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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What is the purpose of setting up of Small Finance Banks (SFBs) in India ?
- 1. To supply credit to small business units
- 2. To supply credit to small and marginal farmers
- 3. To encourage young entrepreneurs to set up business particularly in rural areas.
Select the correct answer using the code given below :
Answer (a) & explanation
Statements 1 and 2 are correct (a). The RBI's 2014 guidelines say Small Finance Banks exist for financial inclusion. They offer savings services and give credit to small business units (1), small and marginal farmers (2), micro and small industries and the unorganised sector. Statement 3 is wrong because encouraging young entrepreneurs in rural areas is not a stated purpose. At least 75% of their loans must go to the priority sector, and at least half their loans must be up to ₹25 lakh.
Many SFBs, such as AU, Ujjivan and Equitas, began as NBFCs or microfinance lenders. Notice how they differ from Payments Banks: payments banks take deposits (up to ₹2 lakh) but cannot lend, and AU later applied to become a universal bank.
statement 3 sounds like a good aim. UPSC tests the RBI's stated objectives, word for word.
Answer as per the official UPSC answer key.
Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)' ?
Answer (a) & explanation
With UPI, mobile wallets are no longer needed for online payments (a). The Unified Payments Interface, launched by NPCI in 2016, moves money straight from one bank account to another using a phone and a virtual payment address or QR code. There is no need to first load money into a mobile wallet. Option (b) is exaggerated because cash is still widely used. Option (c) has no link to FDI. Option (d) is wrong because subsidies go through DBT using the Aadhaar Payment Bridge, not UPI.
UPI now handles about 20 billion transactions a month and is going global, with links to Singapore's PayNow, the UAE and France. Notice the newer features too: UPI Lite, credit cards on UPI, and UPI 123PAY for feature phones.
option (d) sounds good and is linked to digital payments. The "most likely" direct result is the end of the need for wallets.
Answer as per the official UPSC answer key.
Which of the following statements best describes the term 'Scheme for Sustainable Structuring of Stressed Assets (S4A)', recently seen in the news ?
Answer (b) & explanation
S4A was an RBI scheme for reworking big companies' stressed loans (b). The Scheme for Sustainable Structuring of Stressed Assets, launched in June 2016, let banks split a large stressed loan of over ₹500 crore into two parts. The sustainable part was what the company's cash flows could repay. The unsustainable part was turned into equity or similar instruments. It was not about ecological costs (a) or disinvestment (c). It was not part of the IBC (d); it was one of several restructuring schemes before the IBC.
The RBI scrapped all such schemes, including CDR and SDR, in February 2018. Notice how stressed loans are handled now: the IBC, the RBI's June 2019 framework, and the NARCL "bad bank" (2021).
"Sustainable" makes option (a) look ecological. The words "Stressed Assets" point to bank loans.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country.
- 2. NPCI has launched RuPay, a card payment scheme.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Both statements are correct (c). The National Payments Corporation of India (NPCI), set up in 2008, is a not-for-profit company under Section 8 of the Companies Act. It was formed by banks under RBI guidance through the Payment and Settlement Systems Act, 2007. It runs RuPay (2), India's own card network, which is issued free with Jan Dhan accounts, as well as UPI, IMPS, AePS, NACH, FASTag (NETC) and BBPS. These cheap domestic payment systems support financial inclusion (1).
The international arm, NIPL, takes UPI and RuPay abroad. Notice that RuPay is now accepted in Singapore, the UAE, Bhutan and Nepal, and RuPay credit cards can link to UPI. NPCI also limits any one UPI app's share of the market.
Answer as per the official UPSC answer key.
What is/are the purpose/purposes of Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetization Scheme'?
- 1. To bring the idle gold lying with Indian households into the economy
- 2. To promote FDI in the gold and jewellery sector
- 3. To reduce India's dependence on gold imports
Select the correct answer using the code given below.
Answer (c) & explanation
Statements 1 and 3 are correct (c). Both schemes were launched in November 2015 to cut physical gold imports, which widen India's current account deficit. The Gold Monetisation Scheme lets households and temples deposit idle gold with banks and earn interest (1). Sovereign Gold Bonds, issued by the RBI for the government, give a paper alternative with 2.5% interest and gains linked to the gold price (3). Statement 2 is wrong because neither scheme has anything to do with FDI in jewellery.
The government stopped new SGB issues in 2025 because costs rose with the gold price, and medium- and long-term GMS deposits also ended. Notice how gold ETFs and IIBX (GIFT City) are the other parts of gold policy.
Answer as per the official UPSC answer key.
The establishment of 'Payment Banks' is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context?
- 1. Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
- 2. Payment Banks can issue both credit cards and debit cards.
- 3. Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below.
Answer (b) & explanation
Statements 1 and 3 are correct (b). Under the RBI's 2014 guidelines, resident-controlled mobile telephone companies, supermarket chains, NBFCs and others can promote Payments Banks (1). They cannot lend (3). Statement 2 is wrong: they can issue debit cards but not credit cards.
Payments Banks take deposits, now up to ₹2 lakh per customer, and offer remittances and bill payments. Examples include India Post Payments Bank and Airtel Payments Bank. They were proposed by the Nachiket Mor committee. Notice how they extend banking to the unbanked without the risks of lending.
a credit card is a loan. A bank that cannot lend cannot issue one.
Answer as per the official UPSC answer key.
The term 'Core Banking Solutions' is sometimes seen in the news. Which of the following statements best describes/describe this term?
- 1. It is a networking of a bank's branches which enables customers to operate their accounts from any branch of the bank on its network regardless of where they open their accounts.
- 2. It is an effort to increase RBI's control over commercial banks through computerization.
- 3. It is a detailed procedure by which a bank with huge non-performing assets is taken over by another bank.
Select the correct answer using the code given below.
Answer (a) & explanation
Only statement 1 is correct (a). Core Banking Solutions link all of a bank's branches to one central server, so a customer can deposit, withdraw or transfer from any branch on the network, not just the "home branch". Statement 2 is wrong: CBS is a technology for customer service, not a tool for the RBI to control banks. Statement 3 is wrong: taking over a bank with heavy NPAs is a merger or resolution process, unrelated to CBS.
"CORE" is often expanded as Centralised Online Real-time Exchange. Notice how CBS laid the base for ATMs, internet banking, NEFT and RTGS, and later for the UPI and digital-payments boom.
Answer as per the official UPSC answer key.
What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI?
- 1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
- 2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
Answer (c) & explanation
Both statements are correct (c). The RBI introduced MCLR in April 2016 to make banks' loan-pricing method more transparent (1) and to ensure credit at rates fair to both borrowers and banks (2). Banks set lending rates from their marginal, or latest, cost of funds using a fixed formula, so policy rate cuts reach borrowers faster than under the old base rate.
MCLR replaced the base rate system (2010). Because transmission was still slow, from October 2019 new floating-rate retail and MSME loans were linked to an external benchmark such as the repo rate. Notice how each change aims at faster monetary transmission.
Answer as per the official UPSC answer key.
With reference to 'Financial Stability and Development Council', consider the following statements :
- 1. It is an organ of NITI Aayog.
- 2. It is headed by the Union Finance Minister.
- 3. It monitors macroprudential supervision of the economy.
Which of the statements given above is/are correct?
Answer (c) & explanation
Statements 2 and 3 are correct (c). The Financial Stability and Development Council (FSDC) was set up in 2010 by executive order after the global financial crisis. It is chaired by the Union Finance Minister (2). Its members include the heads of the RBI, SEBI, IRDAI, PFRDA and IBBI. It oversees macroprudential supervision of the economy and also looks after inter-regulator coordination and financial literacy and inclusion (3). Statement 1 is wrong because it sits under the Ministry of Finance, not NITI Aayog.
Note that it is not a statutory body. Its sub-committee is chaired by the RBI Governor. Notice the difference between the two kinds of supervision: macroprudential looks at risk to the whole system, while microprudential looks at one bank at a time.
"organ of NITI Aayog" also appeared for NIIF in 2017 Q55. Both are Finance Ministry bodies.
Answer as per the official UPSC answer key.
With reference to 'Bitcoins', sometimes seen in the news, which of the following statements is/are correct?
- 1. Bitcoins are tracked by the Central Banks of the countries.
- 2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
- 3. Online payments can be sent without either side knowing the identity of the other.
Select the correct answer using the code given below.
Answer (b) & explanation
Statements 2 and 3 are correct (b). Bitcoin (2009, created by "Satoshi Nakamoto") is a decentralised cryptocurrency. Its transactions are recorded on a public blockchain kept up by a network of users, so statement 1 is wrong: no central bank tracks or issues it. Anyone with a Bitcoin address can send coins to and receive them from any other address, peer to peer (2). Users are known only by their addresses, so payments can be made without either side knowing the other's real identity (3). This is called being pseudonymous.
In India, crypto gains are taxed at 30% with 1% TDS, and exchanges must register with the FIU-IND. Notice the contrast with the RBI's e-rupee (CBDC), which is a central-bank-issued, legal-tender digital currency.
central banks issue and manage fiat money. Bitcoin's whole design avoids any central authority.
Answer as per the official UPSC answer key.
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Answer (c) & explanation
The SLR is the share of deposits banks must keep in safe liquid assets such as government securities, gold or cash. A cut frees funds for lending, raising liquidity, so banks may cut lending rates (c). Option (a) is wrong: a 0.5-point cut cannot "drastically" raise GDP growth. Option (b) does not follow, since FII flows depend on wider returns and risk. Option (d) is the reverse: an SLR cut raises liquidity.
The SLR is set under the Banking Regulation Act and has fallen over the years to about 18%. Notice how SLR and CRR together shape how much money banks can lend.
"drastically" in options (a) and (d). A small cut has small, likely effects.
Answer as per the official UPSC answer key.
'Basel III Accord' or simply 'Basel III', often seen in the news, seeks to
Answer (b) & explanation
Basel III seeks to improve the banking sector's ability to absorb financial and economic stress and to strengthen risk management (b). Agreed in 2010 by the Basel Committee on Banking Supervision at the Bank for International Settlements, after the 2008 crisis, it asks banks to hold more and better capital, plus buffers, a leverage ratio and liquidity ratios such as the LCR. Option (a) describes the CBD, (c) the Kyoto Protocol and (d) the Montreal Protocol.
India's capital adequacy norm of 11.5% including the conservation buffer is stricter than the Basel minimum. Notice how strong banks protect the whole economy.
Basel is also linked to a convention on hazardous waste. Basel III on its own means banking.
Answer as per the official UPSC answer key.
With reference to Indian economy, consider the following :
- 1. Bank rate
- 2. Open market operations
- 3. Public debt
- 4. Public revenue
Which of the above is/are component/components of Monetary Policy?
Answer (c) & explanation
Monetary policy is run by the RBI through tools such as the bank rate, repo rate, CRR, SLR and open market operations. So 1 and 2 are correct (c). Public debt and public revenue concern government borrowing and taxes, which belong to fiscal policy, run by the government through the Budget.
Since 2016 a six-member Monetary Policy Committee sets the repo rate to keep CPI inflation at 4% within a 2–6% band. Notice how the two policies must work together: loose fiscal policy can push up inflation, forcing tighter monetary policy.
Answer as per the official UPSC answer key.
With reference to inflation in India, which of the following statements is correct?
Answer (c) & explanation
Inflation is often too much money chasing too few goods, so reduced money circulation helps control it (c). Option (a) is wrong: inflation control is shared, with the RBI in the lead. Option (b) is wrong for the same reason. Option (d) is the reverse of the truth.
Since 2016 the RBI has had a legal mandate under the amended RBI Act to keep CPI inflation at 4%, within a band of 2–6%, through its Monetary Policy Committee. The government helps through supply-side steps such as buffer stocks and import duty changes. Notice how monetary and supply measures work together against inflation.
Answer as per the official UPSC answer key.
If the interest rate is decreased in an economy, it will
Answer (c) & explanation
A lower interest rate makes borrowing cheaper, so firms invest more in plant and machinery (c). Option (a) is wrong because cheaper credit usually raises, not lowers, consumption on homes, cars and consumer goods. Option (d) is wrong because saving earns less and becomes less attractive, so savings tend to fall. Any rise in tax collection (b) would be indirect and uncertain, not a direct effect.
This is why the RBI's Monetary Policy Committee cuts the repo rate to support growth and raises it to fight inflation. Notice how one policy rate ripples through loans, deposits, investment and prices.
Answer as per the official UPSC answer key.
What does venture capital mean?
Answer (b) & explanation
Venture capital is long-term equity invested in new, risky businesses with high growth potential, usually start-ups (b). The investor takes a stake, often offers guidance, and exits later through a sale or an IPO. Option (a) is wrong because VC is long-term, not short-term working capital. Options (c) and (d) describe rescue finance and modernisation loans, not venture funding.
In India VC funds are registered with SEBI as Category I Alternative Investment Funds. Notice how VC links to the start-up ecosystem, angel investors and schemes like the Fund of Funds for Startups run through SIDBI.
Answer as per the official UPSC answer key.
The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', sometimes appearing in news, are used in relation to
Answer (a) & explanation
Both terms belong to banking operations (a). The Marginal Standing Facility (2011) lets banks borrow overnight from the RBI in an emergency against government securities, at a rate above the repo rate; it forms the ceiling of the policy corridor. Net Demand and Time Liabilities are a bank's deposits and certain other liabilities; the CRR and SLR are calculated as a share of NDTL. The other options are unrelated fields.
The floor of the corridor is now the Standing Deposit Facility (2022). Notice how these tools let the RBI keep the overnight call rate close to the repo rate.
Answer as per the official UPSC answer key.
What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas?
- 1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
- 2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.
Select the correct answer using the code given below.
Answer (c) & explanation
Both are correct (c). Business Correspondents, allowed by the RBI since 2006, act as bank agents in villages without branches. With a handheld or biometric device they let people deposit and withdraw small sums and open accounts (2 correct). They also deliver subsidies, pensions and MGNREGA wages through Direct Benefit Transfer at the doorstep (1 correct).
BCs were the backbone of financial inclusion drives such as PM Jan Dhan Yojana (2014), together with Aadhaar-enabled payments. Notice how technology, banking and welfare delivery come together in the JAM trinity: Jan Dhan, Aadhaar and Mobile.
Answer as per the official UPSC answer key.
In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'?
- 1. To enable the Central Bank to control the amount of advances the banks can create
- 2. To make the people's deposits with banks safe and liquid
- 3. To prevent the commercial banks from making excessive profits
- 4. To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
Answer (a) & explanation
Statutory reserve requirements are the CRR and SLR. By raising or lowering them, the RBI changes how much money banks can lend, so their key purpose is to control credit creation (1 correct). Deposit safety and liquidity (2) are only a side effect, not the stated purpose in UPSC's key. Curbing bank profits (3) is no aim at all, and keeping vault cash for daily needs (4) is the bank's own business.
The CRR is held as cash with the RBI; the SLR is kept in liquid assets such as government securities. Notice how these are quantitative tools, unlike qualitative tools such as moral suasion.
statement 2 sounds right because SLR assets are safe and liquid. The question asks for the purpose, which is credit control.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. Inflation benefits the debtors.
- 2. Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
Answer (a) & explanation
Statement 1 only is correct (a). Inflation lowers the real value of money. A debtor gains because he repays a fixed sum with money that buys less than when he borrowed (1). Statement 2 is wrong: a bond-holder loses, because the fixed interest and principal he receives buy less than before; inflation erodes the real return. So (b), (c) and (d) fail.
Notice the other winners and losers: fixed-income earners and pensioners lose, while businesses and borrowers, including governments with large debts, gain. That is why governments issue inflation-indexed bonds, such as India's Capital Indexed Bonds and the 2013 Inflation Indexed Bonds linked to WPI and CPI. Unexpected inflation moves wealth from lenders to borrowers. Trap: 'bond-holder' is a lender, not a borrower.
Answer as per the official UPSC answer key.