"Money, Banking & Inflation" — Practice

Question 1

The Reserve Bank of India was nationalised in:
(a) 1949 (b) 1935 (c) 1969 (d) 1991

Accepted Answer

(a) 1949.

The RBI was originally established in 1935 under the RBI Act, 1934, as a privately owned institution, before being nationalised in 1949.

Question 2

The Monetary Policy Committee (MPC), which sets the policy repo rate, consists of:
(a) 6 members — 3 RBI members and 3 external members (b) only the RBI Governor alone (c) 10 members, all from the RBI (d) members nominated solely by the Ministry of Finance

Accepted Answer

(a) 6 members — 3 RBI members and 3 external members.

Established by a 2016 RBI Act amendment, the RBI Governor holds the casting vote in case of a tie among the 6 members.

Question 3

India's current CPI inflation target, along with its tolerance band, is:
(a) 4%, with a +/-2% band (2-6% range) (b) 2%, with no tolerance band (c) 6%, with a +/-4% band (d) 8%, with a +/-1% band

Accepted Answer

(a) 4%, with a +/-2% band (2-6% range).

This flexible inflation-targeting framework, rather than a single rigid figure, gives the RBI some room to manage short-term fluctuations.

Question 4

To control high inflation, the RBI would typically:
(a) raise the repo rate (b) lower the repo rate (c) lower the CRR (d) lower the SLR

Accepted Answer

(a) raise the repo rate.

A higher repo rate makes borrowing costlier for banks, reducing money supply and demand — a contractionary policy stance that helps cool inflationary pressure.

Question 5

Which of the following correctly distinguishes CRR from SLR?
(a) CRR funds are held with the RBI (no interest); SLR funds are held by the bank itself in interest-earning liquid assets (b) both CRR and SLR funds are held with the RBI (c) both CRR and SLR funds are held by the bank itself (d) CRR applies only to foreign banks; SLR applies only to public sector banks

Accepted Answer

(a) CRR funds are held with the RBI (no interest); SLR funds are held by the bank itself in interest-earning liquid assets.

Both reduce funds available for lending, but through structurally different mechanisms — a frequently tested distinction.

Question 6

The reverse repo rate is the rate at which:
(a) the RBI borrows funds from commercial banks (b) commercial banks borrow funds from the RBI (c) commercial banks lend to each other (d) the government borrows from the RBI

Accepted Answer

(a) the RBI borrows funds from commercial banks.

This is the opposite direction from the repo rate, where the RBI lends to commercial banks; raising the reverse repo rate encourages banks to park more funds with the RBI.

Question 7

The RBI's role as 'lender of last resort' means it:
(a) provides emergency liquidity support to commercial banks facing crises (b) lends directly to the general public (c) only lends to foreign governments (d) provides loans exclusively to MSMEs

Accepted Answer

(a) provides emergency liquidity support to commercial banks facing crises.

This is one of the RBI's core central banking functions, alongside being banker to the government and banker's bank to commercial banks.

Question 8

Payments Banks in India are distinguished from Small Finance Banks in that Payments Banks:
(a) cannot extend loans or credit, only accept deposits and provide payment services (b) can extend unlimited loans (c) are exclusively foreign-owned (d) are regulated by state governments, not the RBI

Accepted Answer

(a) cannot extend loans or credit, only accept deposits and provide payment services.

This makes Payments Banks a fundamentally more restricted category than Small Finance Banks, which can extend loans.

Question 9

NABARD (National Bank for Agriculture and Rural Development), established in 1982, primarily functions as:
(a) an apex development bank refinancing rural/agricultural credit institutions (b) a commercial bank for urban retail customers (c) the primary regulator of foreign banks in India (d) the central bank of India

Accepted Answer

(a) an apex development bank refinancing rural/agricultural credit institutions.

SIDBI serves an analogous apex function for Micro, Small and Medium Enterprises (MSMEs), distinct from NABARD's rural/agricultural focus.

Question 10

Regional Rural Banks (RRBs) in India are jointly owned by:
(a) the central government, a sponsor commercial bank, and the concerned state government (b) only private investors (c) only the RBI (d) only foreign banks

Accepted Answer

(a) the central government, a sponsor commercial bank, and the concerned state government.

RRBs are specifically aimed at rural credit delivery, distinct from cooperative banks' separate three-tier structure.

Question 11

Demand-pull inflation occurs when:
(a) aggregate demand exceeds aggregate supply, with too much money chasing too few goods (b) rising input costs are passed on as higher prices (c) the government reduces its own expenditure (d) the RBI lowers the CRR

Accepted Answer

(a) aggregate demand exceeds aggregate supply, with too much money chasing too few goods.

This is distinct from cost-push inflation, where rising production costs (wages, raw materials, fuel) drive prices up even without excess demand.

Question 12

Cost-push inflation is primarily driven by:
(a) rising input/production costs being passed on as higher prices (b) excess consumer demand relative to supply (c) a reduction in the money supply (d) an increase in the CRR

Accepted Answer

(a) rising input/production costs being passed on as higher prices.

Since this occurs even without excess demand, appropriate policy responses often emphasise supply-side measures rather than pure demand-reduction tools.

Question 13

Releasing buffer stocks of foodgrains to control inflation is an example of a:
(a) supply-side measure (b) monetary (demand-side) measure (c) fiscal (demand-side) measure (d) exchange rate measure

Accepted Answer

(a) supply-side measure.

This increases the availability of goods directly, addressing inflation caused by supply shortages rather than excess demand — a different mechanism from monetary or fiscal demand-side tools.

Question 14

Cooperative banks in most Indian states are typically organised in which structure?
(a) a three-tier structure: state cooperative banks → district central cooperative banks → primary agricultural credit societies (b) a single national-level structure only (c) a two-tier structure with no village-level presence (d) they are regulated exclusively by the central government with no state role

Accepted Answer

(a) a three-tier structure: state cooperative banks → district central cooperative banks → primary agricultural credit societies.

Cooperative banks are regulated jointly by the RBI (banking functions) and respective state/central governments (registration/management under cooperative laws).

Question 15

The Bank Rate, at which the RBI lends long-term funds to banks, is best described today as:
(a) a largely standby/penal rate, less actively used than the repo rate for routine policy (b) the primary tool used in every monthly monetary policy decision (c) identical in function to the CRR (d) a rate set by commercial banks, not the RBI

Accepted Answer

(a) a largely standby/penal rate, less actively used than the repo rate for routine policy.

The repo rate has become the RBI's primary operative tool for routine monetary policy signalling and implementation.

Practice — "Money, Banking & Inflation"

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