FOR PRELIMS 2025

PREVIOUS YEAR QUESTIONS

ECONOMY
Q1. With reference to Pradhan Mantri Kaushal Vikas Yojana, consider the following
statements: (UPSC CSE Prelims 2018)

[Link] is the flagship scheme of the Ministry of Labour and Employment.

[Link], among other things will also impart training in soft skills, entrepreneurship, financial and
digital literacy.
[Link] aims to align the competencies of the unregulated workforce of the country to the National
Skill Qualification Framework.

Which of the statements given above is/are correct?

(a) 1 and 3 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2, and 3

Answer: (c) 2 and 3 only

●​ Statement 1 is Incorrect: Pradhan Mantri Kaushal Vikas Yojana (PMKVY) is the

flagship scheme of the Ministry of Skill Development and Entrepreneurship (MSDE), not
the Ministry of Labour and Employment.
●​ Statement 2 is Correct: PMKVY includes training in soft skills, entrepreneurship,
financial, and digital literacy, among other things, to enhance the employability of the
workforce.
●​ Statement 3 is Correct: PMKVY aims to align the skills of the unregulated workforce
with the National Skill Qualification Framework (NSQF) to make them more competitive
and aligned with industry standards.

Q2. ‘Recognition of Prior Learning Scheme’ is sometimes mentioned in the news with
reference to (UPSC CSE PRELIMS 2017)

a) Certifying the skills acquired by construction workers through traditional channels

b) Enrolling the persons in Universities for distance learning programmes
c) Reserving some skilled jobs to rural and urban poor is some public sector undertakings
d) Certifying the skills acquired by trainees under the National Skill Development programme

Answer: a) Certifying the skills acquired by construction workers through traditional

channels

●​ a) Certifying the skills acquired by construction workers through traditional

channels: This aligns with the purpose of the Recognition of Prior Learning (RPL)
Scheme, which aims to assess and certify skills gained informally or through traditional
means, such as on-the-job learning.
●​ b) Enrolling the persons in Universities for distance learning programmes: The
RPL Scheme is focused on skill recognition and certification, not formal education or
 university enrollments. Distance learning programs involve structured curriculum-based
education, which is unrelated to RPL.
●​ c) Reserving some skilled jobs to rural and urban poor in some public sector
undertakings: The RPL Scheme does not deal with job reservations. Its goal is to
validate and certify skills, making individuals more employable. Job reservations are
related to employment policies, not skill certification.
●​ d) Certifying the skills acquired by trainees under the National Skill Development
programme: The trainees under the National Skill Development Programme (NSDP)
are already undergoing formal training and certification. RPL, on the other hand, focuses
on individuals who have acquired skills informally or traditionally without formal training.
Hence, the focus of RPL is different.

Q3. Consider the following in respect of ‘National Career Service’: (UPSC CSE PRELIMS
2017)

[Link] Career Service is an initiative of the Department of Personnel and Training,

Government of India.
[Link] Career Service has been launched in a Mission Mode to improve the employment
opportunities to uneducated youth of the country.

Which of the above statements is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2 only
(d) Neither 1 nor 2

Answer: (d) Neither 1 nor 2

Explanation:

●​ Statement 1: The National Career Service (NCS) is an initiative of the Ministry of Labour
and Employment, not the Department of Personnel and Training. NCS focuses on
providing a platform for job seekers and employers to connect and enhancing
employment-related services.
●​ Statement 2: The NCS platform aims to improve employment opportunities for educated
and skilled individuals by providing career counseling, training, and job matching. It is not
specifically targeted at uneducated youth, but instead seeks to enhance employment
opportunities for a broad range of users, including students, job seekers, and employers.

Q4. With reference to ‘National Skills Qualification Framework (NSQF)’, which of the
statements given below is/are correct? (UPSC CSE PRELIMS 2017)
​
1. Under NSQF, a learner can acquire the certification for competency only through formal
learning.
2. An outcome expected from the implementation of NSQF is the mobility between
vocational and general education.

Select the correct answer using the code given below:

a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Answer: (b) 2 only

Explanation:

1.​ Statement 1:​

The National Skills Qualification Framework (NSQF) allows certification of competencies
acquired through various learning modes, including:
○​ Formal learning (institution-based)
○​ Informal learning (experience-based, on-the-job learning)
○​ Non-formal learning (community-based, short-term skill training programs)​
Therefore, it is not restricted to formal learning alone.
2.​ Statement 2:​
One of the key objectives of NSQF is to enable mobility between vocational education
and general education. This means that learners can seamlessly transition between
academic education and skill-based vocational training, depending on their career
preferences.

Q5. With reference to ‘Stand Up India Scheme’, which of the following statements is/are
correct? (UPSC CSE PRELIMS 2016)

1.​ Its purpose is to promote entrepreneurship among SC/ST and women entrepreneurs.
2.​ It provides for refinance through SIDBI.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

 ●​ Statement 1: The Stand Up India Scheme aims to promote entrepreneurship among
Scheduled Castes (SCs), Scheduled Tribes (STs), and women entrepreneurs. It focuses
on creating jobs and empowering marginalized communities through financial assistance
for setting up enterprises.
●​ Statement 2: The scheme provides for refinancing through the Small Industries
Development Bank of India (SIDBI). SIDBI plays a key role in supporting banks and
financial institutions by providing funds to extend loans under this scheme.

Q6. Disguised unemployment generally means (UPSC CSE Prelims 2013)

(a) large number of people remain unemployed

(b) alternative employment is not available
(c) marginal productivity of labour is zero
(d) productivity of workers is low

Answer: (c) Marginal productivity of labour is zero

Explanation:

●​ Disguised unemployment refers to a situation where more people are employed than
actually needed, especially in the agricultural and unorganized sectors. Here, the
marginal productivity of additional workers is zero, meaning their contribution does not
increase overall output.
●​ Key characteristics of disguised unemployment:
○​ Often found in rural areas and small-scale industries.
○​ People appear employed but do not contribute meaningfully to productivity.
○​ Removing some workers does not affect total production.

Why are the other options incorrect?

●​ (a) Large number of people remain unemployed:

○​ Incorrect, because disguised unemployment refers to people being employed but
without productive contribution, not complete unemployment.
●​ (b) Alternative employment is not available:
○​ Incorrect, as disguised unemployment focuses on underemployment rather than
the unavailability of alternative jobs.
●​ (d) Productivity of workers is low:
○​ Incorrect, because the key feature of disguised unemployment is zero marginal
productivity, not just low productivity.

Q7. In India, which one of the following compiles information on industrial disputes,
closures, retrenchments and lay- offs in factories employing workers? (UPSC CSE
Prelims 2022)
(a) Central Statistics Office
(b) Department for Promotion of Industry and Internal Trade
(c) Labour Bureau
(d) National Technical Manpower Information System

Answer: (c) Labour Bureau

Explanation:

●​ The Labour Bureau, under the Ministry of Labour and Employment, is responsible
for compiling and publishing data on:
○​ Industrial disputes.
○​ Closures, retrenchments, and layoffs.
○​ Other labor market indicators like wages, employment, and working conditions.
●​ The data is gathered from factories and establishments employing workers and helps in
analyzing labor market trends and formulating labor policies.

Other options:

●​ (a) Central Statistics Office (CSO):

○​ Incorrect. The CSO focuses on compiling and publishing national accounts,
including GDP and other economic indicators. It does not deal with labor market
data.
●​ (b) Department for Promotion of Industry and Internal Trade (DPIIT):
○​ Incorrect. DPIIT primarily promotes industrial development and internal trade. It
does not compile data on industrial disputes or layoffs.
●​ (d) National Technical Manpower Information System:
○​ Incorrect. This system collects information related to the availability and utilization
of technical manpower, not industrial disputes or labor data.

Q8. Consider the following statements: As per the Industrial Employment (Standing
Orders) Central (Amendment) Rules, 2018: (UPSC CSE Prelims 2019)
1.​ No notice of termination of employment shall be necessary in the case of temporary
workman.
2.​ If rules for fixed-term employment are implemented, it becomes easier for the
firms/companies to layoff workers.
Which of the statements given above is / are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

Explanation:

1.​ Statement 1: "No notice of termination of employment shall be necessary in the

case of a temporary workman."
○​ Correct.​
As per the Industrial Employment (Standing Orders) Central (Amendment) Rules,
2018, temporary workmen employed for a specific period or task do not require a
notice of termination since their employment is inherently short-term and tied to a
specific contract or purpose.
2.​ Statement 2: "If rules for fixed-term employment are implemented, it becomes
easier for the firms/companies to lay off workers."
○​ Correct.​
Fixed-term employment contracts specify the duration of employment, and the
relationship ends automatically upon completion of the term. Firms are not
obligated to provide severance or follow layoff procedures typically required for
permanent employees, making it easier to manage layoffs.

Q9. With reference to casual workers employed in India, consider the following
statements: (UPSC CSE Prelims 2021)
1.​ All casual workers are entitled for Employees Provident Fund coverage.
2.​ All casual workers are entitled for regular working hours and overtime payment.
3.​ The government can by a notification specify that an establishment or industry shall pay
wages only through its bank account.

Which of the above statements are correct?

(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 and 2 only
(d) 1, 2 and 3

Answer:(b) 2 and 3 only

●​ Statement 1 is not correct: Employees Provident Fund (EPF) coverage is applicable to

employees of establishments with 20 or more workers, but it is not universal for all
casual workers. Casual workers are generally not covered under EPF unless the
employer specifically includes them or the establishment falls under EPF regulations.

●​ Statement 2 is correct: Casual workers are entitled to regular working hours and
overtime payment. The Code on Wages, 2019, mandates that employers fix the number
of hours of work that constitute a normal working day and provide for overtime payment
at a rate not less than twice the normal rate of wages for work exceeding those hours.
 ●​ Statement 3 is correct: The code of wages, 2019 states that the government can,
through a notification, specify establishments or industries that must pay wages only
through bank accounts. This provision aims to promote transparency and ensure that
workers receive their wages promptly.
​

Q10. In a given year in India, official poverty lines are higher in some States than in
others because [UPSC CSE Prelims 2019]

(a) poverty rates vary from State to State

(b) price levels vary from State to State
(c) Gross State Product varies from State to State
(d) quality of public distribution varies from State to State

Answer: (b) price levels vary from State to State

●​ The official poverty line in India is calculated based on the cost of a minimum
consumption basket, which varies across states due to differences in price levels.
●​ States with higher price levels have higher poverty lines to account for the increased
cost of living, while states with lower price levels have relatively lower poverty lines.
●​ This methodology ensures that the poverty line reflects the purchasing power needed to
meet basic needs in each state.

Other options:

●​ (a) Poverty rates vary from State to State: Incorrect. Poverty rates (percentage of
people below the poverty line) differ between states, but they are an outcome of the
poverty line, not the reason for its variation.
●​ (c) Gross State Product (GSP) varies from State to State: Incorrect. GSP indicates
the economic output of a state, but it does not directly determine the poverty line.
●​ (d) Quality of public distribution varies from State to State: Incorrect. The quality of
the Public Distribution System (PDS) affects the effectiveness of poverty alleviation
programs, but it does not influence the calculation of poverty lines.

Q11. Consider the following statements: [UPSC 2023]

Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out
interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising
consumer prices via monetary policy means.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for
Statement-1
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation
for Statement-1
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Answer: (a) Both Statement-I and Statement-II are correct and Statement-II is the correct
explanation for Statement-1

●​ Statement-I is correct: In the period following the COVID-19 pandemic, many countries
experienced a surge in inflation. To combat this rising inflation, numerous central banks
around the world implemented interest rate hikes as a monetary policy measure. This
action is consistent with central banking practices globally.

●​ Statement-II is correct: Central banks typically operate under the assumption that they
can influence consumer prices through monetary policy tools. This is a fundamental
principle of modern monetary policy. One of the primary tools used by central banks to
control inflation is the adjustment of interest rates.

●​ Raising interest rates is a contractionary measure aimed at curbing inflation. Higher

interest rates make borrowing more expensive, discouraging consumer spending and
business investment, which can help slow down the rate of price increases.

●​ Conversely, lowering interest rates is an expansionary measure intended to stimulate

economic growth. Lower interest rates encourage borrowing and spending, which can
boost economic activity and, under certain conditions, lead to a rise in inflation.

●​ Statement-II is the correct explanation for Statement-I: Central banks' belief in their
ability to manage inflation through monetary policy, as stated in Statement-II, directly
explains why they have resorted to interest rate hikes in the recent post-pandemic period
to counteract rising consumer prices, as mentioned in Statement-I.

●​ Therefore, both statements are correct, and Statement-II accurately explains the actions
described in Statement-I.
Q12. Which one of the following activities of the Reserve Bank of India is considered to
be part of 'sterilization’? [UPSC 2023]
(a) Conducting 'Open Market Operations'
(b) Oversight of settlement and payment systems
(c) Debt and cash management for the Central and State Governments
(d) Regulating the functions of Non-banking Financial Institutions

Answer: (a) Conducting 'Open Market Operations' (OMO).

●​ Sterilization is a monetary policy tool used by the Reserve Bank of India (RBI) to
neutralize the effects of foreign exchange interventions on the domestic money supply.
The RBI achieves this by conducting Open Market Operations (OMO), which involve the
buying and selling of government securities.
○​ To decrease liquidity: The RBI sells government securities.
○​ To increase liquidity: The RBI buys government securities.

Why the other options are incorrect?

 ●​ (b) Oversight of settlement and payment systems: This refers to the RBI’s role in
ensuring smooth and efficient financial transactions. While it is a core function of the
RBI, it is not directly related to sterilization.
●​ (c) Debt and cash management for the Central and State Governments: The RBI
acts as a banker to the government, managing its debt and cash flows. This activity
focuses on fiscal management rather than sterilization.
●​ (d) Regulating the functions of Non-banking Financial Institutions (NBFCs): This
involves maintaining financial stability and protecting consumer interests. It is a
regulatory activity, not a part of sterilization operations.

Q13. With reference to the Indian economy, consider the following [UPSC 2015]
1. Bank rate
2. Open market operations
3. Public debt
4. Public revenue

Which of the above is/are component/components of Monetary Policy?

(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4

Answer: (c) 1 and 2.

●​ Bank rate: The bank rate is the interest rate at which the central bank lends money to
commercial banks. It is a tool of monetary policy used to influence the overall interest
rate structure in the economy.
●​ Open market operations: Open Market Operations (OMO) is the buying and selling of
government securities by the central bank to control the money supply. When the central
bank buys securities, it injects liquidity into the market, and when it sells securities, it
absorbs liquidity. OMO is a key instrument of monetary policy.

●​ Public debt: Public debt is the total amount of money owed by the government. While
public debt management is an important aspect of fiscal policy, it's not directly a
component of monetary policy.

●​ Public revenue: Public revenue refers to the income earned by the government through
taxes and other sources. This is also a component of fiscal policy and not monetary
policy
Q14. When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis
points, which of the following is likely to happen? (UPSC 2015)
(a) India’s GDP growth rate increases drastically
(b) Foreign Institutional Investors may bring more capital into our country
(c) Scheduled Commercial Banks may cut their lending rates
(d) It may drastically reduce the liquidity to the banking system

Answer: (c) Scheduled Commercial Banks may cut their lending rates.

●​ The Statutory Liquidity Ratio (SLR) is the percentage of their Net Demand and Time
Liabilities (NDTL) that banks are required to maintain in the form of liquid assets such as
cash, gold, or government securities. When the RBI reduces the SLR, it means banks
are required to hold a lower proportion of their deposits in these liquid assets, freeing up
more funds for lending. This increased availability of funds for lending puts downward
pressure on lending rates as banks compete for borrowers.

●​ (a) India’s GDP growth rate increases drastically: While a reduction in the SLR can
contribute to economic growth by making credit more readily available and potentially
stimulating investment, it is unlikely to lead to a drastic increase in GDP growth rate.
Many other factors influence GDP growth.

●​ (b) Foreign Institutional Investors may bring more capital into our country: The
SLR is primarily a domestic regulatory tool. While it can have indirect effects on foreign
investment, a reduction in the SLR is unlikely to be a major driver of foreign capital
inflows. Other factors like macroeconomic stability, interest rate differentials, and
investment climate are more significant.

●​ (d) It may drastically reduce the liquidity in the banking system: A reduction in the
SLR actually increases liquidity in the banking system, not reduces it. Banks have more
funds available for lending when they are required to hold a lower percentage of their
NDTL in liquid assets.

Q15. In the context of Indian economy; which of the following is/are the
purpose/purposes of ‘Statutory Reserve Requirements’? (UPSC 2014)
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.

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer: (b) 1 and 2 only.

●​ To enable the Central Bank to control the amount of advances the banks can
create: This is a key purpose of Statutory Reserve Requirements (SRR), which include
the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). By mandating
that banks hold a certain percentage of their deposits in reserve, the RBI can directly
influence the amount of credit that banks can create through lending. This is a core
mechanism of monetary policy.

●​ To make the people’s deposits with banks safe and liquid: SRR also play a role in
ensuring the safety and liquidity of bank deposits. By requiring banks to maintain
reserves, the system provides a cushion to handle unexpected withdrawals and ensures
that depositors can access their funds when needed. This contributes to maintaining
public confidence in the banking system.

●​ To prevent the commercial banks from making excessive profits: While SRR can
indirectly impact bank profitability, their primary purpose is not to limit bank profits. The
level of bank profitability is influenced by a range of factors including competition,
operational efficiency, and the overall economic environment.

●​ To force the banks to have sufficient vault cash to meet their day-to-day
requirements: The CRR component of SRR requires banks to hold a certain
percentage of their deposits with the RBI. The SLR requires banks to hold liquid assets,
which can include vault cash but also other assets like gold and government securities.
The objective is not solely about vault cash but broader liquidity management

Q16. The money multiplier in an economy increases with which one of the following?
(UPSC 2021)
(a) Increase in the Cash Reserve Ratio in the banks.
(b) Increase in the Statutory Liquidity Ratio in the banks
(c) Increase in the banking habit of the people
(d) Increase in the population of the country

Answer: (c) Increase in the banking habit of the people.

●​ Money Multiplier (MM): The money multiplier refers to how much the money supply
(M3) expands for every rupee of the monetary base (M0). A higher MM means banks are
lending more, leading to more economic activity.

Banking Habit: When people deposit more money into banks, it provides banks with
more reserves to lend. This increased lending activity leads to a higher money multiplier,
expanding the money supply.
 ●​ (a) Increase in the Cash Reserve Ratio (CRR): The CRR is the percentage of deposits
banks must hold with the RBI. Increasing the CRR reduces the amount banks can lend,
decreasing the money multiplier.

●​ (b) Increase in the Statutory Liquidity Ratio (SLR): Similar to the CRR, the SLR is the
percentage of deposits banks must hold in liquid assets. Increasing the SLR also
restricts lending, leading to a lower money multiplier.

●​ (d) Increase in the population of the country: While a larger population might lead to
more overall economic activity, it doesn't directly correlate to a higher money multiplier.
The key factor is the proportion of money held in banks and used for lending.

Q17. Which of the following statements is/are correct regarding the Monetary Policy
Committee (MPC)? (UPSC 2017)
1. It decides the RBI’s benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only

Answer: (a) 1 only

●​ Statement 1 is correct: The Monetary Policy Committee (MPC) is responsible for

deciding the RBI's benchmark interest rate, which is the repo rate. This rate influences
the overall interest rate structure in the economy and is a key tool of monetary policy.

●​ Statement 2 is incorrect: The MPC is a 6-member body, not a 12-member body. It

comprises three members from the RBI and three members appointed by the
government. The MPC is not reconstituted every year. The members have a four-year
term.

●​ Statement 3 is incorrect: The MPC functions under the chairmanship of the RBI
Governor, not the Union Finance Minister. This ensures the independence of monetary
policy from direct political influence.

Q18. If the RBI decides to adopt an expansionist monetary policy, which of the following
it would NOT do? (UPSC 2020)
1. Cut and optimize the statutory liquidity ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 only.

●​ Expansionist monetary policy, also known as a dovish policy, aims to increase the
money supply in the economy to stimulate economic growth. This is typically done during
periods of slow growth or recession.

●​ Cut and optimize the statutory liquidity ratio: Cutting the Statutory Liquidity Ratio
(SLR) would align with an expansionist monetary policy. A lower SLR requirement
means commercial banks can hold fewer funds in liquid assets and have more funds
available for lending, boosting the money supply.

●​ Increase the Marginal Standing Facility Rate: Increasing the Marginal Standing
Facility (MSF) Rate would be contradictory to an expansionist monetary policy. The MSF
rate is the rate at which banks can borrow overnight funds from the RBI in emergencies.
Increasing this rate would make borrowing more expensive, discourage borrowing, and
have a contractionary effect on the money supply.
•
●​ Cut the Bank Rate and Repo Rate: Cutting the Bank Rate and Repo Rate aligns with
an expansionist policy. The bank rate and the repo rate are benchmark interest rates that
influence the cost of borrowing for banks. Lowering these rates makes borrowing
cheaper for banks, encourages them to lend more, and leads to an expansion of the
money supply.

Q19. With reference to inflation in India, which of the following statements is correct?
(UPSC 2015)
(a) Controlling the inflation in India is the responsibility of the Government of India only
(b) The Reserve Bank of India has no role in controlling the inflation
(c) Decreased money circulation helps in controlling the inflation
(d) Increased money circulation helps in controlling the inflation

Answer: (c) Decreased money circulation helps in controlling the inflation.

●​ Inflation and Money Supply: Inflation, a sustained increase in the general price level of
goods and services in an economy over a period of time, is often linked to the amount of
 money in circulation. When there's an excessive supply of money in the economy, the
purchasing power of each unit of currency declines, leading to a rise in prices.

●​ RBI's Role in Controlling Inflation: The Reserve Bank of India (RBI) is responsible for
controlling inflation in India between 2 to 6% as per the RBI act. The RBI uses various
monetary policy tools to control inflation, including adjusting interest rates and reserve
requirements. Decreasing the money supply through these measures can help control
inflation by decreasing demand and putting downward pressure on prices.

Other options:

●​ (a) Controlling the inflation in India is the responsibility of the Government of India
only: This is incorrect. As explained above, the RBI has the primary responsibility for
inflation control in India. While the government's fiscal policies can impact inflation, the
RBI takes the lead in managing it.

●​ (b) The Reserve Bank of India has no role in controlling the inflation: This is
incorrect. As discussed, the RBI plays a central role in managing inflation through its
monetary policy tools.

●​ (d) Increased money circulation helps in controlling the inflation: This is incorrect.
Increasing money circulation generally leads to higher inflation, as it increases demand
without a corresponding increase in the supply of goods and services.

Q20. Which one of the following is likely to be the most inflationary in its effects? (UPSC
2021)
(a) Repayment of public debt
(b) Borrowing from the public to finance budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit

Answer: (d) Creation of new money to finance a budget deficit. This option is the most
likely to have inflationary effects.

●​ Inflation is a sustained increase in the general price level of goods and services in an
economy. When the money supply increases faster than the production of goods and
services, each unit of currency buys less, and prices rise.

●​ (a) Repayment of public debt: Repaying public debt generally has a deflationary effect
because it reduces the money supply. When the government repays its debts, it takes
money out of circulation.

●​ (b) Borrowing from the public to finance a budget deficit: Borrowing from the public
can have a mildly inflationary effect. When the government borrows money from the
 public, it increases the demand for loanable funds, which can lead to higher interest
rates. Higher interest rates can discourage private investment and consumption, slightly
slowing economic activity. However, this method does not directly increase the money
supply as significantly as printing new money.

●​ (c) Borrowing from the banks to finance a budget deficit: Similar to borrowing from
the public, borrowing from banks can have a mildly inflationary effect by increasing
demand for loanable funds and potentially pushing interest rates higher. Again, it does
not directly inject new money into the economy.

●​ (d) Creation of new money to finance a budget deficit: This option is the most
inflationary. When the government creates new money to finance its spending, it directly
increases the money supply. This is sometimes referred to as "monetizing the deficit,"
a concept we touched upon earlier. This increase in the money supply without a
corresponding increase in the production of goods and services leads to a decrease in
the purchasing power of money and causes inflation. This aligns with the definition of
Monetary Inflation from the sources, which occurs when the printing of more money by
the central bank results in inflation

Q21. With reference to Indian economy, demand-pull inflation can be caused/increased

by which of the following? (UPSC 2021)
1. Expansionary policies
2. Fiscal stimulus
3. Inflation- indexing wages
4. Higher purchasing power
5. Rising interest rates

Select the correct answer using the code given below.

(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5

Answer:(a) 1, 2 and 4 only.

●​ Demand-Pull Inflation: Demand-pull inflation occurs when there's excessive demand

for goods and services in an economy, outpacing the available supply. This imbalance
leads to an increase in prices as consumers compete for limited products. We can
connect this to our previous discussions about how increasing the money supply without
a corresponding increase in production can lead to inflation.

●​ Expansionary policies: Expansionary policies, both monetary and fiscal, are designed
to stimulate economic growth. These policies usually involve increasing government
spending, decreasing taxes, or lowering interest rates. While these measures can boost
 economic activity, they can also lead to demand-pull inflation if the increased demand
they generate outpaces the economy's ability to produce goods and services.

●​ Fiscal stimulus: Fiscal stimulus refers to government actions, such as increased

spending or tax cuts, intended to stimulate demand and boost economic activity. Like
expansionary policies, fiscal stimulus can lead to demand-pull inflation if the increased
demand surpasses supply.

●​ Inflation-indexing wages: Inflation-indexing wages means tying wage increases to the

inflation rate, ensuring that wages keep pace with the rising cost of living. While this
protects workers' purchasing power, it can also contribute to a wage-price spiral, where
rising wages lead to higher production costs, which businesses pass on to consumers as
higher prices, further fueling inflation.

●​ Higher purchasing power: Higher purchasing power implies that consumers have more
money to spend. When consumers have more money, they tend to demand more goods
and services. If this increased demand exceeds the available supply, it can lead to
demand-pull inflation.

●​ Rising interest rates: Rising interest rates are a contractionary measure used to
combat inflation. They make borrowing more expensive, discouraging spending and
investment, which can help cool down an overheated economy and reduce demand-pull
inflationary pressures.

Q22. Which of the following brings out the ‘Consumer Price Index Number for Industrial
Workers’? (UPSC 2015)
(a) The Reserve Bank of India
(b) The Department of Economic Affairs
(c) The Labour Bureau
(d) The Department of Personnel and Training

Answer: (c) The Labour Bureau.

●​ Labour Bureau, an attached office of the Ministry of Labour, prepares the Wage Rate
Index (WRI). The Labour Bureau also monitors wages across various industries. This
aligns with the question, as the Consumer Price Index Number for Industrial Workers
would logically fall under the purview of the Labour Bureau, given its focus on labor and
wage-related data.

Q23. Consider the following statements: (UPSC 2021)

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price
Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to
decide on changing the key policy rates.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3

Answer: (a) 1 and 2 only.

●​ Statement 1: The weightage of food in Consumer Price Index (CPI) is higher than that in
Wholesale Price Index (WPI). This statement is correct.
○​ CPI: Food & Beverages have a weightage of 45.86% in the CPI (All India).
○​ WPI: Primary Articles, which include food articles, have a combined weightage of
~23%.

●​ Statement 2: The WPI does not capture changes in the prices of services, which CPI
does. This statement is also correct.

●​ Statement 3: The Reserve Bank of India has now adopted WPI as its key measure of
inflation and to decide on changing the key policy rates. This statement is incorrect. The
RBI uses the CPI as its key measure of inflation to decide on policy rate changes. The
RBI aims to control inflation between 2% to 6% using headline CPI (All India combined).

Q24. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’,
sometimes appearing in news, are used in relation to: (UPSC 2014)
(a) banking operations
(b) communication networking
(e) military strategies
(d) supply and demand of agricultural products

Answer: (a) banking operations.

●​ Marginal Standing Facility (MSF) Rate: The MSF rate is a key policy rate used by the
Reserve Bank of India (RBI). It acts as a lending rate for commercial banks when they
face acute liquidity shortages. Banks can borrow overnight from the RBI at this rate by
pledging government securities.
●​ Net Demand and Time Liabilities (NDTL): NDTL represents the total amount of funds
held by a bank in the form of demand deposits (like savings accounts) and time deposits
(like fixed deposits). It essentially reflects the bank's liability to its customers.
●​ Both the MSF rate and NDTL are integral to banking operations and monetary policy
management in India. The MSF rate influences liquidity in the banking system and plays
 a role in controlling inflation, a topic frequently discussed in our conversation. NDTL is a
key indicator of a bank's deposit base and is used for various regulatory purposes.

●​ (b) communication networking: This option deals with technology and data transfer,
unrelated to banking.

●​ (c) military strategies: This refers to defense and warfare planning, having no
connection with banking terms.

●​ (d) supply and demand of agricultural products: This relates to agricultural

economics,
●​ banking operations.

Q25. What is/are the purpose/purposes of the Marginal Cost of Funds based Lending
Rate (MCLR)’ announced by RBI? [UPSC-2016)
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.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2.

The Marginal Cost of Funds based Lending Rate (MCLR) is a key aspect of banking operations
in India, similar to the MSF rate and NDTL discussed in the previous question.

●​ Statement 1: These guidelines help improve the transparency in the methodology

followed by banks for determining the interest rates on advances. The MCLR framework
aims to make the process of setting interest rates on loans more transparent. Before the
introduction of MCLR, banks often used internal benchmarks that were not clearly linked
to their actual cost of funds. This lack of transparency made it difficult for borrowers to
understand how interest rates were determined. MCLR links the lending rates directly to
the bank's marginal cost of funds, making the process more transparent and easier for
borrowers to understand.

●​ Statement 2: These guidelines help ensure the availability of bank credit at interest
rates which are fair to the borrowers as well as the banks. The MCLR system is
designed to ensure fairer interest rates for both borrowers and banks. By linking lending
rates to the bank's cost of funds, it prevents banks from arbitrarily setting high-interest
 rates while ensuring they can cover their costs and maintain profitability. This helps
ensure the availability of credit at reasonable rates, supporting economic activity.

Q26. Which one of the following statements correctly describes the meaning of legal
tender money? [UPSC-2018)
(a) The money which is tendered in courts of law to defray the fee of legal cases
(b) The money which a creditor is under compulsion to accept in settlement of his
claims
(c) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country

Answer: (b) The money which a creditor is under compulsion to accept in settlement of
his claims.

●​ Legal Tender: To be considered "legal tender," a coin or currency must meet two
conditions simultaneously: it must be fiat money, and it must be legally valid for all debts
and transactions throughout the country. The other party cannot refuse to accept it.

●​ (a) The money which is tendered in courts of law to defray the fee of legal cases:
While legal tender can be used to pay legal fees, this definition is too narrow. Legal
tender money is any form of money that must be accepted for settling debts.

●​ (c) The bank money in the form of cheques, drafts, bills of exchange, etc.: These
are not considered fiat money because they are not issued by order of a King, Queen,
Government, or Central Bank. Instead, they are paper orders. Their acceptance is based
on agreements between the parties involved, not legal compulsion.

●​ (d) The metallic money in circulation in a country: While metal coins can be legal
tender, this definition is too narrow. Legal tender money can include other forms of
money as well, like paper currency.

Q27. Which of the following is not included in the assets of a commercial bank in India?
[UPSC- 2019)
(a) Advances
(b) Deposits
(e) Investments
(d) Money at call and short notice

Answer: (b) Deposits.

 ●​ A commercial bank's assets are the items of value that it owns. These assets generate
revenue for the bank. A commercial bank's liabilities are the amounts that the bank owes
to others. Deposits are the primary source of funds for banks. When a customer deposits
money, the bank becomes a debtor to the customer. This creates a liability for the bank.

●​ (a) Advances: Advances are loans that a bank provides to its customers. These loans
are assets because they represent a claim that the bank has on its borrowers to repay
the principal amount along with interest.

●​ (c) Investments: Banks invest in various financial instruments, such as government

securities and bonds, to earn returns on their surplus funds. These investments are
considered assets.

●​ (d) Money at call and short notice: This refers to funds that a bank can borrow from
other banks or financial institutions for a very short period, typically overnight or within a
few days. These borrowings are considered assets because they represent funds
available to the bank for its operations.

Q28. Consider the following statements: [UPSC 2021)

1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue
directions to the RBI in the public interest.
3. The Governor of the RBI draws his power from the RBI Act.

Which of the above statements are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c) 1 and 3 only.

●​ Statement 1: The Governor of the Reserve Bank of India (RBI) is appointed by the
Central Government. This statement is correct. The Governor and Deputy Governors of
the RBI are selected by the Financial Sector Regulatory Appointment Search Committee
(FSRASC), headed by the Cabinet Secretary (IAS). The FSRASC then sends the names
of successful candidates to the Appointments Committee of the Cabinet, headed by the
Prime Minister, for final approval.

●​ Statement 2: Certain provisions in the Constitution of India give the Central Government
the right to issue directions to the RBI in the public interest. This statement is
incorrect. The RBI Act, not the Constitution of India, empowers the government to issue
 directions to the RBI. Section 7(1) of the RBI Act allows the government to consult with
the RBI Governor in the public interest. If the Governor does not respond positively,
Section 7(2) empowers the government to issue binding directions to the RBI Central
Board to implement its wishes.

●​ Statement 3: The Governor of the RBI draws his power from the RBI Act. This
statement is correct. The Governor's powers stem from the RBI Act

Q29. In India, which one of the following is responsible for maintaining price stability by
controlling inflation? [UPSC-2021)
(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India

Answer: (d) Reserve Bank of India.

●​ RBI's Mandate: The RBI's primary objective is to maintain price stability while keeping in
mind the overall objective of growth.

●​ Monetary Policy: The RBI uses various monetary policy tools, such as the repo rate,
reverse repo rate, and open market operations, to control inflation and maintain price
stability.

●​ Flexible Inflation Targeting (FIT): Since 2016, India has adopted FIT, where the RBI's
primary focus is on keeping inflation within a target range. Currently, this target is to keep
the Consumer Price Index (CPI) within 2-6%.

●​ Monetary Policy Committee (MPC): A six-member statutory Monetary Policy

Committee (MPC), with the RBI Governor as the ex-officio Chairman, is responsible for
making decisions regarding monetary policy to achieve the inflation target.
●​ (a) Department of Consumer Affairs: This department focuses on consumer protection
and welfare, not monetary policy or inflation control.

●​ (b) Expenditure Management Commission: This commission is concerned with

optimizing government spending, not monetary policy.

●​ (c) Financial Stability and Development Council (FSDC): The FSDC is a coordinating
body for various financial regulators in India, aiming to ensure overall financial stability.
While it plays a role in maintaining a stable financial environment, its primary focus is not
on controlling inflation.
Q30. If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your
bank, the immediate effect on aggregate money supply in the economy will be [UPSC
CSE PRELIMS 2020]
(a) to reduce it by Rs 1,00,000
(b) to increase it by Rs 1,00,000
(c) to increase it by more than Rs 1,00,000
(d) to leave it unchanged.

Answer: (d) to leave it unchanged.

●​ Money supply refers to the total amount of money available in an economy at any given
time. It is measured through various indicators like M0, M1, M2, M3 and M4.

●​ Demand Deposits: Demand deposits are funds held in bank accounts that can be
withdrawn by the account holder at any time. These deposits are part of the money
supply.

●​ Cash Withdrawal: When you withdraw cash from your demand deposit account, you
are simply converting one form of money (bank deposit) into another form (physical
cash). The total amount of money in the economy remains the same.

●​ Impact on Money Supply: The act of withdrawing cash does not increase or decrease
the overall money supply. It only shifts the form in which the money is held. The bank's
liability (the deposit) decreases by the same amount that the customer's cash holding
increases.

●​ M3 as Aggregate Money Supply: M3 is a commonly used measure of money supply,

also known as aggregate monetary resources. M3 includes currency with the public,
demand deposits, and time deposits with banks. When you withdraw cash from a
demand deposit account, the currency with the public increases and demand deposits
decrease, but the overall M3 remains unchanged

Q31. ‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to: (UPSC 2015)
(a) develop national strategies for the conservation and sustainable use of biological diversity
(b) improve banking sector’s ability to deal with financial and economic stress and improve risk
management
(c) reduce the greenhouse gas emissions but places a heavier burden on developed
countries
(d) transfer technology from developed countries to poor countries to enable them to replace the
use of chlorofluorocarbons in refrigeration with harmless chemicals

Answer: (b) improve banking sector’s ability to deal with financial and economic stress
and improve risk management
 ●​ (a) Develop national strategies for the conservation and sustainable use of
biological diversity: This refers to the Convention on Biological Diversity (CBD), an
international treaty aimed at promoting the conservation and sustainable use of
biodiversity.
●​ (b) Improve the banking sector’s ability to deal with financial and economic stress
and improve risk management: Basel III is a set of banking regulations developed by
the Basel Committee on Banking Supervision (BCBS). It aims to prevent financial crises
by ensuring that banks maintain sufficient capital, manage risks effectively, and stay
liquid during economic downturns.
●​ (c) Reduce greenhouse gas emissions but places a heavier burden on developed
countries: This describes the Kyoto Protocol (1997) and later the Paris Agreement
(2015), which aims to reduce greenhouse gas emissions. The principle of "Common but
Differentiated Responsibilities" (CBDR) places greater responsibility on developed
nations due to their historical emissions.
●​ (d) Transfer technology from developed countries to poor countries to enable
them to replace the use of chlorofluorocarbons (CFCs) in refrigeration with
harmless chemicals: This relates to the Montreal Protocol (1987), an international
treaty to phase out ozone-depleting substances (ODS) like CFCs. Developed countries
assist developing nations by providing funds and technology to replace harmful
refrigerants.

Q32. Consider the following statements: (UPSC CSE Prelims 2018)

1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their
own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2. CAR is decided by each individual bank.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (a) 1 only

●​ Statement 1: The Capital Adequacy Ratio (CAR) is the amount banks must maintain in
the form of their own funds to absorb potential losses if borrowers default. It is calculated
as the ratio of a bank’s capital (Tier 1 and Tier 2) to its risk-weighted assets (RWA). This
ensures financial stability and protects depositors. Globally, the Basel III framework sets
a minimum CAR of 8%, while the RBI mandates 9% for Indian banks, with an additional
2.5% capital conservation buffer.
 ●​ Statement 2: The CAR is not decided by individual banks. Instead, it is regulated by
international and national authorities like the Basel Committee on Banking Supervision
(BCBS) and the Reserve Bank of India (RBI). Banks must comply with these regulatory
requirements and cannot arbitrarily set their own CAR levels. Therefore, statement 1 is
correct, while statement 2 is incorrect, making option (a) the correct answer.

Q33. What is/are the facility/facilities the beneficiaries can get from the services of
Business Correspondent (Bank Saathi) in branchless areas? (UPSC 2014)
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.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

●​ Business Correspondents (BCs), also known as Bank Saathis, are individuals or

entities engaged by banks to provide banking services in remote, branchless areas,
particularly in rural regions. They help expand financial inclusion by offering essential
banking services to unbanked populations.
●​ Enables beneficiaries to draw subsidies and social security benefits in their
villages: Business Correspondents facilitate the direct transfer of government
subsidies (e.g., PM Jan Dhan Yojana, MGNREGA wages, social security pensions,
etc.) to beneficiaries without requiring them to visit a bank branch. These
transactions are conducted using Aadhaar-linked bank accounts and biometric
authentication.
●​ Enables beneficiaries in rural areas to make deposits and withdrawals: BCs act as
an extension of the bank, allowing customers to deposit and withdraw money using
handheld devices, micro-ATMs, or mobile banking. They help people access basic
financial services like savings accounts, fund transfers, loan repayments, and bill
payments in their villages.

Q34. Consider the following statements: (UPSC 2022)

1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 and 3 only

●​ Statement 1: Credit rating agencies in India are regulated by the Securities and
Exchange Board of India (SEBI) under the SEBI (Credit Rating Agencies)
Regulations, 1999. The RBI does not directly regulate credit rating agencies, but it
does use credit ratings for regulatory purposes (e.g., for banking regulations).

●​ Statement 2: ICRA Limited (formerly known as Investment Information and Credit

Rating Agency of India Limited) is a public limited company that provides credit
ratings, research, and risk advisory services. It was established in 1991 and is
headquartered in Gurugram, India. It is partly owned by Moody’s Investors Service,
which holds a significant stake in the company.

●​ Statement 3: Brickwork Ratings (BWR) is an Indian credit rating agency based in

Bengaluru, India. It was registered with SEBI in 2007. However, in 2022, SEBI
cancelled Brickwork Ratings' license due to governance issues and regulatory
non-compliance.

Q35. With reference to the ‘Banks Board Bureau (BBB)’, which of the following
statements are correct? [UPSC 2016]
1. The Governor of RBI is the Chairman of BBB.
2. BBB recommends for the selection of heads for Public Sector Banks.
3. BBB helps the Public Sector Banks in developing strategies and capital raising plans.

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 and 3 only

●​ Statement 1: "The Governor of RBI is the Chairman of BBB" is incorrect. The BBB has a
chairman who is usually a retired IAS officer. The Governor of the RBI is not the
chairman of the BBB.

●​ Statement 2: "BBB recommends for the selection of heads for Public Sector Banks" is
correct. The BBB interviews and selects top officials, including MDs, CEOs, Chairmen,
 and full-time Directors for Public Sector Banks (PSBs), among other public sector
financial institutions.

●​ Statement 3: "BBB helps the Public Sector Banks in developing strategies and capital
raising plans" is correct. The BBB also helps banks in governance reforms and raising
capital for BASEL-III implementation

Similar Question:

Q36. The Chairman of public sector banks are selected by the: [UPSC CSE Prelims
2019]
(a) Banks Board Bureau
(b) Reserve Bank of India
(c) Union Ministry of Finance
(d) Management of concerned bank

Q37. With reference to Urban Cooperative Banks in India, consider the following
statements: [UPSC-2021)
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an
Amendment in 1996

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 and 3 only

●​ Statement 1: "They are supervised and regulated by local boards set up by the State
Governments" is incorrect. The sources indicate that UCBs are primarily regulated by
the RBI, although they were previously under dual regulation. Single-state urban
cooperative banks are now regulated solely by the RBI, whereas earlier they were under
the dual supervision of the RBI and the respective state government.

●​ Statement 2: "They can issue equity shares and preference shares" is correct.

●​ Statement 3: "They were brought under the purview of the Banking Regulation Act,
1949 through an Amendment in 1966" is correct. The Banking Regulation Act of 1949
was amended in 1966 to include cooperative banks under its purview.
Q38. 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? [UPSC-2016)
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.

(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3

Answer: (b) 1 and 3 only

●​ Statement 1: "Mobile telephone companies and supermarket chains that are owned and
controlled by residents are eligible to be promoters of Payment Banks" is correct. During
the first round of licensing, resident Indians, along with Non-Banking Financial
Companies (NBFCs), Pre-paid Payment Instrument (PPI) wallets, mobile telephone
companies, supermarket chains, cooperatives, and companies controlled by resident
Indians were eligible to be promoters of Payment Banks.

●​ Statement 2: "Payment Banks can issue both credit cards and debit cards" is incorrect.
The Payment Banks can issue debit cards, but they cannot issue credit cards because
they are not allowed to give loans.

●​ Statement 3: "Payment Banks cannot undertake lending activities" is correct. Payment

Banks are restricted from lending; they can only accept demand deposits and cannot
offer loans. This is a key distinction between Payment Banks and other types of banks

Q39. The term ‘Core Banking Solutions’ is sometimes seen in the news. Which of the
following statements best describes/describe this term? [UPSC-2016)
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.

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a) 1 only

●​ Statement 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" is correct. Core Banking Solution (CBS) is a banking software
with a web platform for centralized data management, allowing for branchless banking.
This enables customers to operate their accounts from any branch, irrespective of where
they initially opened the account.

●​ Statement 2: "It is an effort to increase RBI’s control over commercial banks through
computerization" is incorrect. While CBS involves computerization, its primary purpose is
not to increase the Reserve Bank of India's (RBI) control over commercial banks. CBS is
a banking software that facilitates centralized data management and branchless banking
for the convenience of the customers.

●​ Statement 3: "It is a detailed procedure by which a bank with huge non-performing

assets is taken over by another bank" is incorrect. CBS does not describe the process of
a bank with large non-performing assets being taken over by another bank. It is a
software solution for banking operation

Q40. What is the purpose of setting up of Small Finance Banks (SFBs) in India?
[UPSC-2017)
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:

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a) 1 and 2 only

●​ Statement 1: "To supply credit to small business units" is correct. The SFBs are
intended to serve unserved and underserved consumers, including micro and small
industries.

●​ Statement 2: "To supply credit to small and marginal farmers" is correct. The SFBs
target underserved farmers.

●​ Statement 3: "To encourage young entrepreneurs to set up business particularly in rural

areas" is not correct.
Q41. With reference to the governance of ‘public sector banking in India, consider the
following statements: [UPSC-2018)
1. Capital infusion into public sector banks by the Government of India has steadily
increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the parent State
Bank of India has been affected.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (b) 2 only

●​ Statement 1: While the Indian government has infused capital into Public Sector Banks
(PSBs) through recapitalization programs, the amount has not steadily increased every
year. Capital infusion fluctuates based on economic conditions, bank performance, and
fiscal constraints. For instance, during 2017-2018, the government infused ₹2.11 lakh
crore into PSBs under Indradhanush Scheme. However, capital infusion varies year by
year and is not a steadily increasing trend.

●​ Statement 2: In 2017, the Government of India approved the merger of SBI's five
associate banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank
of Mysore, State Bank of Patiala, and State Bank of Travancore) along with Bharatiya
Mahila Bank into State Bank of India (SBI). This was a major step in banking sector
consolidation to improve efficiency, capital adequacy, and operational strength.

Q42. In India, the Central Bank’s function as the “lender of last resort” usually refers to
which of the following? [UPSC-2021)
1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits

Select the correct answer using the code given below

(a) 1 and 2
(b) 2 only
(c) 2 and 3
(d) 3 only

Answer: (b) 2 only

 ●​ Statement 1: "Lending to trade and industry bodies when they fail to borrow from other
sources" is incorrect. The RBI, as a lender of last resort, primarily provides liquidity to
banks, and does not lend directly to trade and industry bodies.

●​ Statement 2: "Providing liquidity to the banks having a temporary crisis" is correct. The
function of a lender of last resort involves providing liquidity to banks facing temporary
crises. This means that when banks are unable to secure funds from other sources, they
can turn to the central bank for assistance.

●​ Statement 3: "Lending to governments to finance budgetary deficits" is incorrect. The

government cannot borrow from the RBI except in specific situations such as short-term
Ways and Means Advances (WMA) or during war, disaster or a big fall in GDP. While the
RBI does act as a banker to the government, its role as lender of last resort does not
typically involve directly funding budgetary deficits

Q43. Consider the following statements: [UPSC-2017]

1. National Payments Corporation of India (NPCI) helps in promoting financial inclusion in the
country.
2. NPCI has launched RuPay, a card payment scheme.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

●​ Statement 1: "National Payments Corporation of India (NPCI) helps in promoting

financial inclusion in the country" is correct. The NPCI's initiatives, such as the UPI-BHIM
app and other mechanisms, contribute to the financial inclusion of villagers and the poor
by expanding the reach of the banking network. Additionally, one of the stated benefits of
having more companies like NPCI is to provide more services for users, which can be
inferred to include promoting financial inclusion.

●​ Statement 2: "NPCI has launched RuPay, a card payment scheme" is also correct. The
NPCI operates in card payments through RuPay and that NPCI has launched RuPay as
a card payment scheme.

Q44. The Service Area Approach was implemented under the purview of: [UPSC-2019]
(a) Integrated Rural Programme
(b) Lead Bank Scheme
(c) Mahatma Gandhi National Rural Employment Guarantee Scheme
(d) National Skill Development Mission

Answer: (b) Lead Bank Scheme

●​ The Service Area Approach (SAA) was introduced in 1989 as part of the Lead Bank
Scheme (LBS). It aimed to improve credit delivery in rural areas by allocating specific
geographical regions (villages) to particular banks.
●​ Under this approach, each commercial bank branch was assigned a specific service
area (typically a cluster of villages) where it was responsible for meeting the credit
needs of that region.
●​ This was done to ensure that institutional credit reached rural and underbanked
areas, aligning with the goals of financial inclusion.
●​ Other options:
○​ (a) Integrated Rural Development Programme (IRDP) – Launched in 1978-79,
IRDP aimed at promoting self-employment among rural poor through asset and
skill provision but was not directly linked to the Service Area Approach.
○​ (c) Mahatma Gandhi National Rural Employment Guarantee Scheme
(MGNREGS) – This is a wage employment program under the Ministry of
Rural Development that guarantees 100 days of wage employment to rural
households, unrelated to bank-led credit planning.
○​ (d) National Skill Development Mission (NSDM) – Launched in 2015, this
initiative focuses on skill training and employment generation, but it has no
direct link to the Service Area Approach in banking.

Q45. Which one of the following links all the ATMs in India? [UPSC-2018]
(a) Indian Banks’ Association
(b) National Securities Depository Limit
(c) National Payments Corporation of India
(d) Reserve Bank of India

Answer: (c) National Payments Corporation of India

●​ The ATM network in India operates on the National Financial Switch (NFS) technology,
which is managed by the National Payments Corporation of India (NPCI). NPCI is
described as an umbrella entity for retail payment systems. It was founded in 2008 with
the objective to provide cost-effective payment solutions for banks.

Q46. Priority Sector Lending by banks in India constitutes the lending to [UPSC CSE
PRELIMS 2013]
(a) agriculture
(b) micro and small enterprises
(c) weaker sections
(d) All of the above

Answer: (d) All of the above

●​ Priority Sector Lending (PSL) by banks in India includes loans to:

○​ Agriculture.
○​ Micro and Small Enterprises.
○​ Weaker Sections (Scheduled Castes (SC), Scheduled Tribes (ST), Women,
Persons with Disabilities (PH), Minorities, Manual scavengers and Artisans).

Q47. Which of the following grants/ grant direct credit assistance to rural households?
1. Regional Rural Banks
2. National Bank for Agriculture and Rural Development
3. Land Development Banks

Select the correct answer using the codes given below: [UPSC CSE PRELIMS 2013]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c) 1 and 3 only

●​ RRBs are government-sponsored banks established under the Regional Rural Banks
Act, 1976. They provide direct credit assistance to rural households, farmers, small
entrepreneurs, and artisans. They focus on priority sector lending, including agriculture,
small businesses, and rural industries.

●​ NABARD is a developmental financial institution, not a direct lending institution. It

refinances RRBs, Cooperative Banks, and other financial institutions but does not
provide direct loans to rural households. Its role is policy formulation, monitoring, and
capacity-building for rural credit institutions.

●​ LDBs provide long-term credit to farmers for agriculture and land improvement. They
primarily finance land purchase, irrigation projects, farm mechanization, and
development activities.

Q48. The Reserve Bank of India regulates the commercial banks in matters of
1. liquidity of assets
2. branch expansion
3. merger of banks
4. winding-up of banks
Select the correct answer using the codes given below. [UPSC CSE PRELIMS 2013]
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4

Answer: (d) 1, 2, 3 and 4

●​ Liquidity of assets: The RBI uses tools like the Cash Reserve Ratio (CRR) and the
Statutory Liquidity Ratio (SLR) to ensure that banks maintain sufficient liquid assets.
These tools are designed to manage the amount of money available in the banking
system and to ensure that banks can meet their obligations.

●​ Branch expansion: The RBI requires banks to open 25% of their branches in rural
areas to promote financial inclusion. This implies that the RBI regulates the branch
expansion of commercial banks.

●​ Merger of banks: The consolidation of Public Sector Banks (PSBs), which includes
mergers, and the RBI plays a role in this process.

●​ Winding-up of banks: The RBI has the power to force the elimination or merger of
weak banks. This implies that the RBI is involved in the winding-up process of banks.

Q49. If the interest rate is decreased in an economy, it will [UPSC CSE PRELIMS 2014]
(a) decrease the consumption expenditure in the economy
(b) increase the tax collection of the Government.
(c) Increase the investment expenditure in the economy
(d) increase the total savings in the economy.

Answer: (c) Increase the investment expenditure in the economy

●​ Impact on Consumption: The lower interest rates generally lead to increased

consumption expenditure. When borrowing becomes cheaper, people are more likely to
take loans to buy goods and services, boosting overall demand and consumption.
●​ Impact on Tax Collection: There is no direct link between changes in interest rates to
tax collection by the government. While increased economic activity due to lower interest
rates can indirectly impact tax revenue, it is not the primary or direct consequence.
●​ Impact on Investment: Lower interest rates also encourage increased investment
expenditure. When the cost of borrowing is reduced, businesses are more inclined to
invest in capital projects, leading to economic growth and job creation/
●​ Impact on Savings: There is an inverse relationship between interest rates and
savings. When interest rates are lower, the incentive to save money decreases as
 returns on deposits are lower. People are therefore more inclined to spend rather than
save.

Q50. Supply of money remaining the same when there is an increase in demand for
money, there will be [UPSC CSE PRELIMS 2013]
(a) a fall in the level of prices
(b) an increase in the rate of interest
(c) a decrease in the rate of interest
(d) an increase in the level of income and employment

Answer: (b) an increase in the rate of interest

●​ The money market equilibrium is determined by the intersection of money supply (Ms)
and money demand (Md). If the money supply remains constant, but the demand for
money increases, individuals and businesses will compete for the limited supply of
[Link] competition will push interest rates upward because banks and financial
institutions will charge more for borrowing due to higher demand. Higher interest rates
make borrowing more expensive, which can reduce investment and spending in the
economy.
●​ Other options:
○​ (a) A fall in the level of prices: Price levels are mainly influenced by aggregate
demand and supply in the goods market, not just money demand. An increase in
money demand alone does not necessarily cause deflation (fall in prices).
○​ (c) A decrease in the rate of interest: A higher demand for money means
people are willing to pay more for liquidity, leading to higher interest rates, not
lower.
○​ (d) An increase in the level of income and employment: Higher interest rates
usually discourage borrowing and investment, potentially slowing down economic
activity rather than increasing income and employment.

Q51. Consider the following liquid assets: [UPSC CSE PRELIMS 2013]

1. Demand deposits with the banks

2. Time deposits with the banks
3. Savings deposits with the banks
4. Currency

The correct sequence of these decreasing order of Liquidity is

(a) 1-4-3-2
(b) 4-3-2-1
(c) 2-3-1-4
(d) 4-1-3-2
Answer: (d) 4-1-3-2

●​ Liquidity is defined as the ease of converting an asset into cash. Cash is the most liquid
asset.
●​ Currency, which refers to physical cash, is therefore the most liquid of all assets because
it can be used immediately for transactions.
●​ Demand deposits are highly liquid assets, as they are readily available for withdrawal or
transfer. Demand deposits include savings accounts and salary accounts.
●​ Savings deposits are a type of demand deposit and thus also considered liquid.
●​ Time deposits, also known as fixed deposits (FDs), are less liquid than demand deposits
and currency because they cannot be accessed immediately without penalty. These
deposits have a fixed maturity date and are therefore less easily converted to cash.
●​ Based on this analysis, the correct sequence of these assets in decreasing order of
liquidity is:
1.​ Currency (most liquid)
2.​ Demand deposits (including savings deposits)
3.​ Savings deposits
4.​ Time deposits (least liquid)
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