Money, banking, monetary policy and inflation: previous-year questions
76 real UPSC Prelims questions (2011–2026) with the official answer and a clear explanation. 16 of them came in the last five papers.
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Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is not correct ?
Answer (d) & explanation
Statement (d) is not correct (d). Under UPI, money moves between bank accounts; the deposit is a liability of the bank. The Digital Rupee (e₹) is like a currency note in digital form, a direct liability of the RBI, not of users or banks. Option (a) is correct: UPI is a payment system, while the e-rupee is sovereign currency. Option (b) is correct: an e-rupee transfer moves value from wallet to wallet with no separate settlement. Option (c) is correct: e-rupee wallet transactions do not appear in bank statements.
Notice the legal base: the RBI Act was amended in 2022 to let the RBI issue a CBDC. Pilots began that year in wholesale (e₹-W) and retail (e₹-R) forms.
a "not correct" question. Look for the statement that puts the RBI's liability on someone else.
Answer as per the official UPSC answer key.
Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India :
- 1. NBFCs cannot accept demand deposits.
- 2. All the NBFCs operating in India have to be registered with the RBI.
- 3. NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.
- 4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs.
Which of the statements given above is/are correct ?
Answer (a) & explanation
Statements 1 and 4 are correct (a). The RBI lists how an NBFC differs from a bank. Statement 1 is right: NBFCs cannot accept demand deposits. Statement 4 is right: depositors of NBFCs get no DICGC insurance cover. Statement 3 is wrong: NBFCs are not part of the payment and settlement system and cannot issue cheques drawn on themselves. Statement 2 is wrong: not every NBFC registers with the RBI; insurers report to IRDAI, merchant bankers and brokers to SEBI, and chit funds to State governments. So options (b), (c) and (d) fail.
Notice the current rules: since 2021, the RBI regulates NBFCs through a Scale-Based Regulation in four layers: Base, Middle, Upper and Top. DICGC covers bank deposits up to ₹5 lakh.
"All the NBFCs" in statement 2. Many finance companies have another regulator.
Answer as per the official UPSC answer key.
Which one of the following correctly represents the three key sub-indices of the Financial Inclusion Index (FI-Index) of the Reserve Bank of India (RBI) ?
Answer (c) & explanation
The sub-indices are Access, Usage and Quality (c). The RBI launched the FI-Index in August 2021. It covers banking, investments, insurance, postal services and pension, and gives one value between 0 and 100. Its three parameters are Access (35%), Usage (45%) and Quality (20%). Options (a), (b) and (d) list areas or ideas that are not its sub-indices; GDP contribution and affordability are not parameters.
Notice the logic: usage has the most weight, because an account that is never used does not mean real inclusion. Quality includes financial literacy and consumer protection. The index is published every July, and it has risen steadily, helped by Jan Dhan (2014) and UPI.
Answer as per the official UPSC answer key.
Which of the following are the sources of income for the Reserve Bank of India?
- I. Buying and selling Government bonds
- II. Buying and selling foreign currency
- III. Pension fund management
- IV. Lending to private companies
- V. Printing and distributing currency notes
Select the correct answer using the code given below.
Answer (a) & explanation
Buying and selling government bonds and foreign currency earn the RBI income (a). Item I is right: the RBI earns interest on the government securities it holds and gains from trading them in open market operations. Item II is right: it earns from foreign exchange operations, such as interest on reserves and gains on selling dollars. Item III is wrong: pension funds are run under the PFRDA. Item IV is wrong: the RBI does not lend to private companies. Item V is wrong: printing notes is a cost for the RBI, not income.
Notice where the profit goes: the RBI pays a surplus (dividend) to the government each year. It paid a record ₹2.69 lakh crore for 2024-25, set under the Bimal Jalan committee framework.
statement V. Many think the RBI "makes money" by printing money. Printing is an expense; the income comes from the assets bought with that money.
Answer as per the official UPSC answer key.
Consider the following statements in respect of RTGS and NEFT :
- I. In RTGS, the settlement time is instantaneous while in case of NEFT, it takes some time to settle payments.
- II. In RTGS, the customer is charged for inward transactions while that is not the case for NEFT.
- III. Operating hours for RTGS are restricted on certain days while this is not true for NEFT.
Which of the statements given above is/are correct?
Answer (a) & explanation
Only statement I is correct (a). Statement I is right: RTGS settles each payment one by one, in real time, while NEFT settles in half-hourly batches, so it takes a little time. Statement II is wrong: no bank charges for inward RTGS or NEFT credits; the RBI also waived its charges on outward online transfers for savings accounts. Statement III is wrong: both systems run 24×7, 365 days: NEFT since December 2019 and RTGS since December 2020. So options (b), (c) and (d) fail.
Notice the limits: RTGS has a minimum of ₹2 lakh, with no upper limit; NEFT has no minimum. IMPS and UPI, run by NPCI, give instant transfers too. The RBI runs RTGS and NEFT itself.
statement III was true before 2020. UPSC often tests the latest position, not what older books say.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.
- 2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs).
- 3. In India, Stock Exchanges can offer separate trading platforms for debts.
Which of the statements given above is/are correct ?
Answer (c) & explanation
All three statements are correct (c). Statement 1 is right: the Liquidity Adjustment Facility (repo and reverse repo) is open to banks and to standalone primary dealers, which are themselves NBFCs registered with the RBI. Statement 2 is right: foreign portfolio investors may hold G-Secs within limits, and some bonds are fully open to them under the Fully Accessible Route (FAR). Statement 3 is right: NSE and BSE run separate debt segments for trading bonds.
Notice the big change: from 2024, Indian government bonds entered global indices such as JP Morgan's, bringing in large foreign money. The FAR, introduced in 2020, made this possible. Primary dealers help the RBI sell government bonds.
statement 1 sounds wrong because the LAF is "for banks". Primary dealers are NBFCs, and they use it.
Answer as per the official UPSC answer key.
With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements :
- 1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
- 2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.
Which of the statements given above is/are correct ?
Answer (d) & explanation
Neither statement is correct (d). Statement 1 is wrong: under the RBI's 2013 scheme, a foreign bank's wholly owned subsidiary needs a minimum paid-up capital of ₹500 crore. Statement 2 is wrong as worded: on the board, at least 50% must be Indian nationals, NRIs or PIOs, and at least one-third must be Indian nationals resident in India. Statement 2 narrows the rule to Indian nationals alone, so UPSC treated it as wrong.
Notice why the RBI prefers subsidiaries to branches: a subsidiary is a separate Indian company with its own capital, so it is easier to control in a crisis. Subsidiaries also get near national treatment. SBM Bank and DBS Bank India were among the first to take this route.
statement 2 is close to the rule but not the rule. In regulatory questions, a changed group of people makes a statement wrong.
Answer as per the official UPSC answer key.
Consider the following statements in respect of the digital rupee :
- 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
- 2. It appears as a liability on the RBI's balance sheet.
- 3. It is insured against inflation by its very design.
- 4. It is freely convertible against commercial bank money and cash.
Which of the statements given above are correct ?
Answer (d) & explanation
Statements 1, 2 and 4 are correct (d). Statement 1 is right: the e-rupee (Central Bank Digital Currency, pilots since 2022) is legal tender issued by the RBI in line with its monetary policy. Statement 2 is right: like a currency note, it is a liability on the RBI's balance sheet. Statement 4 is right: it can be swapped one-to-one for bank deposits and cash. Statement 3 is wrong: like any currency, it loses value with inflation; nothing in its design protects it.
Notice the difference from crypto: Bitcoin has no issuer and its price swings, while the e-rupee is just a digital form of the rupee. The RBI runs both a retail (e₹-R) and a wholesale (e₹-W) version, and has added offline and programmable features.
"insured against inflation". No currency, paper or digital, is.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II :
Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
Answer (a) & explanation
Both statements are correct and II explains I (a). Statement I is right: after 2021, prices rose sharply worldwide because of supply chains broken by the pandemic and the Ukraine war. The US Federal Reserve, the European Central Bank, the Bank of England and the RBI all raised policy rates; the RBI raised the repo rate by 250 basis points in 2022–23, to 6.5%. Statement II is right and is the reason: central banks believe that dearer credit cools spending and demand, and so brings inflation down.
Notice the limit: monetary policy works on demand, but much of that inflation came from supply shocks, such as fuel and food. With inflation falling, the RBI began cutting rates again in 2025.
Answer as per the official UPSC answer key.
Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
Answer (a) & explanation
Open Market Operations are used for sterilisation (a). When the RBI buys dollars to stop the rupee rising too fast, it pays in rupees, which adds money to the system and can push up inflation. To soak up that extra money, it sells government securities through open market operations. Cancelling the effect of forex operations on money supply this way is called sterilisation. Option (b) is wrong: overseeing payment systems is a separate RBI role. Option (c) is wrong: debt and cash management for governments is its banker role. Option (d) is wrong: regulating NBFCs is supervision.
Notice other sterilisation tools: the Market Stabilisation Scheme (2004), the Standing Deposit Facility (2022) and forex swaps, which avoid selling bonds.
Answer as per the official UPSC answer key.
Consider the following statements with reference to India :
- 1. According to the 'Micro, Small and Medium Enterprises Development (MSMED) Act, 2006', the 'medium enterprises' are those with investments in plant and machinery between ₹15 crore and ₹25 crore.
- 2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.
Which of the statements given above is/are correct?
Answer (b) & explanation
Only statement 2 is correct (b). Statement 1 is wrong: since 2020, a medium enterprise has had a combined test of investment and turnover, and the limits were raised again in 2025 to investment up to ₹125 crore and turnover up to ₹500 crore. The old 2006 limit for medium manufacturing firms was ₹10 crore. None of these is ₹15–25 crore. Statement 2 is right: under the RBI's priority sector rules, all bank loans to MSMEs that meet the MSMED definition count as priority sector lending.
Notice the target: banks must give 40% of their loans to priority sectors, with a sub-target of 7.5% for micro enterprises. MSMEs register on the Udyam portal, and over 6 crore firms have done so.
Answer as per the official UPSC answer key.
With reference to Central Bank digital currencies, consider the following statements :
- 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system.
- 2. A digital currency can be distributed with a condition programmed into it such as a time-frame for spending it.
Which of the statements given above is/are correct?
Answer (c) & explanation
Both statements are correct (c). Statement 1 is right: Central Bank Digital Currencies can be exchanged directly between central banks or users on a shared platform, as tested in projects like mBridge, with no need for the US dollar or the SWIFT messaging network. Statement 2 is right: CBDCs can be programmable: money can be issued only for a set purpose, or with an expiry date, as tested in India's e-rupee pilots for targeted payments such as subsidies.
Notice India's e-rupee, issued by the RBI since December 2022 in wholesale and retail forms. Unlike crypto, a CBDC is legal tender, a direct liability of the central bank. Programmability raises privacy concerns, which the RBI says it will handle carefully.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. The Self-Help Group (SHG) programme was originally initiated by the State Bank of India by providing microcredit to the financially deprived.
- 2. In an SHG, all members of a group take responsibility for a loan that an individual member takes.
- 3. The Regional Rural Banks and Scheduled Commercial Banks support SHGs.
How many of the above statements are correct?
Answer (b) & explanation
Two statements are correct (b). Statement 1 is wrong: the SHG-Bank Linkage Programme was started by NABARD in 1992, not by the SBI. Statement 2 is right: in an SHG, members guarantee each other's loans, called joint liability; this peer pressure replaces collateral. Statement 3 is right: commercial banks, Regional Rural Banks and cooperative banks all lend to SHGs.
Notice the scale: India has over 90 lakh SHGs, mostly of women, under the DAY-NRLM. The Lakhpati Didi target aims to help 3 crore SHG women earn at least ₹1 lakh a year. SHGs have very low loan default rates, which shows how trust works as security. Kerala's Kudumbashree is a well-known model.
SBI is the biggest lender to SHGs today, but the scheme began with NABARD.
Answer as per the official UPSC answer key.
With reference to the Indian economy, consider the following statements :
- 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
- 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
- 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct ?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 1 is wrong: to fight high inflation, the RBI sells government securities through open market operations, pulling money out of the system; buying them would add money. Statement 2 is right: to stop the rupee falling fast, the RBI sells dollars from its forex reserves, which raises the supply of dollars. Statement 3 is right: when US or EU interest rates fall, foreign money flows into India and the rupee tends to rise, so the RBI buys dollars to smooth this and add to reserves.
Notice sterilisation: when the RBI buys dollars it releases rupees, so it may sell bonds to soak them up. India's forex reserves crossed $700 billion in 2024.
statement 1 has the right tool but the wrong direction. Always ask: does this action add money or remove it?
Answer as per the official UPSC answer key.
With reference to the 'Banks Board Bureau (BBB)', which of the following statements are correct ?
- 1. The Governor of RBI is the Chairman of BBB.
- 2. BBB recommends for the selection of heads for Public Sector Banks.
- 3. BBB helps the Public Sector Banks in developing strategies and capital raising plans.
Select the correct answer using the code given below :
Answer (b) & explanation
Statements 2 and 3 are correct (b). The Banks Board Bureau was set up in 2016 under the Indradhanush plan to clean up how public sector banks were run. Statement 2 is right: it recommended heads and whole-time directors of public sector banks and state-run financial institutions. Statement 3 is right: it advised these banks on strategy, governance and capital raising. Statement 1 is wrong: its chairman was an eminent professional, the first being former CAG Vinod Rai, not the RBI Governor.
Notice that in 2022 the BBB was replaced by the Financial Services Institutions Bureau (FSIB), which now also selects heads of public sector insurance companies. Indradhanush stood for seven reforms: Appointments, BBB, Capitalisation, De-stressing, Empowerment, Accountability and Governance.
the RBI Governor heads many bodies, so statement 1 looks safe. BBB was deliberately kept independent of the regulator.
Answer as per the official UPSC answer key.
In India, which one of the following is responsible for maintaining price stability by controlling inflation ?
Answer (d) & explanation
The Reserve Bank of India controls inflation (d). The RBI Act, 1934, amended in 2016, says the primary objective of monetary policy is price stability while keeping growth in mind. The government sets a CPI inflation target of 4%, with a band of 2–6%, and the six-member Monetary Policy Committee sets the repo rate to meet it. Option (a) is wrong: the Department of Consumer Affairs tracks prices of essentials and runs consumer protection. Option (b) is wrong: the Expenditure Management Commission (2014) only advised on government spending. Option (c) is wrong: the FSDC, chaired by the Finance Minister, looks after financial stability, not inflation.
Notice that if inflation stays outside the band for three quarters in a row, the RBI must explain it in writing to the government.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
- 2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
- 3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
Answer (c) & explanation
Statements 1 and 3 are correct (c). The RBI Act, 1934 creates the Reserve Bank and its Central Board. Statement 1 is right: under Section 8 of the Act, the Central Government appoints the Governor and Deputy Governors. Statement 3 is right: the Governor's powers flow from the RBI Act. Statement 2 is wrong: the government's power to give directions to the RBI "in the public interest", after consulting the Governor, is in Section 7 of the RBI Act, not in the Constitution. The Constitution does not mention the RBI at all.
Notice that Section 7 was reportedly discussed for the first time in 2018, during differences between the government and the RBI. The RBI was nationalised in 1949, and it began work in 1935, with headquarters first in Calcutta.
statement 2 is true in substance but names the wrong source. Always check where a power comes from.
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Answer as per the official UPSC answer key.
With reference to 'Urban Cooperative Banks' in India, consider the following statements :
- 1. They are supervised and regulated by local boards set up by the State Governments.
- 2. They can issue equity shares and preference shares.
- 3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 1 is wrong: no local boards regulate Urban Cooperative Banks. They have dual control: the State Registrar of Cooperative Societies handles registration and management, and the RBI regulates their banking business. Statement 2 is right: the 2020 amendment to the Banking Regulation Act allowed UCBs to raise capital through equity shares, preference shares and bonds, with RBI approval. Statement 3 is right: cooperative banks came under the Banking Regulation Act through an amendment in 1966.
Notice the PMC Bank crisis of 2019, which pushed the 2020 amendment giving the RBI more power over cooperative banks. Multi-State cooperative banks are registered under the Central Registrar instead.
Answer as per the official UPSC answer key.
Which one of the following is likely to be the most inflationary in its effects?
Answer (d) & explanation
Creating new money is the most inflationary (d). Option (a) is wrong: repaying public debt returns money to lenders and does not add demand much. Options (b) and (c) are wrong: borrowing from the public or from banks only moves existing money to the government, so total money in the economy changes little. Option (d) is right: creating new money, where the central bank finances the deficit (called monetisation or deficit financing), adds fresh money without adding goods, so prices rise the most.
Notice that India ended automatic monetisation through ad hoc Treasury Bills in 1997 (agreement of 1994). The FRBM Act, 2003 barred the RBI from buying government bonds in primary auctions, with an escape clause used during COVID.
Answer as per the official UPSC answer key.
The money multiplier in an economy increases with which one of the following?
Answer (c) & explanation
The money multiplier rises with a stronger banking habit (c). The money multiplier shows how much broad money banks create from each rupee of reserve money. When people keep more money in banks and less as cash, banks have more to lend, and each loan comes back as a fresh deposit to be lent again. So option (c) is right. Options (a) and (b) are wrong: a higher CRR or SLR locks up funds, leaving less to lend, so the multiplier falls. Option (d) is wrong: population size alone does not change the multiplier.
Notice the formula in its simplest form: multiplier = 1 ÷ reserve ratio. Broad money is M3; reserve money (M0) is the RBI's own money base.
Answer as per the official UPSC answer key.