RBSE Solutions Class 12 Economics Chapter 19 Central Bank Functions and Credit Control

Rajasthan Board RBSE Class 12 Economics Chapter 19 Central Bank: Functions and Credit Control

RBSE Class 12 Economics Chapter 19 Practice Questions

RBSE Class 12 Economics Chapter 19 Multiple Choice Questions

 

Question 1. Bank rate means :
(a) The rate at which commercial bank advances loans.
(b) The rate at which central bank rediscounts the bills of commercial banks.
(c) The rate at which moneylenders advance loans to commercial banks.
(d) The rate at which banks advances loans to public.
Answer: (b) The rate at which central bank rediscounts the bills of commercial banks.
In simple words: The bank rate refers to the interest rate at which the central bank buys or re-buys certain types of promises of future payment (bills) from commercial banks. This helps control how much money is available in the banking system.

🎯 Exam Tip: Understanding the specific role of the central bank in lending money to commercial banks, often by buying their bills, is key here. This helps control how much money is available in the economy.

 

Question 2. W ure of credit control ?

 

Question 3. Which of these is the main function of the central bank?
(a) Issue of currency
(b) Accepting direct deposit from public
(c) Advancing loans to public
(d) All of the options
Answer: (a) Issue of currency
In simple words: The primary job of a central bank is to print and distribute the country's money. This makes sure there is a stable supply of currency for everyone.

🎯 Exam Tip: Remember that the primary role of a central bank is to manage the country's money supply, with issuing currency being a core part of this responsibility.

 

Question 4. Central bank of India is :
(a) State Bank of India
(b) Reserve Bank of India
(c) Union Bank
(d) Syndicate Bank
Answer: (b) Reserve Bank of India
In simple words: The central bank of India is known as the Reserve Bank of India. It plays a crucial role in controlling the nation's financial system.

🎯 Exam Tip: Know the name of the central bank of your country. For India, it is the Reserve Bank of India, which plays a crucial role in the economy.

 

Question 5. Who signs on the one rupee note ?
(a) Governor
(b) Prime Minister
(c) Finance secretary
(d) Finance minister
Answer: (c) Finance secretary
In simple words: The one rupee note in India is signed by the Finance Secretary, while all other higher value notes are signed by the RBI Governor. This is a unique detail about currency.

🎯 Exam Tip: Note that only the one rupee note is signed by the Finance Secretary; all other Indian currency notes are signed by the RBI Governor.

RBSE Class 12 Economics Chapter 19 Very Short Answer Type Questions

 

Question 1. Define central bank.

 

Question 3. What do you mean by rationing of credit ?
Answer: Rationing of credit refers to fixing limits on how much credit can be given for different business activities. This method helps to control and direct where money flows in the economy. For example, the central bank might set a maximum amount for loans in certain sectors.
In simple words: Rationing credit means setting a maximum amount of money that can be loaned for specific business purposes.

🎯 Exam Tip: When defining terms, always focus on the key action (fixing limits) and the purpose (different business activities) to score full marks.

 

Question 4. Write the name of Central Bank of India.
Answer: The Central Bank of India is called the Reserve Bank of India. It acts as the country's main banking institution, responsible for its monetary policy.
In simple words: The Central Bank of India is known as the Reserve Bank of India.

🎯 Exam Tip: Always remember the full official name of your country's central bank, as it's a fundamental piece of economic knowledge.

 

Question 5. Write the name of the monthly bulletin published by RBI.
Answer: The monthly bulletin published by the RBI is known as the ‘RBI Bulletin’. This publication provides important data and analysis on economic and financial developments.
In simple words: The RBI's monthly magazine is called the ‘RBI Bulletin’.

🎯 Exam Tip: When asked for specific names, ensure you use the exact official title, including any special punctuation like apostrophes or quotation marks.

RBSE Class 12 Economics Chapter 19 Short Answer Type Questions

 

Question 1. Explain the function of currency issue of central bank.
Answer: The central bank has the sole legal right to print and circulate money in the country. This power, known as the monopoly of note issue, is held by the RBI, ensuring all currency looks the same. It helps to easily manage and control the amount of money in the economy. The central bank must ensure that it issues currency based on the country's needs, neither too much (to avoid inflation) nor too little (to prevent deflation).
In simple words: The central bank is the only one allowed to print money, which makes sure all currency is uniform. This helps the bank control how much money is in the market, preventing too much or too little money.

🎯 Exam Tip: Highlight "monopoly of note issue" and its benefits like "uniformity" and "credit control" as key phrases for this answer.

 

Question 2. Write down the quantitative measures adopted by the central bank to control credit.
Answer: The central bank uses several quantitative measures to control the total amount of credit in the economy. These include:
1. Bank rate policy: The central bank adjusts the rate at which it lends money to other banks, influencing their lending capacity.
2. Open market operations: The central bank buys or sells government securities to increase or decrease money supply.
3. Cash Reserve Ratio (CRR): This is the percentage of deposits banks must keep with the central bank, which limits their lending.
4. Statutory Liquidity Ratio (SLR): Banks must hold a certain percentage of their assets in liquid forms like cash or gold, affecting available funds. These measures collectively help the central bank manage the country's money flow.
In simple words: The central bank controls how much money is available for loans by changing rates like the bank rate, buying or selling government bonds, and setting how much cash (CRR) and liquid assets (SLR) banks must keep.

🎯 Exam Tip: When listing quantitative measures, briefly explain how each works to either expand or contract credit in the economy.

 

Question 3. Explain the direct action adopted by the central bank.
Answer: Direct action is a measure taken by the central bank when commercial banks do not follow its recommended methods and policies. In such cases, the central bank has the legal authority to intervene directly. For example, it might stop rediscounting bills for non-compliant banks or charge them very high interest rates. This forces commercial banks to adhere to the norms and policies set by the central bank. This is a powerful tool to enforce compliance.
In simple words: Direct action means the central bank steps in with tough rules or penalties if other banks don't follow its financial policies. It might refuse to lend to them or charge high interest rates.

🎯 Exam Tip: Emphasize that direct action is a last resort, used when other persuasive methods have failed, highlighting its coercive nature.

 

Question 4. Explain through a flow chart the central board of directors of RBI.
Answer: The central board of directors of RBI has a total of twenty members. The structure can be shown as follows:
Central Board of Directors of RBI
\( \downarrow \)
Governor (1)
\( \downarrow \)
Deputy Governor (4)
\( \downarrow \)
Directors (10)
\( \downarrow \)
Directors (4) (from four regional boards)
\( \downarrow \)
Government officer (1)
This structured board ensures effective governance and diverse perspectives in policy formulation for the central bank.
In simple words: The RBI's main board has 20 members: one Governor, four Deputy Governors, ten other Directors, four Directors from regional boards, and one government officer. This team helps manage the bank.

🎯 Exam Tip: When describing organizational structures or flowcharts, clearly list each level and the number of members at each level for a comprehensive answer.

 

Question 5. Write down the names of any four publications of RBI.
Answer: The Reserve Bank of India publishes several important reports and documents to keep the public informed. Four of these are:
1. Manual on currency and banking statistics (annual).
2. Monetary policy report of banking (Half yearly).
3. Financial stability report (Half yearly).
4. Statistics on deposits and credit of scheduled commercial banks (Quarterly report).
These publications provide key insights into India's financial health and RBI's operations.
In simple words: The RBI publishes yearly statistics on currency, half-yearly reports on monetary policy and financial stability, and quarterly reports on bank deposits and credit.

🎯 Exam Tip: For listing questions, make sure to name the required number of items accurately and briefly describe their periodicity (e.g., annual, half-yearly) if known.

RBSE Class 12 Economics Chapter 19 Essay Type Questions

 

Question 2. Explain in detail the measures adopted by the central bank to control credit.
Answer: The central bank uses various measures to control the amount of credit available in the economy, impacting inflation and economic activity. These include:
(i) Bank rate: This is the rate at which the central bank lends money to commercial banks. If the bank rate is lowered, loans become cheaper, increasing demand for credit and expanding the money supply. Conversely, a higher bank rate makes loans more expensive, reducing their demand and contracting credit.
(ii) Repo rate: This is the rate at which the central bank lends money to commercial banks for short periods in case of a fund shortage. It helps control inflation by influencing banks' borrowing costs. Adjusting the repo rate is a key way to expand or contract the money supply quickly.
(iii) Reverse repo rate: This is the rate at which the central bank borrows money from commercial banks, typically to absorb excess liquidity from the market. It is a tool used to reduce the money supply in the economy, especially when there is too much money in circulation.
(iv) Cash reserve ratio (CRR): This is the minimum percentage of deposits that commercial banks must hold as reserves with the central bank. Decreasing CRR increases the funds available for banks to lend, while increasing CRR reduces these funds, thereby controlling credit.
(v) Statutory Liquidity Ratio (SLR): This is the percentage of their deposits that commercial banks must maintain in liquid assets like cash, gold, or approved securities, with themselves. SLR directly affects how much money banks have left to offer as credit to customers, ensuring they remain solvent.
In simple words: The central bank manages credit by changing interest rates like the bank rate, repo rate, and reverse repo rate. It also controls how much cash banks must keep as reserves (CRR) and how much liquid assets they need to hold (SLR).

🎯 Exam Tip: Clearly distinguish between each quantitative measure by explaining its definition and how its adjustment affects credit availability in the economy.

 

Question 3. Explain in detail the monetary measures of the Reserve Bank of India.
Answer: The monetary policy instruments used by the central bank are generally divided into two main types:
(a) Quantitative methods:
These methods influence the total volume of credit in the country. They include:
(i) Bank rate policy: The central bank charges this rate when it lends money to commercial banks against their securities. Lowering the bank rate expands credit by making loans cheaper, while raising it contracts credit by making loans more expensive.
(ii) Open market operations: This involves the central bank buying or selling government securities. When the central bank sells securities, it reduces the cash reserves of commercial banks, contracting credit. When it buys securities, it injects money into the banking system, expanding credit.
(iii) Cash Reserve Ratio (CRR): This is the percentage of a bank's net demand and time liabilities that it must deposit with the central bank as cash. Reducing CRR increases credit, and raising it decreases credit.
(iv) Statutory Liquidity Ratio (SLR): This requires banks to hold a certain percentage of their net total demand and time liabilities in the form of designated liquid assets with itself.
(b) Qualitative methods:
These are selective methods designed to control the flow of credit to specific sectors or for particular uses. They include:
(i) Selective credit control: The central bank uses specific measures to regulate credit for particular sectors of the economy based on their needs.
(ii) Stating a limit on re-discounting of bills of the bank: The central bank can limit how many bills it will re-discount for commercial banks, controlling the amount of credit they can access.
(iii) Applying a quota or stating a limit on the loans provided to the various businesses and industries: This sets ceilings on credit for certain sectors.
(iv) Moral suasion: The central bank advises, requests, and persuades commercial banks to follow its monetary policy guidelines voluntarily. This is a non-binding but influential method.
(v) Publicity: The central bank uses publications, magazines, and bulletins to inform the public and commercial banks about its policies and economic challenges, influencing credit behavior indirectly.
(vi) Direct action: If commercial banks do not comply with the central bank's policies, the central bank can take direct action. This may involve refusing to re-discount bills, charging higher interest rates, or even cancelling their license, forcing banks to adhere to the rules. The RBI can employ any of these methods against non-compliant banks.
In simple words: The RBI controls money supply in two ways: Quantitative methods, which change the total amount of money available (like adjusting interest rates or reserve requirements), and Qualitative methods, which guide where the money goes (like telling banks not to lend for certain things or directly acting against non-compliant banks).

🎯 Exam Tip: When explaining monetary measures, clearly categorize them into quantitative and qualitative methods. For each, describe how it works and its effect on credit supply in simple terms.

 

Question 4. Compare central bank and commercial bank on the basis of their functions.
Answer: Here is a comparison of central banks and commercial banks based on their functions:

In simple words: Central banks are usually one per country, manage credit through currency issue, are government's banker, and focus on economic stability. Commercial banks are many, create credit through deposits, serve the public, and aim for profit.

🎯 Exam Tip: When comparing entities, always use clear, distinct points of comparison. Presenting them in a table format helps to organize information and highlight differences effectively.

RBSE Class 12 Economics Chapter 19 Other Important Questions – Answers

RBSE Class 12 Economics Chapter 19 Multiple-Choice Questions

 

Question 1. Main directive principle of the central bank is:
(a) Earning profit
(b) Benefit of the nation
(c) Price stability and economic growth
Answer: (b) Benefit of the nation
In simple words: The central bank's main goal is to serve the country's economy, not to make money for itself. It focuses on the overall welfare and stability of the nation.

🎯 Exam Tip: Remember that central banks are public institutions with a mandate for economic stability and national benefit, unlike commercial banks which primarily aim for profit.

 

Question 2. The function of Central bank is:
(a) Issuing the notes
(b) Banker's bank
(c) Government's banker
(d) All of the options
Answer: (d) All of the options
In simple words: The Central Bank performs many important duties, including printing money, acting as the bank for other banks, and managing government finances. These roles are crucial for a healthy economy.

🎯 Exam Tip: When faced with "All of the options" in an MCQ on functions, quickly verify if at least two options are correct; usually, this indicates "All of the options" is the answer.

 

Question 3. By increasing bank rate:
(a) Credit expands
(b) Credit declines
(c) Credit remains unchanged
(d) None of the options
Answer: (b) Credit declines
In simple words: If the central bank raises the bank rate, it costs more for other banks to borrow money. This means there is less money available for lending to people and businesses, so the overall amount of credit in the economy goes down.

🎯 Exam Tip: Understand the inverse relationship: an increased bank rate means higher borrowing costs for commercial banks, which leads to reduced credit in the economy.

 

Question 4. Banks keeps cash deposits with:
(a) Central bank
(b) Themself
(c) Government
(d) None of the options
Answer: (a) Central bank
In simple words: Commercial banks deposit a portion of their cash reserves with the central bank, which acts as their custodian. This system helps keep the financial system stable.

🎯 Exam Tip: Remember that central banks act as a "banker's bank," holding reserves for commercial banks to ensure stability and liquidity.

 

Question 5. Bank rate means:
(a) Interest rate of banks
(b) Exchange rate
(c) Reserve bank rates
(d) Market rates
Answer: (c) Reserve bank rates
In simple words: The bank rate is essentially the rate set by the Reserve Bank for lending to other banks, influencing overall interest rates in the economy. This is a key tool for monetary policy.

🎯 Exam Tip: Clearly differentiate the bank rate from general market interest rates; the bank rate is a policy tool set by the central bank.

 

Question 7. Qualitative credit control includes:
(a) Rationing of credit
(b) Publicity
(c) Moral Suasion
(d) All of the options
Answer: (d) All of the options
In simple words: Qualitative credit control uses various specific methods, such as setting credit limits, public announcements, and persuading banks, to guide how credit is used in the economy. This helps target specific sectors.

🎯 Exam Tip: Qualitative methods focus on the direction and use of credit, rather than just the total amount, making them targeted tools for economic management.

 

Question 8. In India, currency and credit is controlled by:
(a) State Bank of India
(b) Punjab National Bank
(c) Reserve Bank of India
(d) Co-operative Bank
Answer: (c) Reserve Bank of India
In simple words: The Reserve Bank of India is the main authority responsible for managing the country's money and credit system. It acts as the central financial regulator.

🎯 Exam Tip: Always associate the control of currency and credit in India directly with the Reserve Bank of India (RBI), as it is the central bank.

 

Question 9. Instruments of monetary policy are:
(a) Bank rate
(b) Cash reserve ratio
(c) Statutory liquidity ratio
(d) All of the options
Answer: (d) All of the options
In simple words: Monetary policy uses a mix of tools, including controlling interest rates (bank rate) and setting reserve requirements (CRR, SLR), to manage the economy. These tools work together to maintain financial stability.

🎯 Exam Tip: Familiarize yourself with all the key instruments of monetary policy, as they work together to achieve economic stability.

 

Question 11. Reserve bank was established in:
(a) the year 1935
(b) the year 1947
(c) the year 1951
(d) the year 1971
Answer: (a) the year 1935
In simple words: The Reserve Bank of India started in 1935, playing a key role in India's financial system since then. This was a significant step in the country's economic history.

🎯 Exam Tip: Knowing the establishment year of major financial institutions like the RBI is crucial for understanding their historical context and evolution.

 

Question 12. Reserve bank was nationalised in:
(a) the year 1935
(b) the year 1947
(c) the year 1949
(d) None of the options
Answer: (c) the year 1949
In simple words: The Reserve Bank of India became a government-owned institution in 1949, changing its ownership from private shareholders to the government. This ensured its policies aligned with national goals.

🎯 Exam Tip: Differentiate between the year of establishment and the year of nationalization for the RBI, as these are two distinct historical events.

 

Question 13. Ownership of Reserve Bank of that India is of:
(a) Shareholders
(b) Government
(c) Commercial Banks
(d) None of the options
Answer: (b) Government
In simple words: After its nationalization, the Reserve Bank of India is now fully owned by the government, ensuring its policies serve national economic goals rather than private interests.

🎯 Exam Tip: Understand that nationalization implies government ownership, which directs the institution's objectives towards public welfare rather than private profit.

 

Question 14. Headquarters of Reserve Bank of India is in:
(a) New Delhi
(b) Kolkata
(c) Mumbai
Answer: (c) Mumbai
In simple words: The Reserve Bank of India's main office, or headquarters, is located in Mumbai. This city is also recognized as India's financial capital.

🎯 Exam Tip: Knowing the headquarters of key financial institutions like the RBI is important geographical and economic information.

RBSE Class 12 Economics Chapter 19 Very Short Answer Type Questions

 

Question 1. What is Repo Rate ?
Answer: The Repo Rate is the interest rate at which the central bank lends short-term money to commercial banks. This happens when commercial banks need funds due to a temporary shortage. This rate helps manage liquidity in the banking system and influences overall interest rates.
In simple words: Repo Rate is the rate at which the central bank gives short-term loans to other banks if they run out of money.

🎯 Exam Tip: Understand that the Repo Rate is a key tool for central banks to inject liquidity into the financial system and manage inflation.

 

Question 2. What is Reverse Repo Rate ?
Answer: The Reverse Repo Rate is the rate at which the central bank borrows money from commercial banks. This happens when commercial banks have surplus funds and want to deposit them with the central bank. It helps remove extra money from the banking system to control inflation.
In simple words: Reverse Repo Rate is when the central bank takes money as a loan from other banks.

🎯 Exam Tip: Remember the distinction: Repo is central bank lending to commercial banks, while Reverse Repo is central bank borrowing from commercial banks.

 

Question 3. What is Statutory Liquidity Ratio ?
Answer: Statutory Liquidity Ratio (SLR) is a minimum percentage of total demand and time liabilities that commercial banks must maintain. They keep this as liquid assets, like cash, gold, or government securities, with themselves. This ensures banks have enough liquid funds to meet unexpected needs and contributes to financial stability.
In simple words: SLR is the portion of a bank's money that it must keep ready as cash, gold, or government bonds, to ensure it always has liquid funds.

🎯 Exam Tip: Differentiate SLR from CRR by noting that SLR assets are kept with the banks themselves, while CRR amounts are deposited with the central bank.

 

Question 4. What is cash reserve ratio ?
Answer: The Cash Reserve Ratio (CRR) means that banks must deposit a certain percentage of their total net demand and time liabilities as cash with the central bank. This helps regulate the money supply in the economy and ensures banks have funds for operations.
In simple words: CRR is the amount of cash that banks must keep with the central bank from their total deposits.

🎯 Exam Tip: Remember CRR as a tool used by the central bank to control the banking system's liquidity and, by extension, the overall money supply.

 

Question 5. When is an increase made in cash reserve ratio ?
Answer: An increase in the cash reserve ratio decreases the amount of money banks have to lend. This action is usually taken by the central bank when it wants to reduce the amount of credit in the economy, for example, to control inflation or curb excessive lending. This helps to cool down an overheating economy.
In simple words: The cash reserve ratio is increased when the central bank wants to reduce how much money banks can lend, usually to slow down the economy or control rising prices.

🎯 Exam Tip: Connect an increase in CRR directly to a decrease in credit availability and its primary use in controlling inflationary pressures.

 

Question 7. In which year was the Reserve Bank of India established ?
Answer: The Reserve Bank of India was established in the year 1935. It began its operations to regulate the country's financial system and issue currency. This marked a new era for India's monetary management.
In simple words: The Reserve Bank of India started in 1935.

🎯 Exam Tip: This is a factual question; ensure you recall the correct year of establishment for the RBI.

 

Question 8. Who is the chief officer of Reserve Bank of India ?
Answer: The chief officer of the Reserve Bank of India is the Governor. This individual leads the bank's operations and policy decisions, acting as its primary spokesperson. The Governor plays a crucial role in economic stability.
In simple words: The Governor is the top officer of the Reserve Bank of India.

🎯 Exam Tip: Always remember the official title of the head of the central bank, which is the Governor for the RBI.

 

Question 9. How many members are there in central board of Reserve Bank of India ?
Answer: The central board of the Reserve Bank of India has twenty members. This diverse board helps in making comprehensive decisions about monetary policy and financial regulation. Their collective expertise ensures robust governance.
In simple words: The RBI's main board has 20 members.

🎯 Exam Tip: Factual questions on organizational structure require precise numbers; remember the total count of board members.

 

Question 10. How many deputy governors are there in Reserve Bank of India ?
Answer: There are four deputy governors in the Reserve Bank of India. They assist the Governor in managing the bank's various functions and oversee different departments. These roles are essential for the bank's smooth operation.
In simple words: The Reserve Bank of India has four deputy governors.

🎯 Exam Tip: Specific numbers related to key positions in the RBI (like Deputy Governors) are important facts to recall.

 

Question 11. What do you mean by monetary policy ?
Answer: Monetary policy refers to the actions taken by the central bank to manage the supply of money and credit in an economy. Its goal is to achieve specific economic objectives, like maintaining price stability, promoting economic growth, and ensuring full employment. These policies affect interest rates and inflation.
In simple words: Monetary policy is a plan used by the central bank to control the amount of money and loans in the country, aiming for a stable economy.

🎯 Exam Tip: When defining monetary policy, emphasize both its objective (managing money and credit) and its goal (economic objectives like price stability).

 

Question 12. Mention the two main functions of central bank.

 

Question 15. Write one objective of credit control.
Answer: One important goal of credit control is to help stabilize the economy by stopping big ups and downs in business cycles. It ensures that the amount of money available for borrowing is managed to prevent economic booms and busts.
In simple words: A main goal of credit control is to prevent big ups and downs in how businesses are doing. It helps keep the economy steady by managing how much money is available for lending.

🎯 Exam Tip: When asked for objectives, focus on core economic stability or growth goals directly related to the concept.

 

Question 16. What do you mean by open market operations ?
Answer: Open market operations refer to the central bank buying or selling government securities (like bonds) from or to the public and commercial banks. The government uses this method to control the amount of credit in the economy. For instance, if the central bank wants to reduce credit, it sells securities, taking money out of circulation. If it wants to increase credit, it buys securities, injecting money into the system. This method is a common way to manage money flow and liquidity.
In simple words: Open market operations mean the central bank buys or sells government bonds in the market. This helps the bank control how much money is available for lending.

🎯 Exam Tip: Clearly explain both the buying and selling aspects of open market operations, and how each action affects credit supply in the economy.

 

Question 17. What is meant by rationing of credit ?
Answer: Rationing of credit refers to the central bank setting fixed limits or quotas on the amount of credit that can be given for different business activities. It's like giving out fixed shares of available loans to specific sectors. This helps direct funds to important areas of the economy or restrict lending to less essential ones.
In simple words: Rationing of credit means the central bank sets limits on how much money different businesses or sectors can borrow. It's like giving out fixed shares of available loans.

🎯 Exam Tip: Remember that rationing of credit is about limiting *how much* can be borrowed for specific activities, rather than the overall cost of borrowing.

 

Question 18. Which method is adopted by the central bank for issuing notes ?
Answer: The method adopted by the central bank for issuing currency notes is the Minimum Reserve System. This system ensures that the central bank always keeps a certain minimum amount of reserves, typically in gold and foreign currency, before printing new money. It provides a safety net for the currency's value.
In simple words: The central bank uses a system called the Minimum Reserve System to print and put new money into circulation. This ensures the currency is backed by reserves.

🎯 Exam Tip: Name the specific system clearly and briefly mention its core principle of maintaining reserves.

 

Question 20. Who regulates monetary policy in India?
Answer: In India, monetary policy is regulated by the Reserve Bank of India (RBI). The RBI is responsible for managing the country's money supply and interest rates to achieve economic goals like price stability and growth.
In simple words: In India, the Reserve Bank of India (RBI) is in charge of managing the country's monetary policy. This means the RBI controls things like interest rates and money supply.

🎯 Exam Tip: Always state the full name of the institution responsible for a key economic function like monetary policy.

 

Question 21. How many non-government directors are there in RBI board of directors?
Answer: There are twelve non-government directors on the Reserve Bank of India's (RBI) board of directors. These directors are chosen to bring different viewpoints and experiences to the bank's decision-making process, ensuring a broader perspective.
In simple words: The RBI board has twelve directors who are not from the government. They help the bank make good decisions.

🎯 Exam Tip: For numerical questions about institutional structures, provide the exact number and briefly mention the role of such members.

 

Question 22. What is the function of reserve bank as a banker of banks ?
Answer: The Reserve Bank acts as a banker for all other commercial banks in the country. It accepts deposits from them and also provides them with loans when needed, especially during emergencies. This function makes the RBI the "lender of last resort," ensuring stability in the banking system.
In simple words: The Reserve Bank acts as a bank for other banks. Commercial banks keep their money with the Reserve Bank and can also borrow from it.

🎯 Exam Tip: Highlight "lender of last resort" as a key phrase to explain the RBI's role for other banks.

 

Question 23. How much fund is kept by the Reserve Bank for issuing notes through minimum reserve system?
Answer: The Reserve Bank of India keeps a fund of Rs 200 crore for issuing new currency notes under the Minimum Reserve System. This fund is specifically composed of Rs 115 crore in gold and Rs 85 crore in foreign securities. This minimum reserve ensures the backing and credibility of the currency issued.
In simple words: The Reserve Bank keeps a Rs 200 crore fund to print new money. This fund includes Rs 115 crore in gold and Rs 85 crore in foreign currencies.

🎯 Exam Tip: Specify both the total fund amount and its components (gold and foreign securities) for a complete answer.

 

Question 24. What is the name of central bank of America ?
Answer: The name of the central bank of America is the 'Federal Reserve Bank'. It is often simply called "The Fed." This institution is responsible for overseeing the monetary policy of the United States.
In simple words: The main bank in America is called the Federal Reserve Bank, often shortened to "The Fed". It helps keep the US economy running smoothly.

🎯 Exam Tip: Providing the common short name "The Fed" alongside the full name is a good detail.

 

Question 25. The establishment of RBI has been done under which act?
Answer: The establishment of the Reserve Bank of India (RBI) was carried out under the provisions of the Reserve Bank of India Act, 1934. This legal framework defined its powers, functions, and responsibilities. The act created the foundation for India's central banking system.
In simple words: The Reserve Bank of India was set up according to the rules of the Reserve Bank of India Act, which was passed in 1934. This law gave the RBI its power.

🎯 Exam Tip: Always include the correct name and year of the act for questions related to legal foundations of institutions.

 

Question 27. Who is the present governor of Reserve Bank of India ?
Answer: As per the information provided, the Governor of the Reserve Bank of India (RBI) was Uijit Patel at that time. The Governor is the chief executive of the central bank, responsible for its overall management and policy implementation.
In simple words: The person leading the Reserve Bank of India at the time this content was written was Uijit Patel. The Governor manages the bank.

🎯 Exam Tip: While the name of the governor changes over time, for a historical question like this, stating the name given in the source is correct.

 

Question 28. Does Reserve Bank have a direct connection with the public?
Answer: No, the Reserve Bank of India (RBI) does not have any direct connection with the general public. It primarily deals with the government and commercial banks. Commercial banks are the entities that provide banking services directly to individuals and businesses.
In simple words: No, the Reserve Bank does not deal directly with the general public. Instead, it works with other banks and the government.

🎯 Exam Tip: Distinguish clearly between the roles of a central bank (macro-level) and commercial banks (micro-level services to public).

 

Question 29. Who issues notes in India?
Answer: In India, the one-rupee note is issued by the authority and signature of the Finance Secretary of the Government of India. All other currency notes, such as Rs 10, Rs 50, Rs 100, and Rs 500, are issued by the Reserve Bank of India. This division of responsibility ensures that both the government and the central bank play a role in currency management.
In simple words: In India, the one-rupee note is signed by the Finance Secretary. All other money notes are issued by the Reserve Bank of India.

🎯 Exam Tip: Be precise about which authority issues which denomination of notes, as this is a common point of confusion.

 

Question 30. When was minimum cash ratio system adopted in India?
Answer: The Minimum Cash Ratio System was adopted in India on 6th October 1956. This system mandates that banks must hold a certain amount of cash as reserves, which helps the central bank control the money supply.
In simple words: The system of keeping a minimum cash ratio in India began on October 6, 1956. This requires banks to hold some cash.

🎯 Exam Tip: State the exact date for historical questions, as precision is key for such facts.

RBSE Class 12 Economics Chapter 19 Short Answer Type Questions (SA-I)

 

Question 1. Give historical reference of establishment of central bank.
Answer: Central banks began to be established in the seventeenth century, with the first central bank being founded in Sweden in 1656. Following this, the Bank of England was set up in 1664, becoming a model for many other central banks globally. Other countries like France (1800), the Netherlands (1856), Russia (1869), and Germany (1875) also established their own central banks. In India, the Reserve Bank of India was established in 1935, marking its entry into the global central banking landscape.
In simple words: Central banks started in the 1600s, first in Sweden in 1656, then England in 1664. Other countries followed later, and India's Reserve Bank started in 1935.

🎯 Exam Tip: Provide key dates and countries to illustrate the historical evolution of central banking, showing a broad understanding.

 

Question 3. Why is establishment of central bank needed ?
Answer: A central bank is essential for several critical reasons that support a country's economic and financial stability. These reasons include: 1. **Issuing Notes:** It is the sole authority to issue currency, ensuring uniformity and control over the money supply. 2. **Banker to the Government:** It manages the government's accounts and financial transactions. 3. **Banker's Bank and Supervisor:** It acts as a bank for commercial banks, holding their reserves and supervising their operations. 4. **Lender of Last Resort:** It provides emergency funds to commercial banks, preventing financial crises. 5. **Custodian of Foreign Exchange:** It manages the country's foreign currency reserves, maintaining exchange rate stability. 6. **Clearing House Function:** It facilitates the settlement of inter-bank transactions efficiently. 7. **Credit Control:** It regulates the amount of credit available in the economy to control inflation and deflation. All these roles are crucial for a stable and functioning financial system.
In simple words: A central bank is needed for many important reasons. It prints money, handles government banking, helps other banks, provides emergency loans, manages foreign money, helps banks settle payments, and controls the money available for lending.

🎯 Exam Tip: When listing reasons, use clear headings or bullet points for each function and provide a brief explanation to score full marks.

 

Question 4. Mention four points of difference between centered bank and commercial bank.
Answer: Here are four key differences between a central bank and a commercial bank: 1. **Hierarchy and Control:** The central bank is the top financial institution that oversees and regulates all other banks in the country. In contrast, commercial banks operate under the central bank's control and rules. 2. **Number of Institutions:** Typically, a country has only one central bank, which is a unique entity. However, there are many commercial banks operating within the country. 3. **Note Issuance Authority:** The central bank possesses the exclusive power to print and issue currency notes. Commercial banks do not have the authority to issue currency. 4. **Primary Focus:** The central bank's main objective is to ensure the overall growth and stability of the national economy. Commercial banks, on the other hand, primarily aim to maximize their profits. These distinct roles highlight their different contributions to the financial system.
In simple words: A central bank is the main bank that controls others, while commercial banks follow its rules. There is usually only one central bank but many commercial banks. Only the central bank prints money. The central bank works for the whole economy, but commercial banks work to make a profit.

🎯 Exam Tip: Clearly articulate the contrasting roles and objectives of each type of bank to show a comprehensive understanding of their differences.

 

Question 5. How is central bank a banker's bank?
Answer: A central bank functions as a "banker's bank" because it provides essential services to other commercial banks in the country. It holds a portion of their cash reserves, just as individuals hold deposits in commercial banks. Additionally, it offers loans to these commercial banks, especially as a "lender of last resort" during times of financial difficulty. This role helps to maintain the stability and liquidity of the entire banking system.
In simple words: A central bank acts as a bank for other commercial banks. This means it holds their deposits and gives them loans when they need money, especially during emergencies.

🎯 Exam Tip: Emphasize the two main aspects of a central bank being a "banker's bank": holding reserves and acting as a lender of last resort.

 

Question 6. What is the function of central bank as a government's banker?
Answer: The central bank serves as the government's banker, agent, and financial advisor. In this role, it manages the government's bank accounts, accepts deposits, and makes payments on its behalf. It also facilitates foreign exchange transactions and other banking operations for the government. Furthermore, the central bank advises the government on crucial banking and financial matters, helps arrange public loans, and manages the sale and purchase of government securities. This support helps the government manage its finances effectively.
In simple words: The central bank acts like a normal bank for the government. It handles the government's money, collects payments, and makes payments for the government. It also gives advice to the government on money and finance issues.

🎯 Exam Tip: List specific actions a central bank performs for the government, such as managing accounts, advising, and handling public debt.

 

Question 7. Explain the credit control function of the central bank.
Answer: One of the most vital functions of the central bank is to control the availability and cost of credit in the economy. This involves managing "credit creation," which is the process by which commercial banks create new loans. By controlling credit, the central bank aims to moderate business cycles, preventing excessive economic booms or severe recessions. An effective credit control system helps maintain market stability and supports sustainable economic growth.
In simple words: A key job of the central bank is to control how much money is available for lending in the economy, which is called credit control. This helps to keep the market stable and avoid financial problems.

🎯 Exam Tip: Define "credit control" and explain its primary purpose in stabilizing the economy and managing business cycles.

 

Question 8. What is minimum reserve system?
Answer: The Minimum Reserve System is a framework under which the Reserve Bank of India (RBI) backs its currency. Under this system, the RBI is required to maintain a minimum reserve fund of Rs 200 crore. This fund consists of Rs 115 crore in gold and Rs 85 crore in foreign securities. This system allows the RBI to issue currency up to any quantity, provided it maintains this minimum reserve, ensuring confidence in the nation's currency.
In simple words: The Minimum Reserve System is how the Reserve Bank of India backs its currency. The RBI keeps a minimum fund of Rs 200 crore, made of gold and foreign currencies, to print new money.

🎯 Exam Tip: Clearly state the minimum amount of reserve and its composition (gold and foreign securities) as required by the system.

 

Question 9. Why is. central bank to be the said custodian of foreign exchange reserves?
Answer: The central bank is known as the custodian of foreign exchange reserves because it holds and manages all of a country's gold and international currencies. Its primary responsibility is to maintain the stability of the exchange rate, both the rate fixed by the government and the value of the domestic currency. By managing these reserves, the central bank helps facilitate international trade and investment, ensuring the country has enough foreign currency for its needs.
In simple words: The central bank is called the custodian of foreign exchange reserves because it holds all the country's gold and foreign money. Its job is to keep the value of the country's currency steady.

🎯 Exam Tip: Explain both aspects of the custodian role: holding reserves and actively managing them for exchange rate stability.

 

Question 10. How does the central bank influence credit control through bank rates ?
Answer: The central bank influences credit control by adjusting the bank rate. The bank rate is the interest rate at which the central bank lends money to commercial banks. If the central bank wants to expand credit in the economy, it lowers the bank rate. This makes it cheaper for commercial banks to borrow, encouraging them to lend more to businesses and individuals. Conversely, if it wants to contract credit, it raises the bank rate, making borrowing more expensive and reducing overall lending. This directly affects the cost of borrowing for commercial banks, thereby influencing the overall money supply.
In simple words: The central bank controls how much credit is available by changing the bank rate. If it lowers the rate, banks borrow more cheaply and lend more. If it raises the rate, banks borrow more expensively and lend less.

🎯 Exam Tip: Describe the bank rate, then clearly explain how lowering it and raising it affects commercial bank lending and credit availability.

 

Question 12. Differentiate between cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
Answer: The Cash Reserve Ratio (CRR) requires commercial banks to deposit a specific percentage of their net demand and time liabilities (deposits) as cash with the central bank. This portion of money cannot be used by the banks for lending. In contrast, the Statutory Liquidity Ratio (SLR) requires commercial banks to maintain a certain percentage of their net demand and time liabilities in the form of designated liquid assets, such as cash, gold, or approved government securities, with *themselves*. This distinction is important: CRR funds go to the central bank, while SLR funds stay with the commercial bank, serving as an internal liquidity buffer.
In simple words: CRR means banks must keep some cash with the central bank. SLR means banks must keep some liquid assets (like cash or gold) with themselves. Both control how much money banks can lend.

🎯 Exam Tip: Highlight the key difference: CRR is a reserve with the central bank, while SLR is a reserve held by the commercial bank itself.

 

Question 13. How is credit controlled by cash reserve ratio and statutory liquidity ratio by RBI ?
Answer: The RBI uses the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to control credit by adjusting their percentages. If the RBI wants to expand the availability of credit in the economy, it reduces both the CRR and SLR percentages. This action leaves commercial banks with more funds to offer as loans. Conversely, if the RBI aims to contract credit, it increases both the CRR and SLR. This forces banks to hold more reserves and reduces their ability to provide loans, thereby managing the overall money supply.
In simple words: The RBI controls credit by changing CRR and SLR. If it wants more lending, it lowers them. If it wants less lending, it raises them.

🎯 Exam Tip: Explain the cause-and-effect relationship: lower ratios lead to more credit, higher ratios lead to less credit.

 

Question 14. What are the qualitative methods of credit control?
Answer: Qualitative methods of credit control are tools used by the central bank to regulate the direction of credit flow, rather than just its total quantity. These methods include: 1. **Selective Credit Control:** Directing credit to specific sectors or discouraging it from others. 2. **Rationing of Credit:** Setting limits on the amount of loans available for particular business activities. 3. **Moral Suasion:** Persuading commercial banks through advice and requests to follow the central bank's lending policies. 4. **Publicity:** Publishing information through various media to inform banks and the public about financial policies and expectations. 5. **Direct Action:** Taking punitive measures, such as refusing to rediscount bills or imposing higher interest rates, against banks that do not comply with central bank directives. These methods help the central bank guide how credit is utilized in the economy.
In simple words: Qualitative methods of credit control help the central bank decide where money should be lent. These include guiding specific loans, setting lending limits, convincing banks to follow rules, informing the public, and taking action against banks that do not obey.

🎯 Exam Tip: For each qualitative method, briefly define it and explain its purpose in guiding credit allocation, not just overall quantity.

 

Question 16. What is the credit rationing method of credit control ?
Answer: The credit rationing method of credit control refers to the practice where the central bank fixes specific quotas or limits on the amount of credit that commercial banks can extend for various business activities. Under this method, commercial banks are prohibited from advancing loans beyond these prescribed limits. By adjusting these limits, the central bank can effectively control the flow of credit to different sectors of the economy, ensuring that funds are directed as per economic priorities or to curb excessive lending in certain areas.
In simple words: Credit rationing is a method where the central bank sets a maximum limit on how much money commercial banks can lend for different types of business. Banks cannot give more than these limits.

🎯 Exam Tip: Focus on the "quotas" or "limits" aspect of credit rationing, explaining that it restricts the *amount* of lending for specific purposes.

 

Question 17. What do you mean by Direct Action used for credit control by the central bank?
Answer: Direct action is a stringent method used by the central bank when commercial banks fail to adhere to its policies and guidelines for credit control. In such cases, the central bank has the legal authority to take direct measures against the non-compliant banks. These actions might include refusing to rediscount their bills, stopping the provision of loans to them, or imposing higher interest rates on their borrowings. These tough measures aim to compel commercial banks to follow the central bank's directives, thereby reinforcing its control over the financial system.
In simple words: Direct action is when the central bank takes strong steps against banks that do not follow its rules. This can mean refusing loans or charging more interest to make banks obey.

🎯 Exam Tip: Explain that direct action is a last-resort measure and list specific examples of punitive steps the central bank might take.

 

Question 18. Write two functions of the Reserve Bank.
Answer: Two key functions of the Reserve Bank of India are: 1. **Issuer of Currency:** The RBI is the sole authority responsible for printing and managing the circulation of currency notes and coins. Its main objective is to ensure an adequate supply of good quality currency to the public and to manage the exchange of notes not fit for circulation. 2. **Monetary Authority:** The RBI formulates, implements, and monitors the monetary policy for the entire country. Its primary goal is to maintain price stability, control inflation, and ensure that sufficient credit is available for all productive sectors of the economy to promote sustainable growth. These functions are vital for the country's economic health.
In simple words: Two main jobs of the Reserve Bank are to print and manage all the money in the country, and to set the monetary policy to keep prices stable and ensure enough money for growth.

🎯 Exam Tip: Name each function clearly and provide a concise explanation of its purpose and impact on the economy.

 

Question 19. What is the task of the Reserve Bank as a government banker?
Answer: The Reserve Bank of India performs the task of a government's banker, agent, and financial advisor. It manages all the banking operations for both the central and state governments, including accepting deposits and making payments on their behalf. The RBI also advises the government on financial matters, helps in raising public loans, and manages the sale and purchase of government securities. This role ensures smooth financial operations for the government.
In simple words: The central bank acts like a normal bank for the government. It handles the government's money, collects payments, and makes payments for the government. It also gives advice to the government on money and finance issues. This support helps the government manage its finances.

🎯 Exam Tip: Focus on the specific services the RBI provides to the government, such as managing accounts, advisory roles, and debt management.

 

Question 20. Explain the term Repo Rate.
Answer: The Repo Rate is the interest rate at which the central bank (like the RBI in India) lends money to commercial banks for short periods, usually to meet their immediate funding needs. In a repo transaction, banks sell government securities to the central bank with an agreement to repurchase them at a pre-determined future date and price. This rate is also known as the repurchase rate. The central bank uses the repo rate as a key tool to manage liquidity in the banking system and control inflation.
In simple words: The Repo Rate is the interest rate at which the central bank lends money to commercial banks for a short time. Banks sell securities to the central bank and promise to buy them back later.

🎯 Exam Tip: Define Repo Rate, mentioning its short-term nature, the repurchase agreement, and its role in liquidity management.

 

Question 21. What do you mean by reverse repo rate ?
Answer: The Reverse Repo Rate is the interest rate at which the central bank borrows money from commercial banks within the country. This is a monetary policy instrument used to absorb excess liquidity from the banking system. When the central bank increases this rate, commercial banks are encouraged to deposit their surplus funds with the central bank, which reduces the money available for lending in the market. Conversely, lowering the rate discourages deposits, leaving banks with more funds to lend. This tool helps the central bank manage the money supply, particularly to control inflation.
In simple words: The Reverse Repo Rate is the interest rate at which the central bank borrows money from other banks. If the rate goes up, banks keep more money with the central bank, reducing money in the market.

🎯 Exam Tip: Clearly state that the reverse repo rate involves the central bank *borrowing* from commercial banks and its purpose is to absorb liquidity.

 

Question 22. What is bank rate ? Explain.
Answer: The bank rate is the interest rate at which the central bank lends long-term funds to commercial banks, often acting as a lender of last resort, against approved securities or eligible bills of exchange. Unlike the repo rate, there is no agreement for the commercial banks to repurchase the securities. The central bank adjusts the bank rate to influence the overall cost of credit in the economy. A higher bank rate makes borrowing more expensive for commercial banks, leading to reduced lending and a contraction of credit, while a lower rate encourages more lending. It is essentially the discount rate for long-term borrowings.
In simple words: The bank rate is the interest rate at which the central bank lends money to commercial banks for long periods. By changing this rate, the central bank makes it cheaper or more expensive for banks to borrow, which affects how much money is lent in the economy.

🎯 Exam Tip: Distinguish the bank rate from the repo rate by emphasizing its long-term nature and the absence of a repurchase agreement.

 

Question 23. What are the functions of the Reserve Bank of India as a custodian of foreign exchange?
Answer: The Reserve Bank of India (RBI) serves as the custodian of the country's foreign exchange reserves, which include its stock of gold and international currencies. Its main functions in this role are twofold: first, to safeguard and manage these reserves, and second, to maintain stability in the exchange rate of the domestic currency as determined by the government. By doing so, the RBI ensures that the country has sufficient foreign currency for its international transactions and that the value of the rupee remains stable in the global market, thereby supporting economic stability.
In simple words: The Reserve Bank of India manages the country's foreign money and gold reserves. Its main jobs are to keep these reserves safe and to make sure the value of the Indian rupee stays stable against other currencies.

🎯 Exam Tip: Clearly explain that the RBI's role as a custodian involves both holding reserves and actively managing them for exchange rate stability.

 

Question 25. Explain the structure of regional boards of the Reserve Bank of India in brief.
Answer: The Reserve Bank of India (RBI) has four regional boards located in Mumbai, New Delhi, Chennai, and Kolkata. Each regional board consists of five members, who are typically experts in various fields. One member from each board is elected as its head by the other members. These members serve a tenure of five years. Their primary responsibility is to provide timely information and offer suggestions on important regional economic matters to the central government, helping the RBI formulate more effective policies.
In simple words: The Reserve Bank has four local boards in big cities like Mumbai. Each board has five experts who serve for five years and advise the government on local economic issues.

🎯 Exam Tip: Mention the number of regional boards, their locations, and their role in providing regional insights to the central government.

RBSE Class 12 Economics Chapter 19 Short Answer Type Questions (SA-II)

 

Question 1. Define Central Bank.
Answer: A central bank is the highest financial institution in a country that is responsible for controlling and regulating its entire monetary and financial system. It manages the money supply, interest rates, and the banking sector. Various economists have defined a central bank differently: * According to M.H. De Kock, a central bank is the "apex" or top bank of the monetary and banking structure. * A.C.L. De states that a central bank helps to control and stabilize the monetary and banking system. * Samuelson describes a central bank as a "banker's bank" whose job is to manage the monetary base and high-powered money. * Hawtrey also emphasizes that a central bank is a "banker's bank" because it acts as the lender of last resort to other banks. These definitions collectively highlight its unique position and critical role in maintaining economic stability.
In simple words: A central bank is the main bank in a country that controls all money and banking. Experts like M.H. De Kock and Samuelson agree it's the top bank that helps keep the financial system stable.

🎯 Exam Tip: Provide a general definition first, then include at least two specific definitions from economists to show a deeper understanding.

 

Question 3. Differentiate between Central bank and commercial bank.
Answer: Here are several key differences between a central bank and a commercial bank: 1. **Hierarchy and Control:** The central bank is the supreme bank that oversees, regulates, and controls all other banks in the country. Commercial banks, on the other hand, operate under the directives and supervision of the central bank. 2. **Number of Institutions:** Typically, a country has only one central bank, making it a unique institution. In contrast, there are numerous commercial banks operating within a country. 3. **Currency Issuance:** Only the central bank has the exclusive right and authority to print and issue currency notes. Commercial banks do not possess this note-issuing authority. 4. **Foreign Exchange Custodian:** The central bank acts as the custodian of the nation's gold and foreign exchange reserves. Commercial banks do not hold this role. 5. **Objective:** The central bank's primary objective is to promote the overall economic growth and stability of the country. Commercial banks, conversely, operate with the main aim of maximizing their profits for shareholders. These differences clearly define their distinct roles and responsibilities within the financial system.
In simple words: A central bank is the main bank that controls all others, but commercial banks work under its rules. Most countries have one central bank but many commercial banks. Only the central bank prints money. The central bank keeps the country's foreign money safe, while commercial banks do not. The central bank works for the whole economy's stability, but commercial banks focus on making money.

🎯 Exam Tip: Structure your answer using distinct points of comparison to clearly highlight the differences in their roles, objectives, and powers.

 

Question 4. Which functions of central bank are performed by the Reserve Bank of India?
Answer: The Reserve Bank of India (RBI) performs several crucial functions characteristic of a central bank, ensuring the smooth operation and stability of the Indian economy. These functions include: (i) **Bank of Issuing Notes:** The RBI has the exclusive right to print and issue currency notes, which helps maintain proper currency management and public confidence in the banking system. (iv) **Custodian of Foreign Exchange:** The RBI manages the nation's foreign exchange reserves, including gold and international currencies. It works to stabilize exchange rates set by the government, which is vital for international trade. (v) **Clearing House Function:** The RBI facilitates the settlement of financial transactions among various commercial banks. It acts as a mediator, allowing banks to settle their claims against each other with minimal use of physical cash, often through cheques and drafts. (vi) **Credit Control:** A central role of the RBI is to control the supply of credit in the economy. This involves using various monetary policy tools to manage the total money in circulation, which directly impacts inflation and deflation. (vii) **Publication of Journals:** The RBI regularly publishes magazines, journals, and bulletins. These publications disseminate its policies, economic analysis, and outlook, helping to guide the financial sector and address economic challenges. These comprehensive functions ensure the RBI plays a pivotal role in India's financial architecture.
In simple words: The Reserve Bank of India has many key jobs. It is the only bank that prints money. It also holds the country's foreign currency. It helps other banks settle payments. It controls how much money is available for lending. Lastly, it publishes reports to share its policies and economic information.

🎯 Exam Tip: When listing functions, name each function clearly and provide a brief, impactful explanation of its importance to the economy.

 

Question 5. What functions of general banks are performed by the Reserve Bank of India.
Answer: The Reserve Bank of India (RBI) performs certain functions that are similar to general commercial banks, but it does so primarily for governments and other banks, not the general public. These functions include: (i) **Accepting Deposits:** The RBI accepts deposits from the central government, state governments, and commercial banks. However, it does not pay any interest on these deposits, distinguishing it from commercial bank savings accounts. (ii) **Advancing Loans:** The RBI provides loans to both the central government and commercial banks when they require funds. This acts as a support system for their liquidity needs. (iii) **Borrowing Loans:** The RBI also has the capacity to borrow loans, not just from domestic commercial banks but also from foreign banks if necessary. This helps in managing its own financial position. (iv) **Sale and Purchase of Foreign Securities:** The RBI engages in the buying and selling of foreign government securities. However, it typically deals with securities that have a maturity period of not more than 10 years, which helps in managing foreign exchange reserves. These activities, although resembling those of general banks, serve the RBI's broader mandate of managing the financial system and government finances.
In simple words: The Reserve Bank accepts money deposits from governments and other banks, but does not pay interest. It also lends money to governments and banks, and can borrow from them. Additionally, it buys and sells foreign government bonds.

🎯 Exam Tip: Emphasize that these "general bank functions" of the RBI are for specific clients (governments and banks), not for individuals or regular businesses.

 

Question 1. Explain the functions of the Reserve bank of India ? Or What are the activities performed by the central bank? Explain.
Answer: The functions of the Reserve Bank of India (RBI) are broadly grouped into two main types: (a) **Specific Central Banking Functions:** These functions are crucial for managing the nation's financial system and ensuring its stability. * **Banker's Bank and Controller:** The RBI oversees and regulates all scheduled commercial banks. It holds a portion of their cash reserves as financial deposits, acts as a lender when they face financial crises, and constantly monitors their activities to ensure proper functioning. * **Government's Banker, Agent, and Advisor:** The RBI manages the government's accounts, handles its payments and receipts, and provides expert advice on financial matters. It plays a key role in helping the government achieve its economic growth objectives. * **Custodian of Foreign Exchange Reserves:** The RBI holds the country's gold and foreign currencies. It actively works to keep the exchange rate stable, buying and selling foreign currency as needed to maintain balance in the international money market. * **Clearing House Function:** The RBI acts as a mediator for inter-bank payments, helping different banks settle their financial claims against each other efficiently with minimal use of physical cash, often through instruments like cheques and drafts. * **Regulation and Control of Credit:** A core function is to manage the amount of money and credit available in the economy. The RBI uses various monetary policy measures to either expand or contract credit, which directly impacts inflation and deflation. * **Publication of Journals:** The RBI regularly publishes magazines, journals, and bulletins. These publications explain its policies, economic analysis, and outlook, helping to guide the financial sector and address economic challenges. (b) **General Banking Functions of the Reserve Bank:** These are services the RBI provides to governments and other banks, resembling some commercial banking activities. * **Accepting Deposits:** The RBI accepts deposits from the central government, state governments, and commercial banks, and also from foreign banks if needed. These deposits help manage government and bank funds, although the RBI typically does not pay interest on them. * **Providing Locker Facility:** Although not a primary function for the general public, the RBI also provides certain safe-keeping or locker facilities to specific entities as part of its broader banking services. These comprehensive functions ensure the RBI plays a pivotal role in India's financial architecture, maintaining stability and promoting economic growth.
In simple words: The Reserve Bank has many important jobs. As a central bank, it acts as a bank for other banks, manages the government's money, keeps the country's foreign currency safe, helps banks clear payments, controls how much money is available for lending, and publishes reports. It also performs general banking tasks like accepting deposits from governments and other banks, and even offering locker facilities.

🎯 Exam Tip: For a comprehensive essay answer, categorize the functions (e.g., specific central banking and general banking) and provide detailed explanations for each, showing their importance.

 

Question 2. Explain different methods of credit control adopted by the Reserve Bank of India.
Answer: The Reserve Bank of India (RBI) uses two primary categories of methods to control credit in the economy: **Quantitative Methods** and **Qualitative Methods**. **(a) Quantitative Methods:** These methods aim to control the total volume of credit available in the country. * **(i) Bank Rate Policy:** This is the interest rate at which the central bank lends long-term funds to commercial banks against eligible securities. If the RBI wants to expand credit, it lowers the bank rate, making borrowing cheaper for banks. To contract credit, it raises the bank rate, making borrowing more expensive. This influences the overall cost of credit in the economy. * **(ii) Open Market Operations (OMO):** This involves the central bank buying or selling government securities in the open market. When the RBI sells securities, it reduces the cash reserves of commercial banks, thereby contracting credit. When it buys securities, it injects money into the banking system, expanding credit. OMO helps manage market liquidity. * **(iii) Variation of Cash Reserve Ratio (CRR):** Commercial banks are required to deposit a certain percentage of their net demand and time liabilities as cash with the central bank. A higher CRR means banks have less money to lend, which contracts credit. A lower CRR increases their lending capacity, expanding credit. * **(iv) Variation of Statutory Liquidity Ratio (SLR):** Banks must maintain a specified percentage of their total demand and time liabilities in the form of liquid assets (cash, gold, approved securities) with themselves. Changes in SLR directly affect the funds banks can use for lending. * **(v) Repo Rate:** This is the rate at which the central bank lends money to commercial banks for short periods, against government securities, with a repurchase agreement. Lowering the repo rate makes short-term borrowing cheaper, encouraging banks to lend more. * **(vi) Reverse Repo Rate:** This is the rate at which the central bank borrows money from commercial banks. Increasing this rate encourages banks to park their excess funds with the RBI, reducing money in circulation and thus contracting credit. **(b) Qualitative Methods:** These methods aim to regulate the *direction* and *purpose* of credit, guiding it towards productive sectors and away from unproductive uses. * **(i) Margin Requirements:** This refers to the difference between the value of security offered for a loan and the amount of the loan granted. By increasing the margin, the RBI can make borrowing less attractive for speculative purposes. * **(ii) Rationing of Credit:** The central bank sets limits or quotas on the amount of credit that can be extended for different business activities, preventing excessive lending in certain areas. * **(iii) Moral Suasion:** The RBI advises, requests, and persuades commercial banks to cooperate with its monetary policy goals. This relies on the banks' voluntary compliance. * **(iv) Publicity:** The central bank uses various publications like magazines, journals, and bulletins to inform banks and the public about its policies and economic outlook, aiming to influence their behavior. * **(v) Direct Action:** In cases where commercial banks repeatedly fail to comply with RBI directives, the central bank can take strict measures. This may include refusing to rediscount their bills, stopping loans, or even cancelling their licenses. These actions compel banks to follow regulations. These diverse methods allow the RBI to effectively manage both the quantity and allocation of credit, ensuring financial stability and economic growth.
In simple words: The Reserve Bank controls lending in two main ways. First, through **quantitative methods**, it changes the total amount of money available for lending using tools like interest rates (bank rate, repo rate, reverse repo rate), buying or selling government bonds (open market operations), and requiring banks to keep certain cash reserves (CRR, SLR). Second, through **qualitative methods**, it guides where the money goes. This includes setting limits for specific loans (rationing of credit), advising banks (moral suasion), informing the public (publicity), and taking strong action if banks don't follow the rules (direct action). These methods help keep the economy stable and direct money to important areas.

🎯 Exam Tip: For this broad question, clearly separate quantitative and qualitative methods. For each method, define it and explain how it helps control credit, including both expansion and contraction where applicable.

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