Money, Banking and Monetary Policy

The Chairman of public sector banks in India are selected by the Banks Board Bureau (BBB).

The Banks Board Bureau is an autonomous body responsible for selecting and appointing the Boards of Directors in Public Sector Banks (PSBs) and Financial Institutions. It was established based on the recommendations of the Nayak Committee Report (2014).

Assets represent the resources a bank owns. For a commercial bank, these resources include:

- Advances (loans): Money lent to businesses, individuals, and other borrowers. - Investments Securities like government bonds, treasury bills, or shares in other companies. - Money at call and short notice: Funds are lent to other banks for a very short period, usually overnight. - Deposits are liabilities for a bank. They represent the money that customers entrust to the bank, which the bank is obligated to repay.

Money multiplier: It refers to the extent to which commercial banks can create new money based on deposits. It's calculated as the reciprocal of the reserve ratio (required reserves divided by total deposits).

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): These are regulatory tools used by the central bank to control the money supply.

Higher CRR and SLR: Banks are required to hold a larger portion of deposits as reserves with the central bank. This reduces the amount of money available for lending, thus decreasing the money multiplier.

Lower CRR and SLR: Banks can lend out a larger portion of deposits, increasing the money multiplier.

Banking habit: When people deposit more money in banks, it increases the pool of funds available for lending. This allows banks to create more new money through the lending process, leading to a higher money multiplier.

Population growth: While population growth can lead to higher demand for money, it doesn't directly affect the money multiplier mechanism itself.

The immediate effect on aggregate money supply in the economy, if you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, will be "No change".

Reason: Aggregate money supply refers to the total amount of money circulating in the economy, including both cash and deposits in commercial banks. - M3 = M1 + Time Deposits with Banks Where: - M1 = Currency in circulation + Demand deposits with banks + Other deposits with the central bank


When you withdraw cash from your demand deposit account, you are simply converting your deposit (which is part of the money supply) into currency (also part of the money supply).

The total amount of money in the system remains the same, just the composition (ratio of cash to deposits) changes.

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates.

Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more.

Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity.

Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity.

Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

Statement 1 is incorrect. The 'lender of last resort' (LoLR) function of the central bank primarily applies to commercial banks and financial institutions, not trade and industry bodies. Businesses and industries generally rely on commercial banks, financial institutions, and capital markets for funds. The Reserve Bank of India (RBI) does not directly lend to trade and industry bodies under its LoLR function.

Statement 2 is correct. The central bank (RBI) acts as the 'lender of last resort' for commercial banks facing liquidity shortages. This helps prevent bank failures and maintains financial stability. RBI provides liquidity through mechanisms like repo operations, open market operations (OMO), and special liquidity facilities.

Statement 3 is incorrect. The RBI does not directly lend to the government to cover budgetary deficits under the 'lender of last resort' function. The government primarily finances deficits through market borrowings, treasury bills, and bonds. However, RBI can indirectly support the government by purchasing government securities in the open market (OMO) or monetizing debt in special situations (historically, through ways and means advances - WMA).


Statement A is incorrect: Increase in the Cash Reserve Ratio (CRR) in banks. CRR is the percentage of deposits banks must keep with the RBI. If CRR increases, banks have less money to lend, reducing the money multiplier.

Statement B is incorrect: Increase in the Statutory Liquidity Ratio (SLR) in banks. SLR is the percentage of deposits banks must keep in liquid assets like gold or government securities. A higher SLR means less lending capacity, reducing the money multiplier.

Statement C is correct: Increase in the banking habits of the people. If more people deposit money in banks instead of holding cash, banks get more reserves to lend, increasing the money multiplier. This expands the credit creation process, leading to a higher money supply.

Statement D is incorrect: Increase in the population of the country. A higher population does not directly impact the money multiplier unless it leads to a rise in banking habits or economic activity.

Statement 1 is incorrect. Urban Cooperative Banks (UCBs) are not solely regulated by State Governments. They are jointly regulated by the Reserve Bank of India (RBI) and the respective State Governments. In 2020, the Banking Regulation (Amendment) Act, 2020 gave RBI more control over UCBs, bringing them largely under its regulatory framework for financial stability.

Statement 2 is correct. As per the Banking Regulation (Amendment) Act, 2020, Urban Cooperative Banks can raise funds by issuing equity shares, preference shares, and unsecured debentures with RBI approval. This allows UCBs to strengthen their capital base and improve financial health.

Statement 3 is correct. Initially, cooperative banks were regulated under state laws. In 1966, an amendment to the Banking Regulation Act, 1949, brought Urban Cooperative Banks (UCBs) under RBI's purview for banking-related functions. However, their management and administrative aspects remained under state cooperative laws.


Statement 1 is correct. The Governor of RBI is appointed by the Central Government under the RBI Act, 1934. The Appointments Committee of the Cabinet (ACC), led by the Prime Minister, finalizes the selection. The tenure is typically four years, but the government has the authority to extend or terminate the term.

Statement 2 is incorrect. The Constitution of India does not have any direct provision allowing the Central Government to issue directions to the RBI. However, Section 7 of the RBI Act, 1934, gives the Central Government the power to issue directions to the RBI in the public interest, but this is a statutory provision, not a constitutional one.

Statement 3 is correct. The powers, functions, and responsibilities of the RBI Governor come from the Reserve Bank of India Act, 1934. The Act defines the Governor's role, monetary policy responsibilities, and overall authority over banking regulations.

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further.

Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee.

Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.

The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI).

The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy.

As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.

Statement 1 is incorrect: The Banks Board Bureau (BBB) is headed by a Chairman appointed by the Central Government. The Governor of the Reserve Bank of India (RBI) is not the Chairman of the BBB.

Statement 2 is correct: One of the primary mandates of the BBB was to recommend candidates for the selection of heads (Whole-time Directors and Non-Executive Chairpersons) for Public Sector Banks (PSBs), state-owned financial institutions, and public sector insurers.

Statement 3 is correct: The BBB was also tasked with assisting Public Sector Banks in developing business strategies, capital raising plans, and improving their corporate governance and organizational structure.

Note: In 2022, the Government of India replaced the Banks Board Bureau (BBB) with the Financial Services Institutions Bureau (FSIB), which now carries out these functions.

Statement 1 is incorrect. In the Indian agricultural credit system, Scheduled Commercial Banks (SCBs) contribute the largest share of short-term credit (roughly 75-80%), followed by Regional Rural Banks (RRBs). District Central Cooperative Banks (DCCBs), which are part of the cooperative credit structure, deliver significantly less credit compared to SCBs.

Statement 2 is correct. The Short-Term Cooperative Credit Structure (STCCS) in India typically follows a three-tier structure: 1. State Cooperative Banks (StCBs) at the apex/state level. 2. District Central Cooperative Banks (DCCBs) at the district level. 3. Primary Agricultural Credit Societies (PACS) at the village/grassroots level. One of the primary functions of DCCBs is to mobilize resources and provide financial assistance/funds to the PACS within their jurisdiction.

Hence, option B is the correct answer.