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Reserve Bank Of India (RBI), What Is Its Function & Role In Indian Economy


  • India’s central bank
  • Controls the monetary policy concerning the national currency [Indian rupee]
  • Monetary Authority, Regulator and supervisor of the financial system, Manager of Foreign Exchanges, Issuer of currency, Developmental role, Oversight of Payment and Settlement  System, Banker to the Government
  • Concept of Reserve Bank of India was based on the strategies formulated by Dr. Ambedkar in his book named “The Problem of the Rupee –Its origin and its solution”
  • Established based on the suggestions of the Hilton Young Commission in 1926
  • Reserve Bank of India was established on April 1,1935 in accordance with the provisions of the Reserve Bank of India Act, 1934


  • Central board of directors have control over RBI functions
  • Directors are appointed for a 4-year term by the Government of India
  • Central Board consists of : 1 Governor + 4 Deputy Governors + 4 Directors to be nominated by the Central Government, one from each of the four Local Boards + 10 Directors to be  nominated by the Central Government + 2 Government officials to be nominated by Central  Government
  • Qualifications: No specific qualification laid down
  • Removal: Removed by the central government
  • First Governor of RBI was Sir Osborne Smith and the First Indian Governor of RBI was C D Deshmukh
  • Only Prime Minister who was the Governor of RBI was Manmohan Singh

Monetary Policy Committee

  • Created in 2016
  • To bring transparency and accountability in deciding monetary policy
  • Determines the policy interest rate required to achieve the inflation target
  • Governor RBI acts as an ex-officio chairman
  • Committee comprises of six members
  • Three members are from RBI and three are selected by government
  • MPC is required to meet at least four times in a year
  • Quorum for the meeting of the MPC is four members
  • Once every six months, Reserve Bank is required to publish a document called the Monetary Policy Report

Methods of credit control

  • Economic Capital: Capital that the RBI requires to hold as a counter against unforeseen risks or events or losses in the future


  • Empowers the central government to supersede the RBI Board
  • Issues directions to the RBI after consulting the governor as if they are considered to be “necessary in public interest”


  • RBI can apply to the Central Government for suspension of Business by a Bank
  • Prepares a scheme for such banks revival
  • Based upon the recommendations of RBI, the Central Government then can issue notification
  • Government issues a notification to place a Bank under Moratorium based upon recommendations of RBI



  • Act will replace the Banking Regulation (Amendment) Ordinance, 2020
  • Issuance of shares and securities by cooperative banks to its members or to any other person residing within its area of operation will be subject to the prior approval of the Reserve Bank  of India (RBI)
  • RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification
  • RBI may supersede the Board of Directors of a multi-state cooperative bank for up to five years under certain conditions
  • In case of a co-operative bank registered with the Registrar of Co-operative Societies of a state, the
  • Act allows the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under moratorium
  • Act does not apply to Primary Agricultural Credit Societies (PACS), Cooperative land mortgage banks and any other cooperative societies


Q) Choose the correct statements related to the organisational structure of RBI? The RBI is entrusted with the 21-member Central Board of Directors:

  1. Governor
  2. 4 Deputy Governors
  3. 2 Finance Ministry representatives
  4. 10 government-nominated directors
  5. 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi
  1. 1,2,3 and 4
  2. 1,2,3 and 5
  3. 1,4 and 5
  4. All are correct

Answer: 4

Q) An increase in Bank Rate generally indicates that the market rate of interest is likely to fall.

  1. Market rate of interest is likely to fall.
  2. Central bank is no longer making loans to commercial banks.
  3. Central bank is following an easy money policy.
  4. Central bank is following a tight money policy.

Answer: 4

Q) Choose the correct statements regarding the functions of RBI- RBI is –

  1. Regulator of Bank and Development Authority
  2. Regulator of NBFC
  3. Lender of Last Resort
  4. Banker’s Bank
  5. Regulator of Open Market Operations
  1. 1,2,3 and 4
  2. 1,2,3 and 5
  3. 2,3,4 and 5
  4. All are correct

Answer: 4

Q) When RBI reduces Statutory Liquidity Ratio by 50 basis points , which of the following is likely to happen?

  1. India’s GDP growth rate increases drastically.
  2. Foreign Institutional Investors may bring more capital in to our country.
  3. Scheduled Commercial Banks may cut their lending rates.
  4. It may drastically reduce the liquidity to the banking system.

Answer: 3

Q) With reference to Indian economy, consider the following:

  1. Bank rate
  2. Open Market Operations
  3. Public debt
  4. Public revenue

Which of the above is/are component(s) of Monetary Policy?

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

Answer: 3

Q) What will be the impact on the Cash Reserves of commercial banks if RBI conduct a sale of securities?

  1. Increase
  2. Decrease
  3. Remain Constant
  4. None of These

Answer: 4

Q) RBI, on behalf of government, issues MSS bonds to mop up extra liquidity from the market. This is same as Open Market Operations(OMO), but has a significant difference. What is it?

  1. Money raised from the market by MSS Bond is stored in government’s normal account.
  2. Money raised from the market by MSS Bond is stored in a separate account, known as MSS Account, which cannot be used for normal government expenditure.
  3. Money is not raised by MSS bonds
  4. None of the above

Answer: 2

Q) Under which qualitative tool, RBI fixes maximum limit to loan and advances that can be made, above which the commercial banks cannot exceed?

  1. Rationing of credit
  2. Margin requirement
  3. Loan-Value ratio
  4. Moral Suasion

Answer: 1




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