Banking, RBI and Monetary Policy MCQs for UPSC Prelims with Answers

This UPSC Prelims practice paper on banking, RBI and monetary policy has 15 questions on the Reserve Bank of India, policy rates, banking reforms and financial institutions. Banking and monetary policy are among the most repeated topics of the Indian economy section, and the same concepts appear in the news every time the RBI announces its policy. Each answer has a short explanation, and the sections after the key give simple tables on the policy tools, the types of banks and the reforms.

Why Banking and Monetary Policy Matter for UPSC

The Prelims asks two types of questions: direct definitions such as repo, CRR and SLR, and conceptual statements such as what happens to inflation, loans or the money supply when the RBI changes a rate. In the Mains, the same topics support answers on inflation, growth, financial inclusion and non-performing assets. The concepts are easy once you understand the logic: the RBI controls the cost and the quantity of money in the economy.

Instructions

• Total questions: 15. Suggested time: 15 minutes.
• Each correct answer gives 2 marks and each wrong answer deducts 0.66 marks, as in the real Prelims.
• Attempt all the questions first and check the answer key only after you finish.

Practice Questions

Q1. The Reserve Bank of India began its operations on
(a) 1 April 1935
(b) 15 August 1947
(c) 1 January 1949
(d) 26 January 1950

Q2. The rate at which the RBI lends short-term funds to commercial banks against government securities is called
(a) Reverse repo rate
(b) Repo rate
(c) Bank rate
(d) CRR

Q3. The Cash Reserve Ratio (CRR) is the share of a bank's net demand and time liabilities that must be kept
(a) In government securities with itself
(b) In cash with the RBI
(c) As gold with itself
(d) With other banks

Q4. The Statutory Liquidity Ratio (SLR) can be maintained in the form of
(a) Cash only
(b) Gold, cash and government securities
(c) Foreign exchange only
(d) Corporate bonds

Q5. The Monetary Policy Committee of the RBI has how many members?
(a) Four
(b) Five
(c) Six
(d) Nine

Q6. The inflation target set for the RBI under the flexible inflation targeting framework is
(a) 2 per cent, with a band of 1 per cent
(b) 4 per cent, with a band of 2 per cent on either side
(c) 6 per cent, with a band of 2 per cent
(d) 8 per cent, with no band

Q7. The Marginal Standing Facility (MSF) allows banks to borrow overnight funds from the RBI
(a) Against gold only
(b) Against government securities from within their SLR holdings
(c) Without any security
(d) Against foreign currency

Q8. Which currency note is issued by the Ministry of Finance and not by the RBI?
(a) Rs 2
(b) Rs 1
(c) Rs 10
(d) Rs 100

Q9. The National Bank for Agriculture and Rural Development (NABARD) was established in
(a) 1969
(b) 1975
(c) 1982
(d) 1991

Q10. Which of the following can a Payments Bank NOT do?
(a) Accept deposits
(b) Provide remittance services
(c) Issue debit cards
(d) Give loans

Q11. The National Payments Corporation of India (NPCI), which runs UPI, was set up in
(a) 2001
(b) 2008
(c) 2012
(d) 2016

Q12. The first major nationalisation of 14 commercial banks in India took place in
(a) 1949
(b) 1955
(c) 1969
(d) 1980

Q13. The Insolvency and Bankruptcy Code was enacted in
(a) 2002
(b) 2008
(c) 2016
(d) 2020

Q14. The SARFAESI Act, 2002 allows banks to
(a) Print currency
(b) Recover bad loans by taking possession of the security without going to court
(c) Fix the repo rate
(d) Issue shares of the RBI

Q15. The Standing Deposit Facility introduced by the RBI in 2022 acts as
(a) The ceiling of the policy rate corridor
(b) The floor of the policy rate corridor
(c) The CRR
(d) The bank rate

Answer Key with Explanations

1. Q1: (a) The RBI started functioning on 1 April 1935 under the RBI Act, 1934. It was nationalised on 1 January 1949.
2. Q2: (b) The repo rate is the key policy rate. A higher repo rate makes borrowing costlier and helps to control inflation.
3. Q3: (b) Banks keep the CRR as cash with the RBI, and it does not earn interest for them.
4. Q4: (b) Banks must hold the SLR in liquid assets such as cash, gold and approved government securities with themselves.
5. Q5: (c) The MPC has six members: three from the RBI, including the Governor, and three nominated by the Government. The Governor has the casting vote.
6. Q6: (b) The target is 4 per cent CPI inflation, with a tolerance band of 2 per cent above or below, that is, 2 to 6 per cent.
7. Q7: (b) Under the MSF, banks can borrow overnight against approved securities, including by dipping into their SLR, at a rate above the repo rate.
8. Q8: (b) The Rs 1 note (and coins) are issued by the Government through the Ministry of Finance. All other notes are issued by the RBI.
9. Q9: (c) NABARD was set up in 1982, on the recommendation of the Shivaraman Committee, as the apex institution for agriculture and rural credit.
10. Q10: (d) Payments banks can accept deposits up to a limit and provide payment services, but they cannot give loans or issue credit cards.
11. Q11: (b) The NPCI was set up in 2008 as an umbrella organisation for retail payment systems. UPI was launched in 2016.
12. Q12: (c) In July 1969, 14 large commercial banks were nationalised. Six more were nationalised in 1980.
13. Q13: (c) The IBC, 2016 provides a time-bound process for the resolution of insolvency, and the National Company Law Tribunal is the adjudicating authority for companies.
14. Q14: (b) The Act lets secured creditors enforce their security interest and recover dues from defaulters without the intervention of the courts.
15. Q15: (b) The SDF rate is the floor of the liquidity adjustment corridor. It allows the RBI to absorb surplus liquidity without giving collateral.

Monetary Policy Tools of the RBI

What the RBI Does in Inflation and in a Slowdown

When inflation is high, the RBI follows a tight or contractionary policy: it raises the repo rate, may raise the CRR and sells securities, so that money becomes costlier and demand falls. When growth is slow, it follows an easy or expansionary policy: it reduces the repo rate and the CRR and buys securities, so that loans become cheaper and investment rises. Remember this simple pair: high rate, low inflation, low growth and low rate, high growth, higher inflation risk.

Functions of the RBI

• Issuer of currency: It issues all notes, except the Re 1 note, under the minimum reserve system.
• Banker's bank: It acts as the lender of last resort for commercial banks.
• Regulator of the banking system: It licences and supervises banks under the Banking Regulation Act, 1949.
• Monetary policy: It controls inflation and credit through the Monetary Policy Committee.

Important Banking Reforms

The nationalisation of banks in 1969 and 1980 expanded the banking network to the rural areas. The reforms of 1991, based on the Narasimham Committee, brought in prudential norms and competition. Later, the Jan Dhan Yojana (2014) widened financial inclusion, and the Insolvency and Bankruptcy Code (2016) improved the resolution of bad loans. For a deeper study, read our banking system and financial inclusion notes.

Tricks for Banking Questions

• Use the direction trick: Higher policy rates mean tight money, so loans become costlier and inflation falls.
• Remember the two ratios: CRR is with the RBI in cash, while SLR is with the bank itself in safe assets.
• Remember the corridor: SDF at the bottom, repo in the middle, MSF at the top.

Common Mistakes to Avoid

• Mixing the repo and the reverse repo: The repo is lending by the RBI, and the reverse repo is borrowing by the RBI.
• Ignoring the latest change: Check the current policy rates from the RBI website before the exam.
• Confusing the tools: The CRR and the SLR are ratios, while the repo and the bank rate are interest rates.

After the test, revise with our inflation notes and try the Indian economy MCQs.

Frequently Asked Questions (FAQ)

What is the repo rate?

The repo rate is the rate at which the RBI lends short-term funds to commercial banks against government securities.

What is the difference between CRR and SLR?

CRR is the share of deposits that banks keep as cash with the RBI, while SLR is the share that banks keep with themselves in liquid assets like gold, cash and government securities.

How many members are there in the Monetary Policy Committee?

The MPC has six members: three from the RBI and three nominated by the Government.

What is the inflation target of the RBI?

The target is 4 per cent CPI inflation, with a tolerance band of 2 per cent on either side.

What is the MSF rate?

The MSF rate is the rate at which banks can borrow overnight from the RBI against approved securities, and it is above the repo rate.

What is the Standing Deposit Facility?

It is a facility introduced in 2022 that lets banks park surplus funds with the RBI without collateral. It sets the floor of the policy rate corridor.

Which note is not issued by the RBI?

The Re 1 note is issued by the Ministry of Finance, and all other notes are issued by the RBI.

When was NABARD established?

NABARD was established in 1982 as the apex bank for agriculture and rural development.

Can a payments bank give loans?

No. Payments banks can accept deposits up to a limit and provide payment services, but they cannot give loans.

What is the SARFAESI Act?

It is the 2002 Act that allows banks to recover bad loans by enforcing the security without court intervention.

What does the RBI do to control inflation?

It follows a tight policy by raising the repo rate, increasing the CRR or selling government securities to reduce money supply.

How should I prepare banking for the UPSC Prelims?

Learn the tools in a table, understand their effect on inflation and growth, and revise the key institutions and reforms with their years.