The RBI, Monetary Policy and Money Supply
The RBI, Monetary Policy and Money Supply
The Reserve Bank of India is the country's central bank: it issues currency, manages money supply and regulates banks. NTPC asks when and how the RBI was set up, its functions, the Monetary Policy Committee, the tools of monetary policy and the measures of money supply.
1. The Reserve Bank of India
| Item | Facts |
|---|---|
| Established | 1 April 1935, under the RBI Act 1934, on the Hilton Young Commission's recommendation |
| Nationalised | 1 January 1949 |
| Headquarters | Mumbai (first in Calcutta) |
| First Governor | Sir Osborne Smith; first Indian Governor C.D. Deshmukh |
| Functions | Issues currency (except one-rupee notes and coins, issued by the Government), banker to the government, banker's bank, lender of last resort, custodian of foreign exchange, regulator of banks |
2. Monetary Policy Committee
| Item | Facts |
|---|---|
| Set up | 2016, under the amended RBI Act |
| Members | 6: three from the RBI (including the Governor, who chairs) and three external members appointed by the Government |
| Mandate | Keep CPI inflation at 4% ± 2% |
3. Tools of Monetary Policy
| Tool | Meaning |
|---|---|
| Repo rate | Rate at which the RBI lends short-term to banks |
| Reverse repo rate | Rate at which the RBI borrows from banks |
| CRR (Cash Reserve Ratio) | Share of deposits banks must keep with the RBI as cash |
| SLR (Statutory Liquidity Ratio) | Share of deposits banks must keep in liquid assets (cash, gold, government securities) |
| Bank rate | Rate at which the RBI rediscounts bills or lends long-term to banks (now aligned with the MSF rate) |
| Open market operations | Buying and selling government securities |
| Standing Deposit Facility | Floor of the liquidity corridor (introduced 2022) |
To fight inflation the RBI raises the repo rate or CRR (tight money); to boost growth it cuts them
4. Money Supply
| Measure | Meaning |
|---|---|
| M0 (reserve money) | Currency in circulation + bankers' deposits with the RBI + other deposits with the RBI |
| M1 (narrow money) | Currency with the public + demand deposits + other deposits with the RBI |
| M3 (broad money) | M1 + time deposits of banks |
✗ The RBI issues the one-rupee note | ✓ One-rupee notes and coins are issued by the Ministry of Finance
✗ Raising the repo rate increases money supply | ✓ It makes borrowing costlier and reduces money supply
हिंदी नोट: भारतीय रिज़र्व बैंक की स्थापना 1 अप्रैल 1935 को हुई और 1949 में राष्ट्रीयकरण हुआ। मौद्रिक नीति समिति (2016) में 6 सदस्य हैं और गवर्नर अध्यक्ष होते हैं। रेपो दर पर RBI बैंकों को ऋण देता है; CRR नकद रूप में RBI के पास रखा जाने वाला हिस्सा है।
Exam Pointer: Verified NTPC pattern: the number of members of the Monetary Policy Committee (August 2025 UG CBT-1). RBI-history, tool and money-supply questions are tagged syllabus-based.
Pariksha Pattern: Every Way NTPC Asks This Topic
Pattern 1: Monetary Policy Committee
[PYQ: NTPC UG CBT-1 18-Aug-2025 Shift-3]
EXAM LEVEL
Q. How many members does the Monetary Policy Committee have?
Six.
Answer: 6
EXAMATLAS LEVEL
Q. Who chairs the MPC, how many of its members are from outside the RBI, and what inflation target does it work to?
The RBI Governor chairs it; three members are external, appointed by the Government. The target is CPI inflation of 4% ± 2%.
Answer: RBI Governor; three; 4% ± 2%
Pattern 2: RBI history and functions
[Pattern: syllabus-based, PYQ-style]
EXAM LEVEL
Q. When was the RBI established?
1 April 1935.
Answer: 1 April 1935
EXAMATLAS LEVEL
Q. When was the RBI nationalised, and who was its first Indian Governor?
1 January 1949; C.D. Deshmukh.
Answer: 1949; C.D. Deshmukh
Pattern 3: Policy tools
[Pattern: syllabus-based, PYQ-style]
EXAM LEVEL
Q. What is the rate at which the RBI lends short-term funds to commercial banks called?
The repo rate.
Answer: Repo rate
EXAMATLAS LEVEL
Q. What is the difference between CRR and SLR, and what would the RBI do with the repo rate to control inflation?
CRR is kept as cash with the RBI; SLR is kept by banks in liquid assets such as gold and government securities. To control inflation the RBI raises the repo rate.
Answer: CRR cash with RBI, SLR liquid assets; raise it
Pattern 4: Money supply
[Pattern: syllabus-based, PYQ-style]
EXAM LEVEL
Q. Which measure of money supply is called broad money?
M3.
Answer: M3
EXAMATLAS LEVEL
Q. What does M1 consist of, and how is M3 obtained from M1?
M1 = currency with the public + demand deposits + other deposits with the RBI. M3 = M1 + time deposits of banks.
Answer: As stated; add time deposits
60-Second Revision
- RBI: 1 April 1935, nationalised 1949, HQ Mumbai; Hilton Young Commission.
- MPC 2016: 6 members, Governor chairs; target CPI 4% ± 2%.
- Repo (RBI lends), reverse repo (RBI borrows), CRR (cash), SLR (liquid assets).
- M1 narrow, M3 broad money.