Money and Banking — Practice Questions
UPSC Prelims-pattern practice questions on money and banking with full explanations: the RBI, money supply, currency issue, RRBs and deposit insurance.
Questions
These are original UPSC-pattern practice questions. Attempt each one before revealing the answer.
With reference to the Reserve Bank of India, consider the following statements:
- It was set up on the recommendation of the Hilton Young Commission.
- It began operations in 1935 as a fully government-owned bank.
- It was nationalised with effect from 1 January 1949.
Which of the statements given above is/are correct?
Solution
Statement 1 is correct: the Hilton Young Commission (1926) recommended a central bank. Statement 2 is incorrect: the RBI began operations on 1 April 1935 as a private shareholders’ bank. Statement 3 is correct: it was nationalised on 1 January 1949.
Answer: B
Which one of the following is issued by the Government of India and not by the Reserve Bank of India?
Solution
The RBI has the sole right to issue bank notes (Section 22, RBI Act). The one-rupee note and all coins are issued by the Government of India (Ministry of Finance) and are only distributed by the RBI. The other notes are RBI bank notes.
Answer: A
How many of the following are components of broad money (M3) in India?
- Currency with the public
- Demand deposits with banks
- Time deposits with banks
- “Other” deposits with the RBI
Solution
M3 = M1 + time deposits, and M1 = currency with the public + demand deposits + other deposits with the RBI. So all four are in M3. Time deposits are the item that separates M3 from M1.
Answer: D
In a Regional Rural Bank, the shareholding of the Central Government, the sponsor bank and the State Government is, respectively:
Solution
Under the Regional Rural Banks Act, 1976, the capital is held 50% by the Central Government, 35% by the sponsor bank and 15% by the State Government. Option B swaps the Centre and sponsor bank shares; the others are distractors.
Answer: C
Consider the following statements about the Deposit Insurance and Credit Guarantee Corporation (DICGC):
- It is a wholly owned subsidiary of the Reserve Bank of India.
- It insures deposits up to ₹5 lakh per depositor per bank.
- It insures deposits of foreign governments held in Indian banks.
Which of the statements given above is/are correct?
Solution
Statements 1 and 2 are correct; the ₹5 lakh limit applies from 4 February 2020. Statement 3 is incorrect: deposits of foreign governments, of the Central and State Governments, and inter-bank deposits are excluded from DICGC cover.
Answer: D
Compare the objectives of bank nationalisation in 1969 with the rationale for the consolidation of public sector banks in 2019-20.
Solution
Introduction: In July 1969, fourteen major commercial banks were nationalised; effective April 2020, ten public sector banks were amalgamated into four. Both were State-led restructurings, but for different ends.
Body:
- 1969 objectives: extend banking to rural and semi-urban India; direct credit to agriculture, small industry and weaker sections (priority sector lending); prevent concentration of credit in a few industrial houses; mobilise household savings for planned development.
- 2019-20 rationale: create fewer, larger, better-capitalised banks able to fund large projects; achieve economies of scale in technology and operations; improve risk management and governance after the NPA crisis; reduce overlapping branch networks.
- Continuity: both treat public sector banks as instruments of public policy; both aim at a stronger, more stable banking system.
- Concerns: nationalisation was later linked with political interference and inefficiency; consolidation raises integration challenges (technology, culture, staff) and concentration risk.
Conclusion: 1969 was about reach and redistribution of credit; 2019-20 was about strength and scale. Both succeed only if governance and credit discipline improve alongside structural change.