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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With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
- 1. Expansionary policies
- 2. Fiscal stimulus
- 3. Inflation-indexing wages
- 4. Higher purchasing power
- 5. Rising interest rates
Select the correct answer using the code given below.
Answer (a) & explanation
Items 1, 2 and 4 cause demand-pull inflation (a). Demand-pull inflation comes from too much spending chasing too few goods. Item 1 is right: expansionary policies, such as low rates, raise demand. Item 2 is right: a fiscal stimulus, such as tax cuts or more public spending, raises demand. Item 4 is right: higher purchasing power lets people buy more. Item 3 is wrong: indexing wages to inflation raises firms' costs, which is cost-push inflation. Item 5 is wrong: rising interest rates make borrowing dearer and reduce demand, so they curb inflation.
Notice cost-push causes: dearer oil, supply shocks, and higher wages. A wage–price spiral happens when rising prices push wages up, which push prices up again.
wage indexation does raise prices, but through costs. Sort each cause into demand side or cost side.
Answer as per the official UPSC answer key.
With reference to 'WaterCredit', consider the following statements :
- 1. It puts microfinance tools to work in the water and sanitation sector.
- 2. It is a global initiative launched under the aegis of the World Health Organization and the World Bank.
- 3. It aims to enable the poor people to meet their water needs without depending on subsidies.
Which of the statements given above are correct?
Answer (c) & explanation
Statements 1 and 3 are correct (c). WaterCredit was started by the non-profit Water.org, co-founded by Gary White and actor Matt Damon. Statement 1 is right: it puts microfinance tools to work, through partner lenders that give small loans to poor households for a tap connection or a toilet. Statement 3 is right: the idea is to help people meet water needs through credit they repay, not through subsidies. Statement 2 is wrong: it was not launched under the WHO or the World Bank.
Notice India's own water programmes: the Jal Jeevan Mission (2019), which aims at a tap connection for every rural home, and the Swachh Bharat Mission for toilets. SDG 6 covers clean water and sanitation.
Answer as per the official UPSC answer key.
In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?
- 1. Lending to trade and industry bodies when they fail to borrow from other sources
- 2. Providing liquidity to the banks having a temporary crisis
- 3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
Answer (b) & explanation
Only statement 2 describes the lender of last resort (b). As lender of last resort, the RBI gives emergency funds to a basically sound bank that faces a sudden shortage of cash, so that panic does not spread to other banks and the system stays stable. The Marginal Standing Facility is one such window. Statement 1 is wrong: the RBI does not lend directly to trade or industry bodies. Statement 3 is wrong: lending to governments through ways and means advances is its role as banker to the government, not as lender of last resort.
Notice the idea came from Walter Bagehot's Lombard Street (1873): lend freely to solvent banks, against good collateral, at a penalty rate.
Answer as per the official UPSC answer key.
If you withdraw ₹1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be
Answer (d) & explanation
The money supply stays unchanged (d). Money supply, both M1 (narrow money) and M3 (broad money), is mainly currency with the public plus deposits with banks. When you withdraw ₹1 lakh in cash from a demand deposit, such as a savings or current account, your deposit falls by ₹1 lakh, and currency with the public rises by the same ₹1 lakh. The total does not change; only its form does. So options (a), (b) and (c) are wrong. Over time, lower bank reserves can reduce lending, but the question asks only about the immediate effect.
Notice the other measures: M0 is reserve money, and M3 includes time deposits. The RBI uses M3 as its main measure of money supply.
Answer as per the official UPSC answer key.
In the context of the Indian economy, non-financial debt includes which of the following ?
- 1. Housing loans owed by households
- 2. Amounts outstanding on credit cards
- 3. Treasury bills
Select the correct answer using the code given below :
Answer (d) & explanation
All three are non-financial debt (d). Non-financial debt is the debt owed by the non-financial sectors of an economy: households, non-financial companies and the government. Statement 1 is right because a housing loan is household debt. Statement 2 is right because credit card dues are also household debt. Statement 3 is right because Treasury Bills are short-term borrowing by the government. The only debt left out is that owed by banks and other financial firms, because counting it would double-count money already lent on.
Notice the related measures: the debt-to-GDP ratio of each sector, and the Bank for International Settlements (BIS), which publishes data on total credit to the non-financial sector. Treasury Bills have maturities of 91, 182 and 364 days.
"non-financial" sounds like it excludes loans and bills. It refers to who owes the debt, not what kind it is.
Answer as per the official UPSC answer key.
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
- 1. Cut and optimize the Statutory Liquidity Ratio
- 2. Increase the Marginal Standing Facility Rate
- 3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below :
Answer (b) & explanation
The RBI would not raise the MSF rate (b). An expansionist monetary policy makes money cheaper and more plentiful to boost growth. Statement 1 fits it: cutting the Statutory Liquidity Ratio frees bank funds that were locked in government securities, so banks can lend more. Statement 3 fits it too: cutting the repo rate and bank rate lowers the cost of borrowing from the RBI. Statement 2 does not fit: raising the Marginal Standing Facility rate makes emergency overnight borrowing dearer, which is a tightening step. So 2 is the only thing it would not do.
Notice the Liquidity Adjustment Facility: since 2022, the Standing Deposit Facility is its floor and the MSF its ceiling. The Monetary Policy Committee has six members.
"would it not do". Mark the tightening step, not the easing ones.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
- 2. The WPI does not capture changes in the prices of services, which CPI does.
- 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct ?
Answer (a) & explanation
Statements 1 and 2 are correct (a). Statement 1 is right because food has a weight of about 46% in CPI (Combined), but only about 24% in the WPI. Statement 2 is right because the WPI covers goods only, while the CPI includes services such as education, health, housing and transport. Statement 3 is wrong because, after the Urjit Patel Committee (2014), the RBI adopted CPI (Combined) as its key inflation measure, not WPI. Under flexible inflation targeting, the target is 4%, with a band of 2–6%.
Notice the agencies: the NSO (MoSPI) compiles CPI, and the Office of the Economic Adviser (DPIIT) compiles WPI. Both use the base year 2011–12 for WPI and 2012 for CPI, with revisions under way.
Answer as per the official UPSC answer key.
The Service Area Approach was implemented under the purview of
Answer (b) & explanation
The Service Area Approach came under the Lead Bank Scheme (b). The Lead Bank Scheme, started by the RBI in 1969 on the Gadgil Study Group's advice, gave one bank the lead role in credit planning for each district. The Service Area Approach (SAA), introduced in 1989, went further. Each rural and semi-urban bank branch was given a set of villages and made responsible for planning and meeting their credit needs. It was relaxed in 2004, except for government-sponsored schemes. The IRDP (a), MGNREGS (c) and Skill Mission (d) are unrelated.
Notice the related bodies: District Consultative Committees and State Level Bankers' Committees. Today, financial inclusion relies more on Jan Dhan accounts and bank correspondents.
Answer as per the official UPSC answer key.
Which of the following is not included in the assets of a commercial bank in India?
Answer (b) & explanation
Deposits are not a bank's asset (b). A bank's deposits belong to its customers, and the bank must repay them on demand or when due. So they are a liability on the bank's balance sheet, along with capital and borrowings. Advances (a), meaning loans to customers, earn interest and are the bank's main asset. Investments (c) in government securities and bonds, including those held for the SLR, are also assets. Money at call and short notice (d) is money lent to other banks for very short periods, from one day to two weeks, and is an asset.
Notice the related ratios: the CRR (cash kept with the RBI) and SLR (liquid assets kept by banks). Both are worked out as a share of deposits, the bank's net demand and time liabilities.
deposits feel like the bank's money. For the bank, they are money owed.
Answer as per the official UPSC answer key.
What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?
Answer (d) & explanation
The ICA aims at faster resolution of stressed assets (d). The Inter-Creditor Agreement, signed in July 2018, came from the Sunil Mehta Committee's "Project Sashakt". It applies to stressed loans of ₹50 crore or more given by a consortium of several banks. The lead lender draws up a resolution plan within 180 days, and once lenders holding 66% of the debt by value agree, it binds all of them. This avoids long fights among creditors. It does not deal with the fiscal or current account deficit (a), is not an infrastructure scheme (b), and is not a regulator (c).
Notice the wider tools: the Insolvency and Bankruptcy Code (2016), the RBI's June 2019 framework, and the National Asset Reconstruction Company (NARCL), the "bad bank" set up in 2021.
Answer as per the official UPSC answer key.
The Chairmen of public sector banks are selected by the
Answer (a) & explanation
The Banks Board Bureau selected them (a). In 2019, the Banks Board Bureau, set up in 2016 on the P.J. Nayak Committee's advice, recommended names for chairmen, MDs and whole-time directors of public sector banks. The government then made the appointment. The BBB was meant to make bank governance more professional and less political. The RBI (b) regulates banks but does not pick their heads. The Finance Ministry (c) appoints on the recommendation; it does not run the selection. The bank's management (d) has no role.
Notice the change: in 2022, the BBB was replaced by the Financial Services Institutions Bureau (FSIB), which also selects heads of public sector insurers and other financial bodies. It was set up after the Delhi High Court questioned the BBB's legal standing.
Answer as per the official UPSC answer key.
Consider the following statements :
The Reserve Bank of India's recent directives relating to 'Storage of Payment System Data', popularly known as data diktat, command the payment system providers that
- 1. they shall ensure that entire data relating to payment systems operated by them are stored in a system only in India
- 2. they shall ensure that the systems are owned and operated by public sector enterprises
- 3. they shall submit the consolidated system audit report to the Comptroller and Auditor General of India by the end of the calendar year
Which of the statements given above is/are correct?
Answer (a) & explanation
Only statement 1 is correct (a). The RBI circular of April 2018 on Storage of Payment System Data required all payment system operators, such as Visa, Mastercard and payment apps, to store the entire data about payments they run only in India (1). They were given six months to comply. Statement 2 is wrong because it did not require the systems to be owned by public sector firms. Statement 3 is wrong because the system audit report, by a CERT-In empanelled auditor, goes to the RBI, not the CAG.
In 2021, the RBI barred Mastercard, American Express and Diners Club from adding new customers for not complying. Notice the wider law: the DPDP Act, 2023 and its Rules (2025), which allow most cross-border transfers.
Answer as per the official UPSC answer key.
The money multiplier in an economy increases with which one of the following?
Answer (b) & explanation
The money multiplier rises with the banking habit (b). When people keep more of their money in banks instead of as cash, banks can lend more of each rupee. Each loan returns to the system as a new deposit, which can be lent again. So the money multiplier, the ratio of broad money to reserve money, rises with the banking habit of the people. Options (a) and (c) are wrong because a higher CRR or SLR locks up more of banks' money, lowering the multiplier. Option (d) is wrong because population size does not change the multiplier directly.
Notice the factors that raised India's banking habit: Jan Dhan accounts (over 55 crore), UPI, and demonetisation (2016), which pushed cash into banks. UPSC asked the same question again in 2021.
Answer as per the official UPSC answer key.
With reference to the governance of public sector banking in India, consider the following statements :
- 1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
- 2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
Which of the statements given above is/are correct ?
Answer (b) & explanation
Only statement 2 is correct (b). Statement 1 is wrong because capital infusion into public sector banks did not rise steadily. It went up and down from year to year, and jumped sharply only around 2017–19, through recapitalisation bonds under the Indradhanush plan and the ₹2.11 lakh crore package. Statement 2 is right because, on 1 April 2017, the five associate banks (State Bank of Bikaner and Jaipur, Hyderabad, Mysore, Patiala and Travancore) and Bharatiya Mahila Bank merged with the State Bank of India.
Further mergers followed: Bank of Baroda with Vijaya and Dena (2019), and ten banks into four in 2020, leaving 12 public sector banks. Notice their turnaround: PSBs made record profits of over ₹1.7 lakh crore in FY2024–25.
Answer as per the official UPSC answer key.
Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news ?
Answer (c) & explanation
MDR is the charge a merchant pays the bank for accepting card payments (c). The Merchant Discount Rate is the fee a shopkeeper pays for each card or digital payment received. It is shared among the issuing bank (the customer's bank), the acquiring bank (which provides the PoS machine) and the card network, such as Visa or RuPay. It is not an incentive paid to the merchant (a, d), and it is not cashback to the customer (b).
Since January 2020, there is no MDR on RuPay debit cards and BHIM-UPI payments, to encourage digital payments, and the government compensates banks through an incentive scheme. Notice the debate: fintech firms and banks say zero MDR makes UPI hard to sustain, and MDR on large merchants keeps coming up in discussion.
options (a) and (d) call it an "incentive". MDR is a charge on the merchant, not a reward.
Answer as per the official UPSC answer key.
Which one of the following links all the ATMs in India ?
Answer (c) & explanation
The NPCI links all ATMs in India (c). The National Financial Switch (NFS), run by the NPCI, connects the ATMs of all banks, so a card from one bank can be used at another bank's ATM. The IDRBT started the NFS in 2004, and it moved to NPCI in 2009. The Indian Banks' Association (a) is an industry lobby group. NSDL (b) is a securities depository for shares and bonds. The RBI (d) regulates payments but does not run the ATM switch.
NPCI also runs UPI, RuPay, IMPS, NACH, AePS, FASTag and BBPS. Notice the RBI's ATM rules: limited free transactions per month, plus interchange fees paid by the card's bank to the ATM owner, which were raised in 2025.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- 2. CAR is decided by each individual bank.
Which of the statements given above is/are correct ?
Answer (a) & explanation
Only statement 1 is correct (a). Capital Adequacy Ratio (CAR), also called CRAR, is a bank's own capital as a share of its risk-weighted assets. It is the cushion that absorbs losses when borrowers fail to repay (1). Statement 2 is wrong because the RBI sets it, not each bank, following the Basel III norms. Indian banks must hold 9%, plus a capital conservation buffer of 2.5%, which is stricter than Basel's 8%. Big D-SIBs like SBI, HDFC Bank and ICICI must hold extra capital.
Capital is split into Tier 1 (equity and reserves) and Tier 2 (some bonds). Notice the RBI's Prompt Corrective Action framework, which restricts banks whose CAR or NPAs cross set limits.
Answer as per the official UPSC answer key.
With reference to digital payments, consider the following statements :
- 1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
- 2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct ?
Answer (a) & explanation
Only statement 1 is correct (a). BHIM (Bharat Interface for Money), launched by NPCI in December 2016, is a UPI app that can pay anyone whose bank account is on UPI (1), using a UPI ID, mobile number or QR code. Statement 2 is wrong. A chip-and-PIN debit card uses two factors: something you have (the card) and something you know (the PIN). BHIM is not weaker. It binds your registered phone and device, adds the UPI PIN, and links to your bank account, giving it at least as much security.
BHIM 3.0 (2025) added shared family payments and spending analytics. Notice the RBI's rules for two-factor authentication on digital payments, including new options beyond SMS OTP from April 2026.
Answer as per the official UPSC answer key.
Which one of the following statements correctly describes the meaning of legal tender money ?
Answer (b) & explanation
Legal tender is money a creditor must accept in settling a debt (b). Legal tender is money that the law requires to be accepted as payment. In India, RBI notes are unlimited legal tender, under the RBI Act. Coins issued by the government are legal tender up to set limits under the Coinage Act, 2011: ₹1,000 for coins of ₹1 and above. Court fees (a) have nothing to do with it. Cheques and drafts (c) are not legal tender, so a creditor may refuse them. Metallic money (d) is too narrow a description.
When the ₹500 and ₹1,000 notes were demonetised in November 2016, they lost their legal tender status. Notice that the RBI's e-rupee (CBDC) is also legal tender, while cryptocurrencies are not.
Answer as per the official UPSC answer key.
Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) ?
- 1. It decides the RBI's benchmark interest rates.
- 2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
- 3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below :
Answer (a) & explanation
Only statement 1 is correct (a). The Monetary Policy Committee, set up in 2016 under the amended RBI Act, 1934 (Section 45ZB), fixes the repo rate to meet the inflation target of 4% ± 2% (1). Statement 2 is wrong because it has six members, not twelve, and it is not reconstituted every year. Three are from the RBI, including the Governor as chair, who has a casting vote. Three outside experts are appointed by the government for four years. Statement 3 is wrong because the Finance Minister has no seat on it.
It meets at least four times a year, usually six. Notice that if inflation stays outside the band for three quarters in a row, the RBI must write to the government explaining why, as it did in 2022.
"12-member" and "Finance Minister". Both are invented; the six-member, Governor-led design keeps it independent.
Answer as per the official UPSC answer key.