RBI, Money Supply and Monetary Policy Tools

Attempt the quiz above first, then review every question with its correct answer and a short explanation below.

1. Q1.The Reserve Bank of India (RBI) began operations in which year?

   • A.1920
   • B.1947
   • C.1949
   • D.1935✓ Correct Answer

   Explanation: The RBI began operations on 1 April 1935 under the RBI Act, 1934.

2. Q2.The RBI was nationalised in which year?

   • A.1935
   • B.1947
   • C.1949✓ Correct Answer
   • D.1969

   Explanation: The RBI was nationalised on 1 January 1949, after which it became wholly owned by the Government of India.

3. Q3.The head office of the RBI is located in which city?

   • A.Mumbai✓ Correct Answer
   • B.New Delhi
   • C.Kolkata
   • D.Chennai

   Explanation: The RBI was first set up in Kolkata but moved its head office to Mumbai in 1937.

4. Q4.Currency notes of ₹2 and above in India are issued by:

   • A.the Ministry of Finance
   • B.the State Bank of India
   • C.the Reserve Bank of India✓ Correct Answer
   • D.NABARD

   Explanation: The RBI issues notes of ₹2 and above. The ₹1 note and all coins are issued by the Government of India through the Ministry of Finance.

5. Q5.The rate at which the RBI lends short-term funds to commercial banks against government securities is called the:

   • A.reverse repo rate
   • B.bank rate
   • C.cash reserve ratio
   • D.repo rate✓ Correct Answer

   Explanation: Repo (repurchase) rate is the rate at which banks borrow from the RBI by selling government securities with an agreement to repurchase them.

6. Q6.The Cash Reserve Ratio (CRR) is the share of a bank's deposits that it must keep:

   • A.in government securities
   • B.with NABARD as a loan
   • C.in its own vaults only
   • D.with the RBI in cash✓ Correct Answer

   Explanation: CRR is the percentage of a bank's net demand and time liabilities that must be held with the RBI as cash. Holding securities is the SLR.

7. Q7.The Statutory Liquidity Ratio (SLR) requires banks to hold a share of their deposits in the form of:

   • A.foreign currency only
   • B.liquid assets such as cash, gold and government securities✓ Correct Answer
   • C.loans to priority sectors
   • D.shares of listed companies

   Explanation: SLR is kept with the bank itself in liquid form (cash, gold, approved securities), unlike CRR which is kept with the RBI.

8. Q8.The rate at which the RBI borrows money from commercial banks is called the:

   • A.repo rate
   • B.reverse repo rate✓ Correct Answer
   • C.bank rate
   • D.MSF rate

   Explanation: Under reverse repo the RBI absorbs surplus liquidity by borrowing from banks, the opposite of repo.

9. Q9.How many members does the Monetary Policy Committee (MPC) of the RBI have?

   • A.6✓ Correct Answer
   • B.4
   • C.5
   • D.7

   Explanation: The MPC, created in 2016, has six members: three from the RBI (including the Governor) and three appointed by the Central Government.

10. Q10.If the votes in the Monetary Policy Committee are tied, who has the casting vote?

    • A.The Finance Minister
    • B.The RBI Governor✓ Correct Answer
    • C.The Deputy Governor
    • D.The Chairman of NITI Aayog

    Explanation: The Governor chairs the MPC and has a second, casting vote in case of a tie.

11. Q11.Under the Marginal Standing Facility (MSF), scheduled banks can borrow overnight funds from the RBI by dipping into their:

    • A.CRR balance
    • B.foreign exchange reserves
    • C.priority-sector loans
    • D.SLR portfolio✓ Correct Answer

    Explanation: MSF, introduced in 2011, lets banks borrow overnight against securities within their SLR holdings, at a rate above the repo rate.

12. Q12.Reserve money (M0) is also known as:

    • A.narrow money
    • B.high-powered money✓ Correct Answer
    • C.broad money
    • D.near money

    Explanation: M0 is the base of the money supply (currency in circulation plus bank reserves with the RBI) and so is called high-powered or base money.

13. Q13.Narrow money (M1) consists of currency with the public plus:

    • A.time deposits with banks
    • B.post office savings deposits
    • C.demand deposits with banks✓ Correct Answer
    • D.all deposits of the government

    Explanation: M1 = currency with the public + demand deposits with banks + other deposits with the RBI. Time deposits enter only the broader measures.

14. Q14.The Standing Deposit Facility (SDF) introduced by the RBI in 2022 allows banks to park surplus liquidity with the RBI:

    • A.without providing collateral✓ Correct Answer
    • B.only against government securities
    • C.only for periods above one year
    • D.only if they hold gold

    Explanation: Unlike the reverse repo, the SDF does not need the RBI to give collateral against the money parked with it.

15. Q15.Which of the following is a quantitative (general) tool of credit control?

    • A.Open market operations✓ Correct Answer
    • B.Moral suasion
    • C.Credit rationing
    • D.Margin requirement on specific loans

    Explanation: Bank rate, CRR, SLR, repo/reverse repo and open market operations are quantitative tools; moral suasion, rationing and margins are qualitative or selective.

16. Q16.The Governor of the Reserve Bank of India is appointed by:

    • A.the President on the advice of the Chief Justice
    • B.the Central Government✓ Correct Answer
    • C.the Parliament by a resolution
    • D.the Union Finance Commission

    Explanation: The Governor and Deputy Governors are appointed by the Central Government under the RBI Act, 1934.

17. Q17.Who was the first Governor of the Reserve Bank of India?

    • A.C. D. Deshmukh
    • B.Sir Benegal Rama Rau
    • C.Sir Osborne Smith✓ Correct Answer
    • D.I. G. Patel

    Explanation: Sir Osborne Smith (1935-37) was the first Governor. Sir Benegal Rama Rau and C. D. Deshmukh came later.

18. Q18.Who was the first Indian to become Governor of the Reserve Bank of India?

    • A.Sir Osborne Smith
    • B.Sir James Taylor
    • C.C. D. Deshmukh✓ Correct Answer
    • D.Manmohan Singh

    Explanation: Sir C. D. Deshmukh became Governor in 1943; the first three Governors were British.

19. Q19.The Hilton Young Commission (1926) recommended the creation of:

    • A.a National Bank for Agriculture
    • B.the Imperial Bank of India
    • C.a stock exchange regulator
    • D.a central bank for India✓ Correct Answer

    Explanation: The Royal Commission on Indian Currency and Finance (Hilton Young) recommended a central bank, which led to the RBI Act, 1934.

20. Q20.Under the Minimum Reserve System adopted in 1957, the RBI must hold a minimum of how much in gold and foreign securities against the currency it issues?

    • A.₹200 crore✓ Correct Answer
    • B.₹115 crore
    • C.₹500 crore
    • D.₹1,000 crore

    Explanation: The system requires at least ₹200 crore of assets, of which ₹115 crore must be gold and the rest foreign securities.