📑 Topics on this page (Jump to Topic):
📌 1. RBI: Establishment & History
| Point | Fact |
|---|---|
| Established | 1 April 1935, under the RBI Act 1934 |
| Recommended by | Hilton Young Commission (1926) |
| Nationalised | 1 January 1949 |
| Headquarters | Mumbai (moved from Kolkata in 1937) |
| First Governor | Sir Osborne Smith |
| First Indian Governor | C. D. Deshmukh |
| Governor (as of October 2026) | Sanjay Malhotra (26th, since December 2024) |
- RBI emblem: a tiger and a palm tree. Its accounting year is now April-March (since 2020-21; earlier July-June).
📌 2. Functions of RBI
- Issuing notes (except the ₹1 note and coins).
- Banker to the government — handles transactions and debt of Centre and states.
- Bankers' bank and lender of last resort.
- Custodian of foreign exchange reserves; administers FEMA 1999.
- Credit control and monetary policy; regulates banks and NBFCs; oversees payment systems.
📌 3. MPC & Inflation Target
- MPC: created by the 2016 amendment of the RBI Act; 6 members — 3 from RBI (Governor chairs) + 3 external (appointed by the Centre).
- In a tie the Governor has the casting vote; at least 4 meetings a year (6 in practice).
- Inflation target: CPI inflation of 4% with a tolerance band of 2%–6% — retained for 1 April 2026 to 31 March 2031 (Section 45ZA).
- The target is set by the Centre in consultation with RBI; after 3 straight quarters of failure RBI must report to the government.
📌 4. Tools of Monetary Policy
| Tool | Meaning | Rate (as of October 2026; changes at MPC meetings) |
|---|---|---|
| Repo rate | RBI lends short-term to banks against securities — the policy rate | 5.50% |
| Standing Deposit Facility (SDF) | Banks park funds with RBI without collateral — floor of the LAF corridor (since 2022) | 5.25% |
| Marginal Standing Facility (MSF) | Emergency overnight borrowing — ceiling of the corridor | 5.75% |
| Bank Rate | Long-term lending rate; aligned with MSF | 5.75% |
| Cash Reserve Ratio (CRR) | Share of NDTL banks keep as cash with RBI; earns no interest | 3% |
| Statutory Liquidity Ratio (SLR) | Share of NDTL banks keep themselves in cash, gold or government securities | 18% |
- On 7 October 2026 the MPC raised the repo rate by 25 basis points to 5.50% (the first hike since February 2023) and changed the stance to "calibrated tightening".
- Open market operations (OMO): selling government securities = absorbing liquidity; buying = injecting liquidity.
- Qualitative (selective) tools: margin requirements, moral suasion, credit rationing, direct action.
- To fight inflation a hawkish policy raises rates; to support growth a dovish policy cuts rates.
⚠️ Exam Traps:
- Banks earn no interest on CRR; SLR is held by banks themselves, not with RBI.
- 1 basis point (bps) = 0.01%; 25 bps = 0.25%.
- The MPC has 6 members, not 7; no government official is a voting member.
- The inflation target is on CPI, not WPI.
💡 Memory Tip: Corridor: SDF (floor) < repo (middle) < MSF = Bank Rate (ceiling); 25 basis points apart.
📌 5. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. When was the Reserve Bank of India established? Practice
Correct answer: (D)
RBI began on 1 April 1935 under the RBI Act 1934; it was nationalised on 1 January 1949.
RBI began on 1 April 1935 under the RBI Act 1934; it was nationalised on 1 January 1949.
Q2. RBI was set up on the recommendation of which commission? Practice
Correct answer: (A)
The Hilton Young Commission (1926) recommended a central bank for India.
The Hilton Young Commission (1926) recommended a central bank for India.
Q3. When was RBI nationalised? Practice
Correct answer: (B)
RBI was a shareholders' bank; the government nationalised it on 1 January 1949.
RBI was a shareholders' bank; the government nationalised it on 1 January 1949.
Q4. Who was the first Indian Governor of RBI? Practice
Correct answer: (A)
The first Governor was Osborne Smith; C. D. Deshmukh (1943) became the first Indian Governor.
The first Governor was Osborne Smith; C. D. Deshmukh (1943) became the first Indian Governor.
Q5. Who is the RBI Governor as of October 2026? Practice
Correct answer: (C)
Sanjay Malhotra has been the 26th Governor since December 2024 and chaired the October 2026 MPC meeting.
Sanjay Malhotra has been the 26th Governor since December 2024 and chaired the October 2026 MPC meeting.
Q6. How many members does the Monetary Policy Committee have? Practice
Correct answer: (D)
3 from RBI (including the Governor) and 3 external members — 6 in all.
3 from RBI (including the Governor) and 3 external members — 6 in all.
Q7. How is a decision made if MPC votes are tied? Practice
Correct answer: (B)
Under the RBI Act the Governor has a second (casting) vote in a tie.
Under the RBI Act the Governor has a second (casting) vote in a tie.
Q8. What is the inflation target for 1 April 2026 to 31 March 2031? Practice
Correct answer: (B)
The March 2026 notification kept the CPI target at 4% with a 2%–6% band for five years.
The March 2026 notification kept the CPI target at 4% with a 2%–6% band for five years.
Q9. What is the repo rate? Practice
Correct answer: (C)
Repo = repurchase agreement; banks pledge securities to borrow short-term funds from RBI.
Repo = repurchase agreement; banks pledge securities to borrow short-term funds from RBI.
Q10. What is the repo rate after the 7 October 2026 MPC meeting? Practice
Correct answer: (D)
The MPC raised repo by 25 basis points from 5.25% to 5.50%; SDF 5.25%, MSF and Bank Rate 5.75%.
The MPC raised repo by 25 basis points from 5.25% to 5.50%; SDF 5.25%, MSF and Bank Rate 5.75%.
Q11. Which statement about CRR is correct? Practice
Correct answer: (A)
CRR = the share of NDTL kept as cash with RBI; it earns no interest.
CRR = the share of NDTL kept as cash with RBI; it earns no interest.
Q12. Under SLR, banks may hold which assets? Practice
Correct answer: (D)
Banks hold SLR themselves in liquid assets — cash, gold and approved government securities.
Banks hold SLR themselves in liquid assets — cash, gold and approved government securities.
Q13. Which rate is the floor of the LAF corridor? Practice
Correct answer: (A)
Since 2022 the SDF has been the floor of the corridor; MSF is the ceiling.
Since 2022 the SDF has been the floor of the corridor; MSF is the ceiling.
Q14. To reduce inflation, RBI will: Practice
Correct answer: (B)
Higher rates make loans costlier, reduce demand and curb inflation.
Higher rates make loans costlier, reduce demand and curb inflation.
Q15. Selling government securities in the open market will make liquidity: Practice
Correct answer: (C)
Banks that buy the securities pay RBI, so liquidity is drawn out of the market.
Banks that buy the securities pay RBI, so liquidity is drawn out of the market.
Q16. Which of these is a qualitative tool of monetary policy? Practice
Correct answer: (C)
Moral suasion, margin requirements and credit rationing are qualitative tools; CRR, repo and OMO are quantitative.
Moral suasion, margin requirements and credit rationing are qualitative tools; CRR, repo and OMO are quantitative.
Q17. 25 basis points equal: Practice
Correct answer: (D)
1 basis point = 0.01%, so 25 basis points = 0.25%.
1 basis point = 0.01%, so 25 basis points = 0.25%.
Q18. Who plays the role of "lender of last resort"? Practice
Correct answer: (A)
Lending to banks in distress as a last resort is the job of the central bank (RBI).
Lending to banks in distress as a last resort is the job of the central bank (RBI).
Q19. From where was RBI's headquarters moved to Mumbai in 1937? Practice
Correct answer: (B)
RBI's central office was first in Kolkata and moved to Mumbai in 1937.
RBI's central office was first in Kolkata and moved to Mumbai in 1937.
Q20. In which year was the MPC added to the RBI Act? Practice
Correct answer: (A)
The Finance Act 2016 amended the RBI Act to create the statutory MPC; its first meeting was in October 2016.
The Finance Act 2016 amended the RBI Act to create the statutory MPC; its first meeting was in October 2016.