Money, Banking and Credit
Questions here test the functions of money, the Reserve Bank's role and instruments, the structure of banking, and how credit is created and accessed.
Functions of money
Medium of exchange, unit of account, store of value and standard of deferred payment. Money removes barter's difficulties: the double coincidence of wants, lack of a common measure and indivisibility of goods.
RBI and currency
Established in 1935 and nationalised on 1 January 1949, the RBI issues all notes except the one-rupee note, and coins, which are issued by the Government of India. Legal tender must be accepted in payment. Monetary policy tools: repo rate (RBI lends to banks), reverse repo, CRR, SLR and open market operations.
Banking and credit
Commercial banks, regional rural banks (from 1975), cooperatives and NABARD (1982) for rural credit. SHG-bank linkage, with Bihar's JEEViKA mission, extends credit to women's groups. Also relevant: Kisan Credit Card (1998), PM Jan Dhan Yojana (2014) for financial inclusion, and UPI (2016) for digital payments.
Worked example
A depositor places ₹1,000 in a bank. With CRR at 10 per cent, the bank keeps ₹100 and lends ₹900; when that is deposited, the bank keeps ₹90 and lends ₹810, and so on. Total deposits = 1,000 × 1/0.10 = ₹10,000. Reasoning: the money multiplier is 1/CRR, so it is an upper limit; cash held by the public and weak credit demand reduce it in practice.
Traps that cost marks
Confusing CRR (cash reserve with RBI) with SLR (liquid assets with the bank itself); reversing repo and reverse repo; naming the RBI as issuer of the one-rupee note; treating the multiplier as exact rather than a maximum.