Indian Economy

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high importance~2 Q in Tier 16 formulas⚡ 19 shortcuts8 subtopics

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Money, banking and the RBI

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⏱ 7 min read🧩 5 question types🎯 17 practice Q

The idea in one minute

Reserve Bank of India

Established 1 April 1935 under the RBI Act, 1934 (Hilton Young Commission 1926); nationalised 1 January 1949; HQ Mumbai. Governor: Sanjay Malhotra (26th, since December 2024). Original capital shareholders included private hands until 1949; RBI is the currency issuer, banker to banks and to the government, and manages exchange reserves.

Monetary Policy Committee (2016)

6 members (3 RBI incl. Governor with casting vote + 3 Government nominees); meets at least 4 times a year; mandate — CPI inflation 4% ± 2%.

Policy rates (after the 5 August 2026 MPC — held unchanged, neutral stance)

Rate	Level	Meaning
Repo	5.25%	Lending rate of RBI to banks (policy rate)
SDF	5.00%	Floor; RBI borrows from banks at repo − 0.25%
MSF / Bank Rate	5.50%	Ceiling; repo + 0.25%
CRR	3.00%	Cut from 4% in four 25-bp tranches (Sep–Nov 2025); earns banks nothing
SLR	18%	Minimum share of deposits in gold/G-secs
Reverse repo	3.35%	Dormant as operative rate since SDF's introduction (2022)

Quantitative tools also include OMOs, USD/INR swaps, and VRR/VRRR auctions. Cut CRR/repo → cheaper money → more liquidity; raise → inflation control.

Banking history

Event	Year / fact
RBI set up	1935; nationalised 1949
SBI created (Imperial Bank → SBI)	1955
14 banks nationalised (deposits ≥ ₹50 cr)	19 July 1969
6 more banks (≥ ₹200 cr)	15 April 1980
RRBs started (Narasimham working group)	1975
Narasimham Committee I / II	1991 / 1998 — banking-sector reforms, prudential norms
Nachiket Mor Committee	2014 — financial inclusion, payments banks

The Reserve Bank of India — the monetary authority

The RBI was set up under the RBI Act, 1934 and began work on 1 April 1935 (headquarters then Calcutta, moved to Mumbai in 1937). It was nationalised on 1 January 1949 — the same year the Banking Regulation Act arrived. It is the central bank: sole issuer of currency (except the ₹1 note and coins, issued by the Government of India's Finance Ministry), banker to the government, banker to banks and lender of last resort, custodian of forex reserves, and regulator of banks and payment systems.

The policy toolkit

Repo rate: the rate at which the RBI lends short-term to banks against securities — the main policy rate.
Standing Deposit Facility (SDF): since April 2020 the floor of the corridor — banks park surplus funds with the RBI without collateral, at repo − 25 basis points.
Marginal Standing Facility (MSF): the ceiling at repo + 25 basis points; banks may dip into it at night borrowing above their SLR holdings. The Bank Rate equals the MSF.
CRR (Cash Reserve Ratio): the share of deposits banks must keep as cash with the RBI — earns no interest. SLR (Statutory Liquidity Ratio): the share kept in liquid assets (governments securities, gold) with the bank itself. The RBI moves CRR/SLR to absorb or release liquidity.
Open Market Operations (OMOs), LAF auctions, and forex swaps fine-tune liquidity daily.

The Monetary Policy Committee

Since the RBI (Amendment) Act, 2016, policy decisions rest with a six-member MPC — three from the RBI (the Governor with a casting vote) and three outside members appointed by the government. It meets bi-monthly and targets CPI inflation of 4% with a ±2% band; missing the band for three consecutive quarters triggers a report to the government. The framework's nominal anchor is headline CPI, not WPI.

Money supply and bank history

Money stock tiers: M1 = currency with the public + demand deposits with banks + other deposits with the RBI (narrow money); M2 = M1 + post-office savings; M3 = M1 + time deposits (broad money — the headline aggregate); M4 = M3 + post-office deposits (excluding NSCs). History pins: SBI = Imperial Bank of India nationalised in 1955; its subsidiaries came in 1959. 14 major private banks nationalised on 19 July 1969 and six more in April 1980. Regional Rural Banks began in 1975 (first: Prathama Grameen Bank). Deposit insurance runs through the DICGC (limit ₹5 lakh per depositor per bank since 2020). NPCI (2008) built UPI, RuPay, IMPS and FASTag rails; payment banks and small finance banks followed the Nachiket Mor committee (2014) — payment banks take deposits but cannot lend.

Question types you will see

Each type: how to recognise it, the method step by step, and one question to try.

Type 1very common3 practice Q

RBI identity, history and currency facts

How to spot it:

'The RBI was established under which Act', 'when was it nationalised', 'which note does the RBI not issue', 'where is its headquarters'.

Method

Anchors: RBI Act 1934, operations from 1 April 1935, nationalised 1 January 1949, HQ Mumbai.
Currency split: RBI issues ₹2 and above; the ₹1 note and all coins come from the Finance Ministry.
The RBI is the bankers' bank and lender of last resort — commercial banks are its clients, not the public.

Try this

The one-rupee note in India is issued by —

Show solution

The Government of India (Finance Ministry) — the RBI issues all other denominations; coins are also minted by the government.

Type 2very common3 practice Q

Policy rates and the corridor

How to spot it:

'SDF is how much below the repo rate', 'the bank rate equals', 'which rate is the policy rate', matching rate ↔ instrument.

Method

Learn the corridor as positions, not numbers: SDF = repo − 25 bp (floor); MSF = Bank Rate = repo + 25 bp (ceiling).
Repo = RBI lends to banks (policy rate); SDF = banks park surplus without collateral; MSF = emergency overnight borrowing.
CRR and SLR are ratios, not rates — do not call them 'policy rates'.

Try this

The Standing Deposit Facility (SDF) is placed —

Show solution

25 basis points below the repo rate — the corridor floor where banks deposit surplus liquidity with the RBI without providing collateral.

Type 3very common3 practice Q

Monetary Policy Committee and the inflation target

How to spot it:

'How many members sit on the MPC', 'who holds the casting vote', 'the inflation target is', 'how often does the MPC meet'.

Method

6 members: three from the RBI (the Governor, a Deputy Governor and one RBI officer) and three outside experts appointed by the government. The Governor has the casting vote.
Target: CPI 4% ± 2%; meetings bi-monthly; failure = 3 consecutive quarters outside the band.
Legal base: RBI (Amendment) Act, 2016; the WPI is not the target.

Try this

The casting vote in the Monetary Policy Committee belongs to —

Show solution

The RBI Governor — with six members, a 3-3 split is broken by the Governor's casting vote.

Type 4common2 practice Q

CRR, SLR and liquidity tools

How to spot it:

'CRR is kept with', 'SLR consists of', 'which tool releases liquidity immediately', statement sets contrasting CRR and SLR.

Method

CRR = cash with the RBI, no interest; SLR = the bank's own holdings of G-secs/gold/other approved liquid assets.
Cutting CRR or SLR, buying G-secs (OMO), or lowering repo — each injects ease; the reverse tightens.
The MSF ceiling exists so banks in stress can borrow overnight even beyond SLR holdings.

Try this

The Cash Reserve Ratio (CRR) requires banks to keep —

Show solution

A fixed share of their net demand and time liabilities as cash balances with the RBI, on which no interest is paid.

Type 5common3 practice Q

Money supply tiers and banking milestones

How to spot it:

'M1 consists of', 'which is the broad money measure', '14 banks were nationalised in', 'the first RRB was', DICGC and NPCI facts.

Method

M1 = currency with public + demand deposits + other deposits with RBI; M3 = M1 + time deposits = broad money.
Bank history: SBI 1955 (Imperial Bank); 1969 = 14 banks; 1980 = 6 banks; RRBs 1975 (Prathama).
Systems: DICGC insurance ₹5 lakh; NPCI (2008) runs UPI/RuPay/IMPS; payment banks (Nachiket Mor) take deposits, cannot lend.

Try this

Which of the following is included in M1 but not in M3?

Show solution

Nothing — M3 is M1 plus time deposits, so every M1 component sits inside M3. Watch such trap options carefully in 'narrow vs broad money' questions.

Shortcuts that save time

⚡ Corridor arithmetic

Repo is the middle: SDF = repo − 0.25 (floor), MSF = Bank Rate = repo + 0.25 (ceiling). With repo 5.25 → 5.00 / 5.25 / 5.50.

Example

If repo were 6.00%, what would the MSF be?

Show solution

6.25% — always repo + 25 bp.

⚡ Nationalisation anchors

1935 born, 1949 nationalised (RBI), 1955 SBI, 1969 fourteen, 1975 RRBs, 1980 six.

Example

How many banks in the 1980 round?

Show solution

Six (deposits ≥ ₹200 crore).

⚡ MPC fixed points

6 members; 4 meetings a year minimum; target CPI 4% ± 2%; Governor's casting vote.

Example

Who has the casting vote in the MPC?

Show solution

The RBI Governor.

Mistakes to avoid

Where most students lose marks on this subtopic.

Mistake 01

Repeating pre-2026 rates — repo is 5.25%, CRR 3%, not 6.5%/4%.

Mistake 02

Confusing reverse repo (3.35%, dormant) with SDF (5.00%, the operative floor).

Mistake 03

Crediting the Nachiket Mor committee with banking reforms of the 1990s — those were Narasimham I/II.

Quick revision

Read this the night before the exam.

RBI Act 1934; working 1 April 1935; nationalised 1 Jan 1949; HQ Mumbai; issues all currency except ₹1 note and coins.
Corridor: SDF = repo − 25 bp (floor); MSF = Bank Rate = repo + 25 bp (ceiling).
CRR = cash with RBI; SLR = liquid assets with the bank; OMO = buying/selling G-secs.
MPC: 6 members (3 RBI, Governor casting vote), bi-monthly, CPI 4% ± 2%, breach = 3 quarters.
M1 = currency + demand deposits + other RBI deposits; M3 = M1 + time deposits.
1955 SBI; 1969 (14 banks); 1980 (6 banks); 1975 RRBs; DICGC ₹5 lakh; NPCI 2008 (UPI 2016).

Practice: 17 questions

Sets of 10, mixed across the question types above. Every answer has a step-by-step explanation.

Topic test · 10 questions

Suggested time 4 min · wrong answers go to your mistake notebook automatically.

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