Indian Economy & Indian Financial System
Indian Economy & Indian Financial System
This domain tests how candidates connect macro policy, money and credit, and India’s regulated financial architecture. Questions often ask which institution does what, how RBI liquidity tools affect banks, and how fiscal and monetary signals transmit to deposits, credit and markets.
Core rules and concepts
- RBI conducts monetary policy under a flexible inflation-targeting framework; the repo rate is the policy rate, while the reverse repo/SDF absorb liquidity.
- CRR is cash held with RBI and earns no interest; SLR is held in approved assets, mainly government securities. Both restrict lendable resources.
- Money supply: M1 = currency with public + demand deposits + other deposits with RBI; broader measures add time deposits.
- Fiscal policy is government taxing and spending; fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts). It is financed by borrowing.
- Regulators: RBI for banks, payment systems and money market; SEBI for securities; IRDAI for insurance; PFRDA for pensions; FSDC coordinates.
- FDI is durable ownership; FPI is portfolio flow and more reversible. Both affect exchange rates and reserves.
Worked example
A bank has ₹100 crore demand deposits. CRR is 4.5%. Required CRR balance = 4.5% × ₹100 crore = ₹4.5 crore. The bank cannot lend that ₹4.5 crore, though it may hold more. If CRR rises, the simple deposit multiplier 1/CRR falls, but actual credit creation also depends on currency leakage, excess reserves, SLR and demand for loans.
Traps
Do not confuse repo (RBI lends against securities) with reverse repo (RBI absorbs). CRR is not a return-earning reserve. Fiscal deficit is not the same as revenue deficit. A rate cut does not guarantee immediate loan-rate transmission.