthly) to review monetary policy and decide the policy repo rate. Therefore, the answer is C.

Question 19

Under the Banking Regulation Act 1949, which section empowers the RBI to prescribe the Statutory Liquidity Ratio (SLR) that commercial banks must maintain?

Accepted Answer

SLR is prescribed under Section 24 of the Banking Regulation Act 1949. This section grants RBI the authority to fix the minimum percentage of net demand and time liabilities (NDTL) that banks must hold in liquid assets such as government securities, gold, and cash. Therefore, the answer is B.

Question 20

Under the transmission mechanism of monetary policy, when the RBI reduces the Repo Rate, which of the following is the most direct and immediate consequence for commercial banks?

Accepted Answer

When the RBI reduces the Repo Rate, the cost of borrowing for commercial banks decreases immediately. Banks can borrow funds from the RBI at a lower rate, which reduces their cost of funds. This lower cost of borrowing is then transmitted to customers through reduced lending rates (on loans and advances), increased deposit rates (to attract deposits), and expanded credit growth. The most direct and immediate consequence is the reduction in the cost of funds for banks. Therefore, the answer is C.

RBI Grade B RBI Functions & Monetary Policy

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60-Second Revision — RBI Functions & Monetary Policy