ROLE OF RBI — Complete Notes & PYQs

For UPSC | JKPSC | JKSSB Finance Accounts Assistant (FAA)

1. Introduction to RBI

• The Reserve Bank of India (RBI) is India's central bank, established under the Reserve Bank of India Act, 1934.
• Commenced operations on 1 April 1935, originally set up on the recommendation of the Hilton Young Commission.
• Initially a privately owned institution; nationalised on 1 January 1949.
• Headquarters: Mumbai. It also has a monetary museum and regional/local offices across states.
• Current Governor: Sanjay Malhotra (as of 2026); assisted by four Deputy Governors.
• Governed by a Central Board of Directors, appointed by the Government of India.
• Preamble objective: 'to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.'

2. Core Functions / Role of RBI

(a) Bank of Issue

• Sole authority to issue currency notes in India (except one-rupee notes/coins, issued by the Ministry of Finance under RBI's signature authority).
• Follows the Minimum Reserve System since 1957 to back note issue (minimum reserve of gold and foreign securities).

(b) Banker to the Government

• Acts as banker, agent and financial advisor to the Central and State Governments.
• Manages public debt, Ways and Means Advances (WMA), and government's cash balances.

(c) Banker's Bank / Lender of Last Resort

• Holds cash reserves of commercial banks (via CRR) and provides them loans in times of crisis.
• Acts as clearing house for inter-bank transactions.

(d) Controller of Credit / Monetary Policy Authority

• Regulates money supply and credit through monetary policy tools (see Section 3).
• Monetary Policy Committee (MPC) — 6 members, formed under RBI Act (amended 2016) — decides the policy repo rate to maintain inflation target (4% ± 2%).

(e) Custodian of Foreign Exchange Reserves

• Manages the country's forex reserves and administers FEMA, 1999 (Foreign Exchange Management Act).
• Intervenes in forex markets to manage rupee volatility.

(f) Regulator and Supervisor of the Financial System

• Regulates and supervises commercial banks, NBFCs, Urban Cooperative Banks, and Payment System Operators.
• Issues licences, sets prudential norms (CRAR, NPA norms), conducts inspections.

(g) Developmental / Promotional Role

• Promotes financial inclusion (Jan Dhan-linked initiatives, priority sector lending norms).
• Set up/promoted institutions like NABARD, SIDBI, NHB, DICGC (Deposit Insurance and Credit Guarantee Corporation).

(h) Regulator of Payment and Settlement Systems

• Regulates RTGS, NEFT, UPI and other digital payment systems under the Payment and Settlement Systems Act, 2007.

3. Monetary Policy Tools

Quantitative (General) Tools

• Repo Rate: Rate at which RBI lends short-term funds to commercial banks against securities.
• Reverse Repo Rate: Rate at which RBI borrows/absorbs liquidity from banks.
• Bank Rate: Rate at which RBI lends long-term funds without collateral; also used to calculate penalty on shortfall of CRR/SLR.
• Cash Reserve Ratio (CRR): % of Net Demand and Time Liabilities (NDTL) banks must keep as cash reserve with RBI.
• Statutory Liquidity Ratio (SLR): % of NDTL banks must maintain in liquid assets (cash, gold, approved securities) with themselves.
• Open Market Operations (OMO): Buying/selling government securities to regulate liquidity.
• Marginal Standing Facility (MSF): Emergency overnight borrowing window for banks, introduced in 2011, priced above repo rate.
• Standing Deposit Facility (SDF): Introduced in April 2022 to absorb excess liquidity without collateral, replacing the reverse repo as the floor of the policy corridor.

Qualitative (Selective) Tools

• Margin requirements for lending against securities.
• Moral suasion — persuading banks through advice/informal requests.
• Direct action / rationing of credit to specific sectors.
• Regulation of consumer credit (like differential rates for housing, credit cards).

4. Organisational Structure

• Central Board of Directors: Full-time — Governor + up to 4 Deputy Governors; Part-time — Government nominees + 10 Directors from various fields.
• Local Boards: One each for the four regions (Mumbai, Kolkata, Chennai, New Delhi) — represent regional/economic interests.
• Key Departments: Department of Economic and Policy Research (DEPR), Department of Banking Regulation, Financial Stability Unit, Monetary Policy Department.
• Monetary Policy Committee (MPC): 6 members — 3 from RBI (Governor as Chairperson) + 3 external members appointed by Government; decisions by majority vote, Governor has casting vote.

5. Key Legislations & Recent Developments

• RBI Act, 1934 — established RBI; basis for monetary policy framework.
• Banking Regulation Act, 1949 — regulates banking companies in India.
• FEMA, 1999 — replaced FERA; governs foreign exchange transactions.
• Inflation Targeting Framework (2016 amendment) — flexible inflation targeting of 4% (+/- 2%) CPI, reviewed every 5 years.
• Payment and Settlement Systems Act, 2007 — regulates digital/electronic payment systems.
• SDF introduced (April 2022); e-Rupee (CBDC) pilot launched (Nov–Dec 2022) — Digital Rupee (wholesale & retail segments).

6. Quick Revision Table

7. Previous Year Question (PYQ) — JKSSB FAA

Verified genuine PYQ related to the Role of RBI, as asked in the JKSSB Finance Accounts Assistant (FAA) Prelims Exam, 2022 (Economy section):

Q1. [JKSSB FAA 2022 — Actual PYQ]

In 1991, as a step of economic reform to help resolve the balance of payments crisis, what treatment was given to the value of the Indian rupee?

(A) It was devalued

(B) Its value was appreciated (increased)

(C) It faced rapid inflation

(D) Its value remained stable

Answer: (A) It was devalued

Explanation: On 1 and 3 July 1991, the RBI devalued the Indian Rupee by around 18–19% against major currencies as part of the Balance of Payments crisis reforms. This boosted exports, discouraged imports, and encouraged capital inflow from NRIs.

Note: The JKSSB FAA question bank for 'Role of RBI' as a standalone topic is limited in openly available, verifiable archives. Below is a set of high-quality practice/expected questions built strictly on the FAA syllabus (Fiscal & Monetary Policy, Role of RBI) and JKSSB's typical statement-based MCQ pattern, to supplement your revision.

8. Statement-Based Practice MCQs (JKSSB FAA / JKPSC / UPSC Pattern)

Q2. [Statement-based]

Consider the following statements regarding the Reserve Bank of India:

1. RBI was established under the Reserve Bank of India Act, 1934.

2. RBI was nationalised in 1935, the same year it began operations.

Which of the statements given above is/are correct?

(A) 1 only

(B) 2 only

(C) Both 1 and 2

(D) Neither 1 nor 2

Answer: (A) 1 only

Explanation: RBI began operations on 1 April 1935 as a privately owned bank; it was nationalised much later, on 1 January 1949 — not in 1935. So Statement 2 is incorrect.

Q3. [Statement-based]

Consider the following statements about the Monetary Policy Committee (MPC):

1. The MPC has six members, of which three are RBI officials and three are external members.

2. The MPC's primary mandate is to fix the Cash Reserve Ratio (CRR) of banks.

3. In case of a tie in voting, the RBI Governor has a casting vote.

Which of the statements given above is/are correct?

(A) 1 and 3 only

(B) 2 and 3 only

(C) 1, 2 and 3

(D) 1 only

Answer: (A) 1 and 3 only

Explanation: The MPC's mandate is to fix the policy Repo Rate to achieve the inflation target, not the CRR (CRR is set by RBI's Central Board/RBI itself, not the MPC). Statements 1 and 3 are correct.

Q4. [Statement-based]

Consider the following statements:

1. Statutory Liquidity Ratio (SLR) is maintained by banks with the RBI.

2. Cash Reserve Ratio (CRR) is maintained by banks with themselves in the form of liquid assets.

Which of the statements given above is/are correct?

(A) 1 only

(B) 2 only

(C) Both 1 and 2

(D) Neither 1 nor 2

Answer: (D) Neither 1 nor 2

Explanation: The statements are swapped. CRR is the portion of NDTL that banks must keep with the RBI as cash reserve.

SLR is the portion of NDTL that banks must maintain themselves in liquid assets like cash, gold, and approved government securities.

Q5. [Statement-based]

Consider the following statements regarding the tools of monetary policy:

1. Repo Rate is the rate at which RBI lends short-term funds to commercial banks against government securities.

2. Marginal Standing Facility (MSF) is generally priced below the Repo Rate.

3. Open Market Operations involve the buying and selling of government securities by RBI to regulate liquidity.

Which of the statements given above is/are correct?

(A) 1 and 2 only

(B) 1 and 3 only

(C) 2 and 3 only

(D) 1, 2 and 3

Answer: (B) 1 and 3 only

Explanation: MSF is priced above the Repo Rate (it is a penal, emergency overnight borrowing window for banks), not below it.

Statements 1 and 3 are correct.

Q6. [Statement-based]

Consider the following statements:

1. The Standing Deposit Facility (SDF) was introduced by RBI in April 2022.

2. SDF allows RBI to absorb excess liquidity from banks without any collateral.

Which of the statements given above is/are correct?

(A) 1 only

(B) 2 only

(C) Both 1 and 2

(D) Neither 1 nor 2

Answer: (C) Both 1 and 2

Explanation: SDF was introduced in April 2022 as a liquidity-absorbing tool that does not require RBI to provide collateral in return (unlike reverse repo), making both statements correct.

Q7. [Statement-based]

Which of the following functions are performed by the RBI?

1. Banker to the Government

2. Lender of last resort to commercial banks

3. Direct collection of Income Tax

4. Custodian of Foreign Exchange Reserves

Select the correct answer using the code given below:

(A) 1, 2 and 3 only

(B) 1, 2 and 4 only

(C) 2, 3 and 4 only

(D) 1, 2, 3 and 4

Answer: (B) 1, 2 and 4 only

Explanation: Collection of Income Tax is a function of the Income Tax Department (CBDT) under the Ministry of Finance, not RBI. RBI performs the other three functions listed.

Q8. [Statement-based]

With reference to the RBI's inflation targeting framework, consider the following statements:

1. The flexible inflation target is fixed at 4% with a tolerance band of +/- 2%.

2. The inflation target is based on the Wholesale Price Index (WPI).

Which of the statements given above is/are correct?

(A) 1 only

(B) 2 only

(C) Both 1 and 2

(D) Neither 1 nor 2

Answer: (A) 1 only

Explanation: RBI's inflation targeting framework (since the 2016 amendment to the RBI Act) uses the Consumer Price Index (CPI), not the WPI, as the target measure.

Q9. [Statement-based]

Consider the following statements about the structure of RBI:

1. RBI's Central Board consists only of full-time officials, i.e., the Governor and Deputy Governors.

2. RBI has four Local Boards representing the four regions of the country.

Which of the statements given above is/are correct?

(A) 1 only

(B) 2 only

(C) Both 1 and 2

(D) Neither 1 nor 2

Answer: (B) 2 only

Explanation: RBI's Central Board has both full-time officials (Governor + up to 4 Deputy Governors) and part-time members (Government nominees and Directors from various fields), so Statement 1 is incorrect. RBI does have four Local Boards (Mumbai, Kolkata, Chennai, New Delhi), so Statement 2 is correct.

Q10. [Statement-based]

Which of the following institutions were set up on the recommendation/at the initiative of the RBI?

1. NABARD

2. SIDBI

3. SEBI

Select the correct answer using the code given below:

(A) 1 only

(B) 1 and 2 only

(C) 2 and 3 only

(D) 1, 2 and 3

For UPSC | JKPSC | JKSSB Finance Accounts Assistant (FAA)

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