Learn RBI functions in detail, including monetary policy, currency management, banking regulation, financial stability, forex operations, payment systems and developmental roles.

India’s financial system does not function on its own. Behind the stability of the banking system, the smooth circulation of currency, the functioning of payment systems, monetary policy, foreign-exchange management and several other critical financial activities stands the Reserve Bank of India (RBI). Understanding RBI functions therefore means understanding much of the architecture of India’s monetary and financial system.

The RBI is far more than a bank for banks. Its responsibilities have expanded significantly since it began operations in 1935. Today, its functions cover monetary policy, liquidity management, currency, banking regulation and supervision, financial stability, foreign exchange, payment systems, consumer protection, financial inclusion, financial-market development and several developmental responsibilities.

The Reserve Bank of India Act, 1934 provides the foundation for the institution, but RBI’s powers and responsibilities are spread across several laws, including the Banking Regulation Act, FEMA, the Government Securities Act and the Payment and Settlement Systems Act.

What Is the Reserve Bank of India?

The RBI is India’s central bank.

Its origins can be traced to the Hilton-Young Commission, formally the Royal Commission on Indian Currency and Finance, which recommended a central bank for India in 1926. The Reserve Bank of India Act was enacted in 1934, and RBI commenced operations on 1 April 1935 as a private shareholders’ bank with paid-up capital of ₹5 crore. It was nationalised in 1949.

The historical development is important because RBI’s role was never static. It evolved as India’s economy moved from a tightly regulated financial system towards a more market-oriented, globally integrated and increasingly digital financial system.

Why Are RBI Functions So Important?

A modern economy needs a stable monetary and financial system.

Businesses need credit. Households need banking services. Governments need mechanisms for managing public debt. Consumers need reliable payment systems. International trade requires foreign exchange. Banks need liquidity. Financial markets need orderly conditions.

A breakdown in any of these systems can quickly spread to the wider economy.

This is why central banking is fundamentally concerned with macroeconomic stability and financial stability. The PDF explains macroeconomic stability in terms of sustainable growth and low and stable inflation, while financial stability involves maintaining resilience in the financial system and avoiding financial crises.

Major RBI Functions at a Glance

The major functions can be grouped as follows:

RBI Function	Broad Purpose
Monetary policy	Maintain price stability while keeping growth in mind
Liquidity management	Keep financial-system liquidity aligned with monetary-policy objectives
Currency management	Issue and manage banknotes
Banking regulation	Regulate banking companies and other regulated entities
Banking supervision	Monitor safety and soundness
Financial stability	Identify and mitigate systemic risks
Foreign exchange management	Maintain orderly FX-market conditions
Payment systems	Regulate and supervise payment systems
Public debt management	Manage specified Government debt functions
Consumer protection	Protect customers and resolve grievances
Financial inclusion	Improve access to financial services
Financial-market development	Develop deeper, safer and more resilient markets
Developmental functions	Support financial and economic development

1. RBI as the Monetary Authority

One of the most important RBI functions is monetary policy.

Monetary policy involves the use of monetary instruments to influence variables such as:

interest rates;
money supply;
credit availability.

The objective is to achieve the statutory monetary-policy objectives. Following the 2016 amendment to the RBI Act, the primary objective is price stability while keeping growth in mind.

This is a major conceptual point.

It does not mean that RBI ignores growth.

Rather:

Price stability is primary, while growth is explicitly kept in mind.

2. Monetary Policy Committee

The modern monetary-policy framework in India is committee-based.

The Monetary Policy Committee has six members:

RBI Governor;
Deputy Governor in charge of monetary policy;
one RBI officer nominated by the Central Board;
three external members appointed by the Central Government.

The external members serve four-year terms.

The MPC must meet at least four times a year. Each member has one vote, and the Governor has a casting vote in case of a tie.

The MPC determines the policy rate required to achieve the inflation target.

3. Inflation Targeting

India’s monetary policy framework moved through several stages.

Monetary targeting

Broad money was an intermediate target.

Multiple Indicator Approach

RBI considered multiple monetary, economic, financial and external indicators.

Flexible Inflation Targeting

India eventually adopted the FIT framework.

The Urjit Patel Committee was constituted on 12 September 2013 and submitted its report in January 2014. Its recommendations helped establish the basis for the subsequent transition to flexible inflation targeting.

The Government subsequently notified a CPI inflation target of 4%, with a tolerance band of 2% to 6%, for the initial period beginning August 5, 2016.

4. RBI’s Liquidity Management Function

Setting the policy repo rate is only part of monetary policy.

RBI must also make the financial system operate consistently with the policy stance.

This is where liquidity management becomes critical.

The operating target is:

Weighted Average Call Rate — WACR

RBI uses liquidity operations to keep the WACR aligned with the policy repo rate.

Repo, SDF and MSF

The three instruments are easier to understand as a corridor.

SDF

Banks place money with RBI.

It forms the lower end of the corridor.

Repo

RBI provides liquidity against eligible collateral.

It represents the policy rate in the middle.

MSF

Banks borrow overnight from RBI against eligible securities within the prescribed limits.

It forms the upper end.

Therefore:

SDF → Floor

Repo → Middle

MSF → Ceiling

5. Cash Reserve Ratio

CRR is another important monetary-policy and liquidity-management instrument.

Banks are required to maintain a specified proportion of NDTL with RBI.

Increasing CRR:

→ banks maintain more funds with RBI
→ less liquidity available to the banking system.

Reducing CRR:

→ less funds locked with RBI
→ more liquidity available.

The PDF specifically describes CRR as a direct instrument with an immediate impact on system liquidity.

6. Statutory Liquidity Ratio

SLR requires banks to maintain prescribed assets against demand and time liabilities.

The PDF states that, as of August 2024, the SLR was 18%.

Typical assets include:

unencumbered Government securities;
cash;
gold.

CRR and SLR should never be treated as identical.

CRR = balance maintained with RBI

SLR = specified liquid assets maintained by bank

7. Open Market Operations

Open Market Operations involve Government securities.

RBI buys securities

→ liquidity increases.

RBI sells securities

→ liquidity decreases.

OMOs can therefore be used to manage durable liquidity.

The PDF notes that direct secondary-market transactions can be undertaken through the NDS-OM platform.

8. Market Stabilisation Scheme

MSS was introduced in 2004.

It is designed to absorb more enduring surplus liquidity.

An important feature distinguishes MSS from normal Government borrowing.

Money raised under MSS is kept in a separate account and is not available for ordinary Government expenditure. Otherwise, Government spending would simply put the absorbed rupee liquidity back into the banking system.

9. Unconventional Monetary Policy

The Global Financial Crisis forced central banks to expand their traditional toolkit.

Examples include:

quantitative easing;
credit easing;
forward guidance;
unconventional liquidity facilities.

India also deployed unconventional measures during COVID-19.

LTRO

RBI introduced LTRO in February 2020.

Five auctions were conducted during February–March 2020, each of ₹25,000 crore.

The PDF reports total system-liquidity augmentation of ₹1,25,117 crore.

TLTRO

Targeted Long-Term Repo Operations were introduced to direct liquidity towards particular sectors and instruments experiencing stress.

TLTRO 2.0 specifically attempted to improve transmission of liquidity to smaller and mid-sized entities, including NBFCs and MFIs.

At least 50% of funds were earmarked as:

10% for MFIs;
15% for NBFCs with assets of ₹500 crore and below;
25% for NBFCs with assets between ₹500 crore and ₹5,000 crore.

10. RBI as Currency Authority

The RBI Act gives RBI the sole right to issue banknotes in India.

Important statutory provisions include:

Section 22 — sole right of issue;
Section 23 — Issue Department;
Section 24 — denominations;
Section 25 — design/form/material;
Section 26 — legal tender;
Section 27 — clean notes;
Section 28 — mutilated/torn notes;
Sections 33–34 — Issue Department assets/liabilities.

This is one of the most important legal aspects of RBI’s currency function.

11. RBI as Regulator of Banks

RBI derives extensive regulatory powers from the Banking Regulation Act, 1949.

It regulates and supervises banking companies and exercises various powers over:

licensing;
management;
advances;
directions;
inspection;
stressed assets;
governance.

For example:

Section 22 → licensing

Section 35 → inspection

Section 35A → directions

Section 35AA → insolvency-resolution directions

Section 35AB → stressed assets

12. RBI and NBFCs

RBI’s regulatory perimeter extends beyond banks.

Section 45-IA of the RBI Act requires an NBFC to obtain a Certificate of Registration and maintain the prescribed Net Owned Fund before commencing NBFC business.

RBI also has powers concerning:

inspection;
directions;
management;
Board supersession;
restructuring;
amalgamation.

This demonstrates how RBI’s role has evolved beyond traditional banking.

13. RBI and Cooperative Banks

Cooperative banking has historically involved dual regulatory control because:

cooperative societies fall within the State legislative sphere;
banking falls within the Union sphere.

Consequently, RBI deals primarily with the banking aspects while cooperative authorities retain management-related responsibilities subject to the applicable law.

The Banking Regulation Amendment Act, 2020 strengthened RBI’s powers concerning cooperative banks.

14. RBI and Financial Stability

Financial stability is broader than keeping individual banks safe.

It requires preventing systemic risk.

Systemic risk becomes dangerous because financial institutions are interconnected. A problem at one institution or market can spread through:

funding relationships;
asset-price channels;
payment systems;
confidence effects;
interconnected exposures.

The Global Financial Crisis demonstrated the importance of this system-wide perspective.

15. Macroprudential Regulation

Microprudential regulation asks:

“Is this institution safe?”

Macroprudential policy asks:

“Is the financial system as a whole becoming unsafe?”

Macroprudential tools can include:

LTV limits;
leverage ratios;
dynamic provisioning;
risk weights;
capital buffers;
liquidity buffers;
stress tests;
higher requirements for systemically important institutions.

16. Financial Stability and FSDC

The Government established the Financial Stability and Development Council in December 2010.

It provides an apex-level forum for:

financial stability;
inter-regulatory coordination;
financial-sector development.

The Finance Minister chairs it.

The FSDC Sub-Committee is headed by the RBI Governor.

17. RBI as Foreign Exchange Manager

The rupee’s exchange rate is determined by market demand and supply.

RBI’s objective is not to maintain a permanently fixed rupee-dollar rate.

Instead, intervention seeks to:

reduce excessive volatility;
maintain orderly market conditions;
maintain adequate foreign-exchange reserves.

18. Sterilised FX Intervention

Suppose capital inflows cause excessive appreciation pressure.

RBI buys dollars.

That:

increases forex reserves

but also:

injects rupees into the system.

If RBI wants to offset the liquidity effect, it can undertake sterilisation.

Conversely, selling dollars absorbs rupee liquidity.

Thus FX intervention and monetary/liquidity management cannot be studied in isolation.

19. RBI and Payment Systems

The Payment and Settlement Systems Act, 2007 makes RBI the authority for regulation and supervision of payment systems.

Under Section 4, a payment system cannot commence or operate without RBI authorisation.

RBI can also:

prescribe standards;
obtain information;
inspect;
audit;
issue directions;
revoke authorisation in specified circumstances.

This function has become increasingly important with the rapid growth of digital payments.

20. RBI and Consumer Protection

Consumer protection is an important RBI responsibility.

The three earlier Ombudsman schemes for:

banking;
NBFCs;
digital transactions

were integrated into the Reserve Bank – Integrated Ombudsman Scheme, 2021, effective 12 November 2021.

The objective is to resolve complaints concerning deficiency in service in a simpler, centralised manner.

21. RBI’s Developmental Role

RBI is not solely a regulator.

The PDF specifically recognises its developmental functions.

These include:

promoting financial institutions;
supporting rural development;
supporting financial inclusion;
developing financial markets;
facilitating credit to sectors such as MSMEs.

This is particularly important when understanding RBI as the central bank of a developing economy.

22. RBI’s Role Is Much Wider Than the Preamble

The Preamble highlights:

banknote issuance;
reserves;
monetary stability;
monetary policy;
price stability with growth.

But RBI’s actual responsibilities have expanded to include:

bank regulation;
NBFC regulation;
cooperative-bank regulation;
currency management;
public debt;
foreign exchange;
payment systems;
consumer protection;
financial literacy;
financial inclusion;
financial stability.

This is perhaps the single most important conceptual takeaway from the first five chapters:

The RBI’s legal and functional footprint is much wider than its original central-banking mandate.

Key Takeaways — Article 1

The Reserve Bank of India performs multiple interconnected roles.

It is simultaneously:

monetary authority;
currency issuer/manager;
banker to banks;
banker to Government;
banking regulator and supervisor;
NBFC regulator;
financial-stability authority;
foreign-exchange manager;
payment-system regulator;
consumer-protection institution;
financial-market developer;
developmental institution.

The real significance of these functions lies in their interaction.

Monetary policy influences liquidity and interest rates. Liquidity affects financial markets. Financial markets influence credit and investment. Banking regulation affects financial stability. Foreign-exchange operations affect both reserves and rupee liquidity. Payment infrastructure affects confidence and financial-system resilience.

Therefore, studying RBI functions as isolated bullet points is a weak preparation strategy.

The correct approach is to understand the architecture connecting them.

FINAL HIGH-YIELD SHEET — CHAPTERS 1–5

30 facts worth memorising cold

Riksbank — 1668
Bank of England — 1694
Federal Reserve — 1914
Bagehot’s Lombard Street — 1873
Hilton-Young Commission — 1926
RBI Act — 1934
RBI commenced — 1 April 1935
RBI nationalised — 1949
Franklin National + Bank Herstatt — 1974
Global Financial Crisis — 2007–08
FSDU/FSU — August 2009
FSDC — December 2010
Urjit Patel Committee — 12 Sept 2013
Urjit Patel report — January 2014
RBI-Government agreement — February 2015
RBI Act amendment — May 2016
MPC constituted — 29 Sept 2016
Inflation target — 4%
Tolerance band — 2%–6%
MPC — 6 members
External MPC members — 4 years
MPC minimum meetings — 4/year
SDF — April 2022
MSS — 2004
First FX swap — USD 5 bn, 26 March 2019, 3 years
LTRO — February 2020
G-SAP — April–September 2021
FSD replaced FSU — 2023
COVID liquidity support — ₹17.2 lakh crore
Monetary transmission — 2–3 quarters output; 3–4 quarters inflation; 8–12 quarters persistence

RBI’s Functions and Working – Master Transformation

PART A — EXAM-ORIENTED KNOWLEDGE BASE

CHAPTER 1 — EVOLUTION OF CENTRAL BANKING GLOBALLY AND IN INDIA

Priority: VERY HIGH

1. What is a Central Bank?

A central bank is fundamentally different from an ordinary commercial bank.

The PDF explains that central banks historically emerged from institutions that performed functions such as:

financing governments;
managing government debt;
issuing currency;
holding accounts of other banks;
facilitating transactions between banks;
eventually acting as lender of last resort.

The earliest institutions were often established under government charters and enjoyed special privileges, particularly regarding currency issuance.

Exam distinction

Commercial bank: primarily serves customers and undertakes banking business.

Central bank: operates at the apex of the monetary and financial system and performs functions connected with monetary stability, financial stability, currency, liquidity, banking-system regulation and other public-policy objectives.

2. Historical Evolution of Central Banking

Institution	Year
Sveriges Riksbank / Swedish Central Bank	1668
Bank of England	1694
Federal Reserve, United States	1914
Reserve Bank of India began operations	1935

At the beginning of the twentieth century, there were only 18 central banks; today, most countries have one.

Memory chain

1668 → 1694 → 1914 → 1935

Riksbank → Bank of England → Federal Reserve → RBI

3. Why Did Central Banks Become Lenders of Last Resort?

Banks have an inherent maturity/liquidity mismatch:

liabilities are predominantly short-term and liquid;
assets are comparatively long-term and illiquid.

Depositors can demand their money quickly, whereas loans and other bank assets cannot necessarily be converted into cash immediately.

This creates vulnerability to bank runs.

The failure of one bank can also affect others, creating contagion.

4. Bagehot’s Dictum

In 1873, Walter Bagehot published Lombard Street.

His doctrine regarding the lender of last resort is commonly expressed through three important principles:

Lend freely + against good collateral + at a penal rate

The purpose is to provide liquidity to a fundamentally viable institution facing temporary stress and prevent a liquidity crisis from becoming a broader banking crisis.

VERY HIGH PRIORITY

Remember:

Bagehot → 1873 → Lombard Street → Lender of Last Resort

5. Macroeconomic Stability vs Financial Stability

Macroeconomic stability

The PDF associates it with:

stable and sustainable economic growth;
low and stable inflation.

Financial stability

It means maintaining a resilient financial system and avoiding financial crises.

Comparison

Feature	Macroeconomic Stability	Financial Stability
Main concern	Growth and prices	Resilience of financial system
Major policy tool	Monetary policy	Liquidity, regulation, supervision and macroprudential measures
Main risk	Inflation/recession	Financial instability/crisis

6. Monetary Policy as a Stabilisation Tool

If:

High inflation + excessively strong growth

→ central bank may increase interest rates
→ borrowing becomes more expensive
→ consumption/investment decline
→ aggregate demand weakens
→ inflationary pressure can moderate.

Conversely:

Low inflation + weak economic activity

→ lower interest rates
→ cheaper borrowing
→ consumption/investment encouraged
→ economic activity stimulated.

The difficult part of central banking is balancing:

price stability + sustainable growth.

7. Lender of Last Resort and Regulation/Supervision

The PDF distinguishes two broad approaches to financial stability:

Ex-post support

Provide liquidity when a crisis occurs.

→ Lender of Last Resort

Ex-ante prevention

Build a safer financial system through:

prudential regulation;
supervision;
monitoring;
risk controls.

This reduces the probability that a financial crisis develops in the first place.

8. Basel Committee

Two significant international banking failures in 1974:

Franklin National Bank — United States
Bank Herstatt — Germany

Their international implications highlighted the need for cooperation among central banks.

The Basel Committee on Banking Supervision (BCBS) was consequently established.

Its standards became an important foundation for national and international banking regulation.

Memory trigger

1974 failures → international banking risk → BCBS → Basel Standards

9. Unconventional Monetary Policy

The Global Financial Crisis of 2007–08 strengthened the monetary-policy toolkit.

Examples mentioned:

quantitative easing;
credit easing;
negative interest rates;
forward guidance.

Central banks also became “market makers of last resort” when financial markets became dysfunctional.

10. COVID-19 and Central Banking

COVID-19 represented a different type of shock because it originated outside the financial sector but created enormous financial and economic consequences.

Central banks:

eased policy stances;
used liquidity measures;
supported market functioning;
provided regulatory forbearance/flexibility;
worked alongside fiscal authorities.

The recovery subsequently generated inflationary pressures.

11. FinTech, BigTech and Cyber Risk

The PDF highlights several emerging challenges:

digital payments;
digital currencies;
FinTech;
BigTech;
cybersecurity;
systemic risk;
operational risk;
competition risk;
privacy;
data safety;
monetisation of data.

A key regulatory challenge is determining whether regulation should be:

activity-based or entity-based.

The PDF specifically notes that entity-based regulation may become more relevant when dealing with financial activities undertaken by large BigTech firms.

12. Climate Risk and Central Banking

Climate change can create risks to:

monetary stability;
growth;
financial stability;
safety and soundness of regulated entities.

Because climate risks cross geographic and sectoral boundaries, international coordination is important.

The FSB’s Roadmap for Addressing Financial Risks from Climate Change was endorsed by the G20 in July 2021.

The roadmap covers four broad areas:

firm-level disclosures;
data;
vulnerabilities;
regulatory and supervisory practices/tools.

13. Evolution of RBI

1926 — Hilton-Young Commission

The Royal Commission on Indian Currency and Finance, popularly known as the Hilton-Young Commission, recommended creation of a central bank for India.

Objectives included:

separating currency and credit control from Government;
augmenting banking facilities throughout India.

1934 — RBI Act

The Reserve Bank of India Act, 1934, established the legal foundation of RBI.

1935 — Commencement

RBI commenced operations on 1 April 1935.

It began as a private shareholders’ bank.

1949 — Nationalisation

RBI was nationalised in 1949.

Critical chronology

1926 → 1934 → 1935 → 1949

Hilton-Young recommendation → RBI Act → RBI starts operations → Nationalisation

14. RBI’s Broad Mandates

The PDF identifies three broad dimensions:

1. Monetary stability

Preserving confidence in the value/purchasing power of money.

2. Inclusive growth and development

Financial access contributes to poverty reduction and reduction of inequality.

3. Financial stability

Ensuring a resilient financial system.

RBI also has responsibilities concerning development of financial markets and institutions.

15. RBI and Foreign Exchange

During and after World War II, foreign exchange was scarce.

RBI initially operated under:

Defence of India Rules, 1939
later Foreign Exchange Regulation Act, 1947

Over time, the emphasis shifted from foreign exchange regulation towards foreign exchange management.

16. 1991 Balance of Payments Crisis

The 1991 BoP and foreign exchange crisis was a watershed.

RBI played an important supporting role in:

crisis management;
market reforms;
regulatory reforms;
liberalisation;
external-sector management;
prudential regulation;
banking technology;
monetary-policy instruments;
currency management.

17. RBI and Payment Systems

Central banks are described as being at the heart of payment and settlement systems.

RBI developed payment infrastructure not merely to improve transaction efficiency but also to strengthen financial-system stability.

18. COVID-era RBI Balance Sheet Figures

The PDF gives a useful numerical sequence:

Year	RBI balance sheet size as % of GDP
2019–20	24.6%
2020–21	28.6%
2021–22	26.7%
2022–23	22.5%

The PDF notes that RBI’s balance-sheet expansion was relatively subdued compared with the US, UK and Euro Area.

The chart on the PDF page also visually compares the central-bank balance-sheet and reserve-money developments across economies.

CHAPTER 1 — RAPID REVISION

Must remember

Riksbank — 1668
Bank of England — 1694
Federal Reserve — 1914
Hilton-Young Commission — 1926
RBI Act — 1934
RBI operations — 1 April 1935
RBI nationalised — 1949
Bagehot’s Lombard Street — 1873
Franklin National Bank + Bank Herstatt failures — 1974
Global Financial Crisis — 2007–08
FSB climate roadmap endorsed by G20 — July 2021
RBI balance sheet/GDP: 24.6 → 28.6 → 26.7 → 22.5

CHAPTER 2 — LEGAL FRAMEWORK FOR RESERVE BANK FUNCTIONS

Priority: VERY HIGH

This chapter is particularly important for a promotional examination because it connects function → statute → section → RBI power.

The biggest mistake would be memorising only the names of Acts. The examination can easily test the specific section and power.

1. RBI Act, 1934 — Foundational Statute

The RBI is constituted under the Reserve Bank of India Act, 1934.

However, the PDF makes an important point:

RBI’s legal authority is not confined to the RBI Act.

Its functions derive from several statutes, including:

RBI Act, 1934
Banking Regulation Act, 1949
FEMA, 1999
Government Securities Act, 2006
Payment and Settlement Systems Act, 2007
Credit Information Companies (Regulation) Act, 2005
SARFAESI Act, 2002
National Housing Bank Act, 1987
Factoring Regulation Act, 2011
MSME Act, 2006

and others.

2. Legal Origin of RBI

1927

A Bill was introduced in the Legislative Assembly to establish a central bank.

It was subsequently withdrawn due to lack of agreement.

1933

The White Paper on Indian Constitutional Reforms recommended establishment of a Reserve Bank.

6 March 1934

The fresh Bill received the Governor General’s assent.

1 April 1935

RBI commenced operations.

Initial paid-up capital:

₹5 crore

It began as a private shareholders’ bank.

3. RBI Preamble — Two Critical Objectives

The amended Preamble contains two fundamental ideas:

Objective 1

Regulate issue of banknotes and keeping of reserves to secure monetary stability and operate the currency and credit system to the country’s advantage.

Objective 2

Have a modern monetary-policy framework suited to an increasingly complex economy, with the primary objective of monetary policy being price stability while keeping in mind growth.

4. Central Board — Section 7

Section 7, RBI Act

General superintendence and direction of RBI’s affairs and business are entrusted to the Central Board.

Section 8

Deals with Directors.

The Board is headed by the Governor and assisted by not more than four Deputy Governors.

The Central Board exercises the powers and performs acts that may be exercised by RBI.

Exam trap

Do not confuse:

Central Board
with
MPC
with
FSDC.

They have entirely different statutory/institutional roles.

5. Section 17 — RBI’s Banking Business

Section 17 enables RBI to undertake specified banking/business activities.

These include, among others:

accepting deposits;
SDF deposits;
purchase/sale/rediscounting of bills;
short-term loans and advances;
contributions to National Rural Credit Funds;
derivatives;
Government securities;
repo/reverse repo;
lending/borrowing securities;
certain share transactions;
deposits with SBI for specified purposes;
banknote-related activities.

6. Section 18 — Lender of Last Resort

Section 18 → Lender of Last Resort

This is a very high-yield association.

7. Section 19 — Prohibited Business

Section 19 specifies businesses which RBI may not transact.

Memory

17 = Can do specified banking business

18 = Lender of Last Resort

19 = Cannot do specified business

8. Banker to Central Government

Section 20

RBI has an obligation to accept money for the account of the Central Government.

Section 21

RBI has the right to make payments up to the amount standing to the credit of the Central Government’s account and perform exchange, remittance and banking operations, including management of Union public debt.

Section 21-A

Banking arrangements with State Governments may be undertaken through agreements between RBI and the concerned State Government.

These agreements must be laid before Parliament.

Important distinction

Section	Subject
20	Obligation regarding Central Government accounts
21	Right/operations for Central Government
21-A	State Government banking arrangements

9. Issue of Banknotes

Section 22

RBI has the sole right to issue banknotes in India.

Section 23

The Issue Department must be kept wholly distinct from the Banking Department.

Section 24

Provides for denominations, with the section permitting specified denominations and other denominations subject to the statutory ceiling stated in the PDF.

Section 25

Design, form and material approved by Central Government on recommendation of RBI’s Central Board.

Section 26

Banknotes are legal tender, subject to the statutory mechanism under which the Central Government may declare a series not to be legal tender.

Section 27

Clean notes.

Section 28

Exchange of mutilated/torn notes is described as a matter of grace, not a matter of right.

Section 29

Banknotes issued by RBI are exempt from stamp duty.

Sections 33–34

Assets and liabilities of the Issue Department.

Sections 38–39

Obligations relating to supply of coins and different forms of currency.

The RBI Act was amended in 2022 to explicitly accommodate the concept of banknotes in physical or digital form and make certain provisions inapplicable to digital banknotes.

10. Monetary Policy — Chapter III-F

The RBI Act’s Chapter III-F establishes the statutory basis for:

Monetary Policy Framework;
Monetary Policy Committee.

Section 45ZA

Central Government, in consultation with RBI, determines the inflation target in terms of CPI once every five years.

Section 45ZB

Provides for constitution of the MPC.

Composition:

RBI Governor
Deputy Governor in charge of monetary policy
One RBI officer nominated by Central Board
Three persons appointed by Central Government

Total:

6 members.

11. MPC — Key Facts

Feature	Position in PDF
Total members	6
Internal members	3
External members	3
External-member term	4 years
Minimum meetings	4 per year
Voting	One vote/member
Tie	Governor has casting vote
Main statutory task	Determine policy rate required to achieve inflation target

The MPC resolution is published after each meeting.

Minutes are published on the 14th day after the policy announcement and include:

resolution;
vote of each member;
rationale;
statement of each member.

12. Government Securities Act, 2006

Purpose:

To consolidate and amend law relating to Government securities and their management by RBI.

Section 1

Applies to Government securities created/issued by Central or State Government.

Section 12

RBI may determine title to Government security where doubt exists.

Section 18

Provides protection concerning orders made by RBI under the Act in the circumstances specified.

Section 31

The Public Debt Act, 1944 does not disappear in a blanket fashion; it ceases to apply to Government securities/matters covered by the GS Act.

13. FEMA, 1999

Section 10

RBI may authorise persons to deal in:

foreign exchange;
foreign securities;

including as:

Authorised Dealer;
money changer;
offshore banking unit;
other authorised categories.

RBI may also revoke authorisation subject to the statutory conditions/procedure.

Section 13

Contraventions and penalties — adjudication by the Directorate of Enforcement.

Section 15

RBI may compound certain contraventions according to the applicable rules.

14. Banking Regulation Act, 1949

The PDF identifies several critical provisions.

Section 5(ca)

Defines banking policy as policy specified by RBI in the interest of:

banking system;
monetary stability;
sound economic growth;

while considering:

depositor interests;
deposits/resources;
equitable allocation;
efficient use of resources.

Critical BR Act Section Map

Section	RBI power/function mentioned
21	Control of advances
22	Licensing/cancellation of banking companies
35	Inspection
35A	Directions to banking companies
35AA	Directions concerning insolvency resolution process, subject to statutory conditions
35AB	Directions relating to stressed assets
35B	Previous approval concerning appointment/reappointment/termination of chairman/whole-time directors
36-AA	Removal of executives/officers/employees under specified conditions
36-AB	Additional directors
36ACA	Supersession of boards
51	Application of specified BR Act provisions to SBI, nationalised banks and RRBs
56	Application/modification of BR Act to cooperative banks

15. NBFC Regulation

Section 45-IA — RBI Act

An NBFC must obtain:

Certificate of Registration (CoR) from RBI;
prescribed Net Owned Fund,

before commencing NBFC business.

Other important provisions:

Section	Subject
45J	Regulation/prohibition of deposit-soliciting prospectus/advertisements
45JA	Policy/directions to NBFCs
45L	Information/directions
45N	Inspection
45-ID	Removal of director
45-IE	Supersession of Board
45-MBA	Amalgamation/reconstruction/splitting

RBI may also establish a Bridge Institution under the circumstances described in the chapter to preserve continuity of critical NBFC activities.

16. Cooperative Banks — Dual Regulation

This is a favourite conceptual area.

Under Article 246 and the Seventh Schedule:

incorporation/regulation/winding-up of cooperative societies → State List;
banking → Union List.

Therefore cooperative banks historically operate under a dual regulatory/control structure involving RBI and Registrar of Cooperative Societies.

17. Banking Regulation Amendment Act, 2020 — Cooperative Banks

The amendment extended several BR Act provisions concerning management/functioning to cooperative banks.

The PDF specifically mentions:

Sections 10, 10A, 10B, 10BB, 10C, 10D, 35B, etc.

Section 56 was also modified to give primacy to its provisions in case of conflict.

The amendment excludes specified:

Primary Agricultural Credit Societies;
cooperative societies principally engaged in long-term agricultural development finance,

provided the statutory conditions mentioned in the PDF are satisfied, including restrictions relating to use of “bank/banker/banking” and acting as drawee of cheques.

18. Cooperative Bank Capital Raising

The amendment permits cooperative banks, subject to the prescribed conditions:

equity shares;
preference shares;
special shares;

and, subject to RBI approval, certain unsecured debentures/bonds or similar securities with maturity of 10 years or more.

19. Derivatives and Money Market — Chapter III-D

Chapter III-D was inserted into the RBI Act effective 9 January 2007.

Section 45U

Defines derivative broadly as an instrument settled at a future date whose value is derived from changes in:

interest rate;
foreign exchange rate;
credit rating/index;
securities prices;
combination of these.

Examples:

interest-rate swaps;
FRAs;
foreign currency swaps;
currency options.

Money-market instruments

Include:

call/notice money;
term money;
repo;
reverse repo;
CD;
commercial usance bill;
CP;
other debt instruments with original/initial maturity up to one year, as specified by RBI.

Section 45W

RBI may regulate transactions in derivatives, money-market instruments etc. in public interest or to regulate the financial system.

Section 45V

Provides statutory validity to specified derivatives transactions where at least one party falls under RBI’s regulatory purview.

20. Payment and Settlement Systems Act, 2007

Section 4

No person may commence or operate a payment system without RBI authorisation.

Section 8

RBI may revoke authorisation for specified violations/non-compliance.

Chapter IV

Provides RBI’s regulatory and supervisory powers.

These include:

setting standards;
calling for information/returns;
inspection;
audit;
directions.

21. Credit Information Companies

Regulated under:

Credit Information Companies (Regulation) Act, 2005

Three pillars:

Credit Information Companies
Credit Institutions
Specified Users

RBI can:

issue directions;
inspect CICs;
determine policy concerning their functioning.

22. Consumer Protection — Integrated Ombudsman

Three earlier schemes:

Banking Ombudsman Scheme — 2006
Ombudsman Scheme for NBFCs — 2018
Ombudsman Scheme for Digital Transactions — 2019

were integrated into:

RBI Integrated Ombudsman Scheme, 2021

Effective:

12 November 2021

It provides a centralised grievance mechanism for customers of regulated entities including:

banks;
NBFCs;
Payment System Participants;
Credit Information Companies.

Core concept:

deficiency in service.

23. Developmental Role

Section 17(8AA)

Promoting, establishing, supporting or aiding financial institutions can be RBI business.

Section 54

RBI may maintain expert staff for rural credit/development studies and provide guidance/assistance to NABARD and conduct special studies for integrated rural development.

24. Factoring Regulation Act, 2011

RBI’s role includes:

regulation and supervision of factors;
directions;
collection of information.

25. MSME Act, 2006

A senior RBI official not below Executive Director is included in the National Board for MSMEs.

RBI’s role includes supporting smooth credit flow to MSMEs.

26. SARFAESI + NHB

The PDF highlights two important developments:

SARFAESI Act, 2002

RBI’s powers include regulation/supervision of Asset Reconstruction Companies.

National Housing Bank Act

Amendments in 2019 transferred certain regulatory powers over Housing Finance Companies from NHB to RBI.

HFCs consequently came to be treated as a category of NBFC for regulatory purposes.

CHAPTER 2 — SECTION MEMORY SHEET

RBI Act

7 → Central Board
17 → RBI banking business
18 → Lender of Last Resort
19 → Prohibited business
20 → Central Government money
21 → Central Government banking operations
21-A → State Government agreements
22 → Sole banknote issue
23 → Issue Department
24 → Denominations
25 → Design/form/material
26 → Legal tender
27 → Clean notes
28 → Mutilated/torn notes
29 → Stamp duty
33–34 → Issue Department assets/liabilities
38–39 → Coins/currency obligations
45-IA → NBFC CoR/NOF
45J → Deposit advertisements
45JA → NBFC policy/directions
45L → Information/directions
45N → NBFC inspection
45-ID → NBFC director removal
45-IE → NBFC Board supersession
45-MBA → NBFC reconstruction etc.
45U → Derivatives/money-market definitions
45V → Validity of specified derivatives
45W → RBI regulation of derivatives etc.
45ZA → Inflation target
45ZB → MPC

BR Act

21 → Advances
22 → Banking licence
35 → Inspection
35A → Directions
35AA → Insolvency resolution direction
35AB → Stressed assets
35B → Directors
36AA → Removal of personnel
36AB → Additional directors
36ACA → Board supersession
51 → Certain banks
56 → Cooperative banks

Other Acts

GS Act 2006 → Government securities

FEMA 1999 → Foreign exchange

PSS Act 2007 → Payment systems

CIC Act 2005 → Credit Information Companies

SARFAESI 2002 → ARCs

NHB amendments 2019 → HFC regulatory powers to RBI

CHAPTER 3 — MONETARY POLICY FRAMEWORK

Priority: VERY HIGH

1. Definition of Monetary Policy

Monetary policy means the use of monetary instruments under the control of the central bank to influence:

interest rates;
money supply;
availability of credit;

with a view to achieving policy objectives.

2. Evolution of Objectives

Historically monetary policy in India evolved around:

price stability;
adequate credit to productive sectors;
orderly financial markets;
economic growth;
financial stability.

After the May 2016 amendment to the RBI Act, the statutory primary objective became:

Price stability while keeping growth in mind.

3. Three Components of Monetary Policy Framework

The PDF divides monetary policy framework into:

A. Objectives

Long-term aims/nominal anchors not directly controlled by the central bank.

B. Operating procedure

Day-to-day management of liquidity to influence the operating target.

The PDF memorably calls this the:

“nuts and bolts” / “plumbing in the architecture”

of monetary policy.

C. Governance arrangements

Concern:

decision-making;
responsibilities;
powers;
accountability.

4. Operating Target

Historically:

bank reserves;
short-term interest rates

were important operating targets.

With market-based monetary policy frameworks, emphasis shifted toward short-term interest rates.

The overnight rate became the dominant operating target globally.

For India:

WACR = Weighted Average Call Money Rate

is the operating target.

5. Monetary Targeting Framework

During 1971–1985, monetisation of fiscal deficits strongly influenced monetary policy.

The Committee to Review the Working of the Monetary System, chaired by Dr Sukhamoy Chakravarty (1985), recommended monetary targeting with feedback.

Under this framework:

broad money became intermediate target;
reserve money became an important operating instrument.

Formula from the PDF

If:

expected real GDP growth = 6%;
income elasticity of demand for money = 1.5;
tolerable inflation = 5%;

then:

M3 growth = 1.5 × 6 + 5 = 14%

The framework operated from the mid-1980s to 1997–98.

6. Shift to Market-Based Instruments

By 1997:

SLR had declined to 25%;
CRR had declined to 9.5%;

of NDTL, according to the historical account in the PDF.

Financial liberalisation made money demand less stable, and interest-rate/exchange-rate channels became more important.

7. Multiple Indicator Approach

RBI adopted the Multiple Indicator Approach in April 1998.

It examined both:

Quantity variables

money;
credit;
output;
trade;
capital flows;
fiscal position.

Rate variables

market rates of return;
inflation;
exchange rate.

From the early 2000s, forward-looking information from RBI surveys was increasingly used.

The approach operated broadly during 1998–99 to 2008–09.

The PDF gives:

average real GDP growth: 7.1%
average inflation: approximately 5.5%

during this period.

8. Why Inflation Targeting?

Problems with the multiple-indicator approach included:

lack of a clearly defined nominal anchor;
persistent inflation;
weakening growth;
uncertainty about the exact policy focus.

Several committees had advocated movement toward inflation targeting from around 2007.

9. Urjit Patel Committee

Constituted

12 September 2013

Chairman

Dr Urjit R. Patel

Report

January 2014

Its work set the stage for India’s flexible inflation-targeting framework.

10. Flexible Inflation Targeting — FIT

Under FIT:

MPC → policy repo rate → WACR → broader financial rates → aggregate demand → inflation & growth

The repo rate is set based on the current/evolving macroeconomic situation with the objective of achieving inflation target over the business cycle while accommodating growth concerns in the short run.

11. Statutory FIT Framework

Before the May 2016 amendment:

February 2015 Agreement between Government and RBI provided the framework.

The May 2016 RBI Act amendment gave FIT a statutory basis.

The amended Act specifies:

CPI as inflation measure;
target determined by Government in consultation with RBI;
target reset every five years.

12. Inflation Target — PDF’s Stated Figures

The Government notified in August 2016:

Target

4% CPI inflation

Upper tolerance

Lower tolerance

Initial target period

5 August 2016 to 31 March 2021

13. Failure to Achieve Inflation Target

The PDF defines failure as:

Condition A

Average inflation exceeds the upper tolerance level for three consecutive quarters.

Condition B

Average inflation falls below the lower tolerance level for three consecutive quarters.

Following failure, RBI must report:

reasons for failure;
remedial actions;
estimated time required to return to target.

14. Monetary Policy Report

The amended Act requires RBI to publish the Monetary Policy Report once every six months.

It explains:

sources of inflation;
inflation forecast for 6–18 months ahead.

15. MPC Composition

The six-member MPC was constituted on:

29 September 2016

Composition:

3 internal + 3 external

External members:

4-year term

Meeting frequency:

at least 4 times a year

Tie:

Governor gets casting vote.

16. Institutions Supporting Monetary Policy

Monetary Policy Department — MPD

Assists MPC in monetary-policy formulation.

Financial Markets Committee — FMC

Meets daily to review liquidity and financial-market conditions.

Financial Markets Operations Department — FMOD

Operationalises MPC decisions through day-to-day liquidity management.

Its immediate objective is alignment of:

WACR ↔ policy repo rate.

17. Monetary Policy Instruments

The PDF lists:

Repo Rate
SDF
Reverse Repo Rate
MSF
LAF
Bank Rate
CRR
SLR
OMOs
MSS
Forex Swaps

Repo Rate

Rate at which RBI provides liquidity under LAF against eligible collateral.

Standing Deposit Facility — SDF

RBI accepts uncollateralised overnight deposits.

As of August 2024 in the PDF:

SDF = 25 bps below repo

Introduced:

April 2022

It replaced fixed reverse repo as the floor of the LAF corridor.

MSF

Overnight borrowing facility for banks against their SLR portfolio within the prescribed limit.

As of August 2024 in the PDF:

2% below SLR

MSF rate:

25 bps above repo

It acts as a safety valve against unexpected liquidity shocks.

Reverse Repo

RBI absorbs liquidity against eligible Government securities.

LAF

Liquidity Adjustment Facility includes:

overnight/term repo;
overnight/term reverse repo;
SDF;
MSF.

18. LAF Corridor

Upper bound

MSF

Middle

Policy Repo Rate

Lower bound

SDF

Memory

MSF ↑

REPO

SDF ↓

19. Bank Rate

Rate at which RBI is prepared to buy/rediscount bills of exchange or other commercial paper.

It also operates as a penal rate for reserve requirement shortfalls.

The PDF states that Bank Rate is published under:

Section 49, RBI Act, 1934

and is aligned with MSF.

20. CRR

CRR is the proportion of NDTL that banks must maintain with RBI.

The PDF describes maintenance over a fortnight:

Saturday → following reporting Friday

with average daily maintenance and a stipulated minimum daily maintenance.

21. SLR

Banks maintain specified assets against their demand and time liabilities.

As of August 2024, the PDF states:

SLR = 18%

Typical assets include:

unencumbered Government securities;
cash;
gold.

22. MSS

Market Stabilisation Scheme

Introduced:

2004

Purpose:

Absorb more enduring surplus liquidity, especially associated with large capital inflows.

Government securities/T-Bills are issued and the cash raised is kept in a separate account rather than being available for ordinary Government spending.

23. Unconventional Monetary Policy

Broad categories:

Quantitative Easing

Asset purchases that significantly expand/alter central-bank balance sheets.

Forward Guidance

Central-bank communication intended to influence expectations regarding future policy.

24. India’s COVID-era Unconventional Measures

LTRO

Introduced:

February 2020

Five auctions during February–March 2020:

each ₹25,000 crore;
one 1-year operation;
four 3-year operations.

Total system liquidity augmentation:

₹1,25,117 crore

Banks subsequently prepaid:

₹1,23,572 crore, approximately 98.8% of funds availed.

25. TLTRO

Introduced during:

March–April 2020

Purpose:

Direct liquidity towards stressed sectors/entities.

Funds had to be invested in:

investment-grade corporate bonds;
CP;
NCDs.

Up to 50% of incremental eligible holdings could be acquired from primary market, with remaining from secondary market, including MFs/NBFCs.

26. TLTRO 2.0

Purpose:

Reach small/mid-sized corporates, NBFCs and MFIs.

At least 50% of funds were allocated as:

10% → MFIs
15% → NBFCs with assets ₹500 crore and below
25% → NBFCs with assets between ₹500 crore and ₹5,000 crore.

Memory

10 + 15 + 25 = 50

27. On-Tap TLTRO

Introduced:

October 2020

Tenor:

up to 3 years

Rate:

floating rate linked to policy repo.

The scheme was subsequently expanded to include the 26 stressed sectors identified by the Kamath Committee (2020) and later bank lending to NBFCs.

28. G-SAP

Government Securities Acquisition Programme

Implemented:

April–September 2021

Purpose:

improve monetary transmission;
support orderly yield-curve evolution;
provide upfront commitment regarding size of G-sec purchases.

It operated through secondary-market purchases of Government securities.

29. Operation Twist

RBI undertook simultaneous:

purchase of long-term securities + sale of short-term securities

Purpose:

compress term premium;
reduce yield-curve steepness;
influence long-term interest rates;
improve transmission.

It is liquidity-neutral at inception.

30. Forward Guidance During COVID

RBI used communication to reinforce the accommodative stance.

The PDF describes this as including:

time-contingent guidance;
state-contingent guidance.

Forward guidance complemented liquidity operations.

31. Monetary Transmission

Monetary transmission is:

Policy-rate change → financial-market rates/asset prices → behaviour of households/firms/government → aggregate demand → inflation/growth

Channels:

interest-rate channel;
credit channel;
exchange-rate channel;
asset-price channel;
expectations channel.

For India, the PDF notes that the interest-rate channel has been found to be the strongest in many studies.

32. Transmission Lags

According to the PDF:

Output

Effect after approximately:

2–3 quarters

Inflation

Effect after approximately:

3–4 quarters

Persistence

Impact can persist:

8–12 quarters.

33. External Benchmarking

From 1 October 2019, scheduled commercial banks, excluding RRBs, were required for specified new floating-rate personal/retail loans and MSE loans to link rates to:

policy repo rate;
3-month T-bill;
6-month T-bill;
another FBIL-published benchmark market rate.

For medium enterprises, external benchmark linkage became effective:

1 April 2020.

CHAPTER 3 — RAPID REVISION

Framework chronology

1971–85 → Monetary Targeting

1985 → Chakravarty Committee

Mid-1980s–1997-98 → Monetary Targeting

April 1998 → Multiple Indicator Approach

1998-99–2008-09 → Multiple Indicator era

12 Sept 2013 → Urjit Patel Committee constituted

Jan 2014 → Report

Feb 2015 → RBI-Government Agreement

May 2016 → RBI Act amendment

June 2016 → Amendment effective

Aug 2016 → 4% CPI target, 2–6% band

29 Sept 2016 → MPC constituted

CHAPTER 4 — MARKET OPERATIONS

Priority: VERY HIGH

This chapter is where candidates frequently know definitions but fail to understand the mechanics.

1. Operating Target

The monetary-policy operating target is:

WACR — Weighted Average Call Rate

It represents the volume-weighted rate of overnight transactions in the call money market.

RBI uses market operations to keep WACR aligned with the policy rate.

2. System Liquidity

Formula

System Liquidity = Net Borrowing from RBI − Excess Reserves

Where:

Net Borrowing from RBI

= Repo + MSF + SLF borrowings
− Reverse Repo deposits

And:

Excess Reserves

= Actual reserves − Required reserves.

Interpretation

Positive figure → liquidity deficit

Negative figure → liquidity surplus

This is an excellent numerical/conceptual examination trap.

3. Transient vs Durable Liquidity

Transient/frictional liquidity

Can reverse:

overnight;
over a short period.

Major source:

Government cash balances held with RBI

Durable liquidity

Results from permanent/long-term changes, such as:

currency in circulation;
unsterilised FX intervention;
banking-system reserves/NDTL-related changes.

4. Instruments for Transient Liquidity

LAF

Includes:

repo;
reverse repo;
SDF;
MSF.

5. Instruments for Durable Liquidity

Include:

LTRO/LTRRO;
outright OMO;
CRR changes;
MSS;
USD/INR swaps.

6. 2019 Internal Working Group

RBI reviewed liquidity-management framework in:

September 2019

Recommendations included:

continue corridor system;
maintain call rate as target;
greater flexibility regarding liquidity surplus/deficit;
fewer operations for efficiency;
discontinue assured liquidity up to 1% of NDTL;
introduce longer-term repo operations;
improve liquidity-management disclosures.

7. Revised Liquidity Framework

The PDF’s table identifies:

Short-term/transient

14-day variable-rate repo/reverse repo — main operation
Variable-rate term repo/reverse repo — overnight to 13 days
SDF
MSF
FX swaps
Fixed-rate reverse repo

Durable

LTRO
LTRRO
FX swap auctions
OMO.

8. SDF Timing

The PDF states:

Daily: 5:30 p.m. to 11:59 p.m.

SDF was operationalised in:

April 2022

From 30 December 2023, RBI allowed reversal of SDF and MSF liquidity facilities even on weekends/holidays.

9. Repo/MSF Collateral

Eligible collateral includes specified:

SLR-eligible;
unencumbered;
Government of India securities;
Treasury Bills;
State Government Securities.

Market value is used for collateral calculation.

10. Margin

If:

Borrowing = ₹100 crore

and margin:

required collateral:

₹105 crore

There is no margin requirement for collateral provided by RBI under reverse repo operations, according to the PDF.

11. e-Kuber

Bids/offers are submitted electronically through RBI’s:

e-Kuber

system.

MSF/SDF settlement is automatic and immediate after placement.

12. ASISO

Automated Sweep-in and Sweep-out

Banks can specify desired end-of-day balances.

Based on the preset amount, SDF/MSF bids can be generated automatically.

This is optional.

13. Variable-Rate Repo Auction

Bids are arranged:

highest quoted rate → lowest quoted rate

Cut-off is determined based on the notified auction amount.

Successful bidders:

bids at or above cut-off

If multiple bids exist at cut-off:

pro-rata allotment.

No bids are accepted at or below the prevailing repo rate.

14. LAF Corridor Mechanics

Surplus liquidity

More lenders than borrowers
→ market rate falls
→ approaches SDF floor.

Deficit liquidity

More borrowers than lenders
→ market rate rises
→ approaches MSF ceiling.

Thus:

SDF = floor

MSF = ceiling

Repo = policy anchor in middle.

15. Fine-Tuning Operations

If WACR approaches SDF:

→ liquidity surplus

→ RBI can conduct variable-rate reverse repo

→ absorb liquidity

→ push rates upward toward repo.

If WACR approaches MSF:

→ liquidity deficit

→ RBI can conduct variable-rate repo

→ inject liquidity

→ pull rates downward toward repo.

16. Liquidity Forecasting

Known factors

Examples:

LAF operation reversals;
OMO settlements;
FX-operation settlements;
Government bond redemptions;
coupon payments;
primary auctions.

Unknown factors

Examples:

bank reserve maintenance;
currency-in-circulation changes;
exact Government-account inflows/outflows.

Both must be incorporated into liquidity assessment.

17. Two Pillars of Liquidity Assessment

Pillar I

Near-term:

4–6 weeks

Focuses on autonomous liquidity drivers:

currency demand;
excess reserves;
Government balances;
FX intervention where information becomes available.

Pillar II

Longer-term assessment of:

broad money;
bank credit;
deposits;
base-money expansion.

Pillar II provides the broader information framework; Pillar I supports near-term discretionary operations.

18. Durable Liquidity

Traditional tools:

OMO;
MSS.

Expanded toolkit:

long-term USD/INR swaps;
LTRO;
TLTRO.

First buy/sell FX swap auction:

USD 5 billion

3-year tenor

26 March 2019

LTRO introduced:

February 2020

Tenor:

1–3 years.

19. OMO

OMO sale

→ reduces liquidity.

OMO purchase

→ increases liquidity.

OMO may occur through:

auction;
direct secondary-market transactions.

NDS-OM is the anonymous order-matching platform used for direct secondary-market G-sec transactions.

20. Operation Twist

Simultaneous:

buy long-term G-secs + sell short-term G-secs

Purpose:

Change relative long/short rates without initially changing system liquidity.

Thus:

OMO

can affect liquidity.

Operation Twist

is initially liquidity-neutral but changes the yield curve.

21. MSS

MSS is particularly useful where:

OMO sales are undesirable;
RBI does not have enough securities to absorb surplus liquidity.

Under MSS:

Government securities are issued.

But funds raised are:

sequestered

and cannot be spent by Government for ordinary expenditure.

This prevents the liquidity from returning to the banking system.

22. COVID Liquidity Operations

Important numbers:

SLF-MF — April 2020

₹50,000 crore

Repo tenor:

90 days

TLTRO 2.0

At least 50% directed towards specified smaller NBFC/MFI categories.

May 2021 healthcare liquidity window

₹50,000 crore

SFB SLTRO

₹10,000 crore

Contact-intensive sector liquidity window

₹15,000 crore

Additional AIFI support

₹66,000 crore

23. Foreign Exchange Operations

RBI does not target a fixed exchange rate according to this chapter.

The rupee exchange rate is determined by market demand and supply.

RBI’s objective is to ensure that economic fundamentals are reflected in the external value of the rupee, while:

reducing excessive volatility;
maintaining orderly market conditions;
helping maintain adequate forex reserves.

24. RBI FX Intervention

Capital inflow + excessive appreciation pressure

RBI may:

buy dollars

→ increases demand for dollars
→ reduces excessive appreciation pressure
→ increases INR liquidity.

Capital outflow + excessive depreciation pressure

RBI may:

sell dollars

→ increases dollar supply
→ reduces depreciation pressure
→ absorbs INR liquidity.

25. Sterilisation

FX intervention has a liquidity effect.

RBI buys dollars

→ pays INR
→ INR liquidity increases.

RBI sells dollars

→ receives INR
→ INR liquidity decreases.

RBI may undertake offsetting liquidity operations.

This process is:

Sterilisation

26. FX Intervention Instruments

RBI can intervene through:

spot;
forwards;
swaps;
futures.

Spot market:

T+2 settlement

Forward transactions affect:

spot rate;
forward premium.

Swaps affect:

forward premium.

27. OTC vs ETCD

OTC

Delivery-based.

Both rupee and dollar legs are settled.

Exchange Traded Currency Derivatives

Cash-settled in rupees.

Only net profit/loss is settled.

An important consequence:

ETCD transactions do not alter forex reserves in the same way as delivery-based transactions because dollars need not be delivered/taken.

28. Exchange-Rate Risk

The PDF’s example demonstrates how currency movements can destroy expected profit even when the underlying transaction is commercially profitable.

Exporter example

Expected:

$10 × ₹85 = ₹850

Cost:

₹800

Expected profit:

₹50

If exchange rate falls to:

₹80/$

realised rupee revenue:

₹800

Expected profit disappears.

Hedging instruments

forwards;
futures;
options.

29. Forex Reserve Adequacy

Reserve adequacy considers:

import cover;
size of capital inflows;
composition;
risk profile;
external shocks.

The PDF makes the conceptual point that India’s reserves have historically been accumulated significantly through capital inflows rather than persistent current-account surpluses.

30. Special FX Operations

November 2008

Temporary rupee-dollar swap facility following global dollar liquidity stress.

Maximum period:

3 months

6 September 2013

FCNR(B) dollar swap window announced.

Open until:

30 November 2013

Tenor:

3–5 years

Fixed swap rate:

3.5% p.a.

26 March 2019

First RBI buy/sell FX swap auction:

USD 5 billion

3 years

CHAPTER 4 — RAPID REVISION

Liquidity

Positive system-liquidity formula → deficit

Negative → surplus

Corridor

SDF → FLOOR

Repo → MIDDLE

MSF → CEILING

Durable liquidity

OMO + MSS + LTRO + FX swaps + CRR

Key dates

MSS — 2004
Liquidity framework review — September 2019
First FX swap auction — 26 March 2019
LTRO — February 2020
TLTRO — March 2020
G-SAP — April–September 2021
SDF operationalised — April 2022
SDF/MSF weekend/holiday reversal — 30 December 2023

CHAPTER 5 — FINANCIAL STABILITY

Priority: VERY HIGH

1. What is a Financial System?

The PDF divides the financial system into:

financial markets;
financial intermediaries;
financial infrastructure.

Examples of intermediaries include:

banks;
insurance companies;
NBFCs.

Financial infrastructure includes:

payment;
clearing;
settlement arrangements.

2. Direct vs Indirect Finance

Direct finance

Funds raised through securities such as:

shares;
bonds.

Indirect finance

Funds channelled through intermediaries such as:

banks;
NBFCs.

Indian context

The PDF describes banks as the main source of financing for households/corporates and an important saving vehicle.

3. Systemic Risk

Systemic risk arises when impairment of financial-system services becomes severe enough to materially affect:

economic growth;
welfare.

A build-up of systemic risk creates financial instability.

4. Lessons of Global Financial Crisis

The 2007–09 crisis highlighted:

leverage;
complex financial instruments;
opacity;
interconnectedness;
shadow banking;
links between shadow banking and regulated banking.

5. Two Dimensions of Systemic Risk

Time dimension

Build-up of systemic risk over the financial cycle.

Associated concept:

Procyclicality

Cross-sectional dimension

Risk transmission through interconnectedness among institutions/sectors.

Memory

Time = build-up

Cross-sectional = contagion

6. Three-Pillar Financial Stability Framework

Financial stability requires:

1. Institutional/governance structure

Who is responsible?

2. Measurement and monitoring

How much systemic risk exists?

3. Macroprudential policy

What should be done to reduce it?

7. Measuring Systemic Risk

Tools include:

micro stress tests;
macro stress tests;
interconnectedness analysis;
banking stability indicators;
systemic liquidity indicators;
credit-GDP trends.

Such analysis is often published through:

Financial Stability Reports / Reviews.

8. RBI’s Pre-GFC Macroprudential Approach

Even before the Global Financial Crisis, RBI had used measures that were effectively macroprudential.

Examples:

time-varying LTV ratios;
equity-market exposure restrictions;
monitoring unhedged FX exposures;
real-estate exposure limits;
bank open-position limits;
higher margins;
currency-derivative position limits.

9. FSDC

Financial Stability and Development Council

Established:

December 2010

Purpose:

strengthen/institutionalise financial-stability mechanisms;
improve inter-regulatory coordination;
promote financial-sector development.

Chair:

Finance Minister

Members include heads of major financial regulators and senior Government officials.

FSDC also addresses:

macroprudential supervision;
large financial conglomerates;
financial-sector development;
financial literacy;
financial inclusion.

10. FSDC Reconstitution

May 2018

Additional members included, among others:

Minister of State responsible for DEA;
Secretary, Department of Electronics and Information Technology;
Revenue Secretary;
Chairperson, IBBI.

August 2020

Chairperson of:

International Financial Services Centres Authority (IFSCA)

was included.

11. FSDC Sub-Committee

The FSDC Sub-Committee replaced the earlier:

High-Level Coordination Committee on Financial Markets.

Head:

RBI Governor

Members include representation from FSDC members, excluding:

Finance Minister;
Minister of State (Finance).

The four Deputy Governors are also members.

An RBI Executive Director responsible for financial stability is Member Secretary.

12. Five Technical Groups

The Sub-Committee has five technical groups:

1. IRTG

Inter-Regulatory Technical Group

2. TGFIFL

Technical Group on Financial Inclusion and Financial Literacy

3. IRF

Inter-Regulatory Forum

4. EWG

Early Warning Group

5. IRTG-FinTech

Inter-Regulatory Technical Group-FinTech

13. Financial Stability Unit → Financial Stability Department

RBI established the operationally independent:

Financial Stability Unit

in:

August 2009

It became:

Financial Stability Department

in:

2023

The FSD prepares:

Half-yearly Financial Stability Reports

It also conducts:

macroprudential surveillance;
systemic stress tests;
financial-stability modelling.

14. Microprudential vs Macroprudential

Microprudential

Focus:

individual institution

Objective:

Safety/soundness of the institution.

Macroprudential

Focus:

financial system as a whole

Objective:

Prevent systemic-risk build-up and limit contagion.

15. Objectives of Macroprudential Policy

Objective 1 — Mitigate procyclicality

Prevent excessive build-up of:

debt;
leverage.

This addresses the:

Time dimension

Objective 2 — Improve resilience

Enable the system to absorb shocks.

This addresses:

Cross-sectional dimension

including contagion and systemically important institutions.

16. Macroprudential Tools

To control procyclicality

leverage ratio;
LTV limits;
dynamic provisioning;
higher risk weights.

To strengthen resilience

capital buffers;
liquidity buffers;
higher capital for systemically important institutions;
stress tests.

Countercyclical Capital Buffer

Can be activated when a predetermined threshold such as the:

credit-to-GDP gap

is breached.

17. RBI During COVID-19

RBI reduced policy rate by:

115 bps

during:

March–May 2020

The PDF says RBI did not reduce the policy repo rate below the:

4% inflation target

Financial conditions were eased through liquidity measures amounting to:

₹17.2 lakh crore

equivalent to:

8.7% of GDP of 2021–22

18. COVID and Financial Stability

The PDF emphasises that RBI tried to balance:

price stability + financial stability + growth

Liquidity measures were designed with:

collateral;
banks as counterparties;
preferably sunset clauses.

During 2021, surplus liquidity was shifted toward longer horizons, helping move short-term rates away from ultra-low levels.

19. HTM Flexibility and 2023 Banking Stress

During COVID and the subsequent inflationary tightening cycle, banks received greater flexibility concerning securities held in the:

Held-to-Maturity (HTM)

category.

The PDF links this flexibility to avoiding marked-to-market losses that could contribute to banking stress, including the banking crisis of March 2023.

20. Emerging Global Financial-Stability Risks

The PDF identifies:

Rising interest rates

Potential consequences:

higher financing costs;
higher loan-loss provisions;
weaker profitability;
weaker loan demand;
tighter credit standards.

Global disinflation

Risks include:

asset repricing;
financial-market volatility;
debt vulnerabilities.

AI

Risks:

model risk;
data quality;
governance;
overreliance on models.

Cyber risk

Potential consequences:

loss of confidence;
disruption of critical services;
systemic effects through technological/financial interconnectedness.

21. Climate Risk

The PDF identifies climate risk as an important emerging financial-stability issue.

RBI is focusing on:

integrating climate-related financial risks into regulation/supervision;
assessing effects on financial stability;
encouraging sustainable finance.

CHAPTER 5 — RAPID REVISION

Critical dates

FSU — August 2009
FSDC — December 2010
FSDC reconstitution — May 2018
IFSCA added to FSDC — August 2020
FSD replaces FSU — 2023

Critical numbers

COVID policy-rate reduction — 115 bps
Period — March–May 2020
Liquidity support — ₹17.2 lakh crore
Equivalent — 8.7% of FY2021-22 GDP
Inflation target referenced — 4%

Five FSDC Sub-Committee Technical Groups

IRTG + TGFIFL + IRF + EWG + IRTG-FinTech

PART B — MASTER CONCEPT CONNECTIONS

This is the part you should understand rather than blindly memorise.

The RBI policy architecture

MPC

↓

sets

Policy Repo Rate

↓

RBI manages

System Liquidity

↓

anchors

WACR

↓

transmits through

Interest / Credit / Exchange Rate / Asset Price / Expectations Channels

↓

affects

Aggregate Demand

↓

affects

Inflation + Growth

At the same time:

RBI liquidity + regulation + supervision + macroprudential tools

↓

protect

Financial Stability

And:

FX intervention

↓

affects both

Exchange Rate + Rupee Liquidity

which is why:

FX Intervention ↔ Sterilisation ↔ Liquidity Management

is such an important conceptual relationship.

PART C — CHAPTER 1–5 MASTER COMPARISON TABLE

Topic	Core objective	Key instrument/body
Monetary stability	Stable purchasing power	Monetary policy
Price stability	Control inflation	MPC/repo rate
Liquidity management	Align WACR with policy rate	LAF
Transient liquidity	Short-term liquidity mismatch	Repo/SDF/MSF/reverse repo
Durable liquidity	Persistent liquidity imbalance	OMO/MSS/LTRO/FX swaps
Financial stability	Prevent systemic crisis	Macroprudential framework
Banking stability	Individual-bank soundness	Prudential regulation/supervision
FX stability	Reduce excessive volatility	FX intervention
FX intervention’s liquidity effect	Manage rupee liquidity impact	Sterilisation
Payment stability	Safe transfer of funds	Payment-system regulation
Consumer protection	Resolve service deficiencies	Integrated Ombudsman
Development	Financial/economic development	Developmental functions

PART D — HIGH-YIELD “DO NOT CONFUSE” BOX

1. Repo vs Reverse Repo

Repo → RBI injects liquidity

Reverse repo → RBI absorbs liquidity

2. SDF vs MSF

SDF → bank parks money with RBI

MSF → bank borrows money from RBI

SDF = floor

MSF = ceiling

3. CRR vs SLR

CRR → balances maintained with RBI

SLR → prescribed liquid assets maintained by bank

4. OMO vs Operation Twist

OMO purchase/sale → liquidity impact

Operation Twist → simultaneous long-term purchase + short-term sale; liquidity-neutral at inception

5. Sterilisation vs FX Intervention

FX intervention changes FX demand/supply and automatically affects rupee liquidity.

Sterilisation is the offsetting liquidity operation undertaken to neutralise that liquidity effect.

6. Microprudential vs Macroprudential

Micro → individual institution

Macro → entire system

7. Monetary Policy vs Liquidity Management

MPC determines the policy rate and stance.

RBI’s operational machinery then manages liquidity so that:

WACR stays aligned with the policy rate.

8. FSDC vs FSDC Sub-Committee

FSDC → apex coordination forum, chaired by Finance Minister

FSDC Sub-Committee → operational/regular financial-stability coordination, headed by RBI Governor

PART E — MASTER CHRONOLOGY SO FAR

1668 — Riksbank

↓

1694 — Bank of England

↓

1873 — Bagehot, Lombard Street

↓

1914 — Federal Reserve

↓

1926 — Hilton-Young Commission

↓

1934 — RBI Act

↓

1 April 1935 — RBI operations

↓

1949 — RBI nationalised

↓

1971–85 — monetary-policy framework dominated by fiscal monetisation

↓

1985 — Chakravarty Committee

↓

mid-1980s–1997-98 — Monetary Targeting

↓

1991 — BoP/FX crisis

↓

April 1998 — Multiple Indicator Approach

↓

2004 — MSS introduced

↓

2007–08 — Global Financial Crisis

↓

August 2009 — FSU

↓

December 2010 — FSDC

↓

12 Sept 2013 — Urjit Patel Committee constituted

↓

January 2014 — Urjit Patel Committee report

↓

February 2015 — RBI-Government monetary-policy agreement

↓

May 2016 — RBI Act amended

↓

June 2016 — amendment effective

↓

August 2016 — 4% CPI target / 2–6% tolerance band notified

↓

29 Sept 2016 — MPC constituted

↓

9 Jan 2007 — Chapter III-D effective (chronologically belongs earlier than some entries above; do not reorder by chapter)

↓

2019 — liquidity framework review / external benchmark developments

↓

26 March 2019 — first USD 5 billion, 3-year FX swap auction

↓

February 2020 — LTRO

↓

March 2020 — TLTRO

↓

March–May 2020 — 115 bps policy-rate reduction

↓

April 2020 — TLTRO 2.0 / SLF-MF

↓

October 2020 — On-Tap TLTRO

↓

2021 — G-SAP and additional liquidity measures

↓

April 2022 — SDF operationalised

↓

30 Dec 2023 — SDF/MSF reversals permitted on weekends/holidays

↓

2023 — FSU became FSD

What Is the Reserve Bank of India?

Why Are RBI Functions So Important?

Major RBI Functions at a Glance

1. RBI as the Monetary Authority

2. Monetary Policy Committee

3. Inflation Targeting

Monetary targeting

Multiple Indicator Approach

Flexible Inflation Targeting

4. RBI’s Liquidity Management Function

Weighted Average Call Rate — WACR

Repo, SDF and MSF

SDF

Repo

MSF

5. Cash Reserve Ratio

6. Statutory Liquidity Ratio

7. Open Market Operations

RBI buys securities

RBI sells securities

8. Market Stabilisation Scheme

9. Unconventional Monetary Policy

LTRO

TLTRO

10. RBI as Currency Authority

11. RBI as Regulator of Banks

12. RBI and NBFCs

13. RBI and Cooperative Banks

14. RBI and Financial Stability

15. Macroprudential Regulation

16. Financial Stability and FSDC

17. RBI as Foreign Exchange Manager

18. Sterilised FX Intervention

19. RBI and Payment Systems

20. RBI and Consumer Protection

21. RBI’s Developmental Role

22. RBI’s Role Is Much Wider Than the Preamble

Key Takeaways — Article 1

Suggested Internal Links

FINAL HIGH-YIELD SHEET — CHAPTERS 1–5

30 facts worth memorising cold

RBI’s Functions and Working – Master Transformation

PART A — EXAM-ORIENTED KNOWLEDGE BASE

CHAPTER 1 — EVOLUTION OF CENTRAL BANKING GLOBALLY AND IN INDIA

Priority: VERY HIGH

1. What is a Central Bank?

Exam distinction

2. Historical Evolution of Central Banking

Memory chain

3. Why Did Central Banks Become Lenders of Last Resort?

4. Bagehot’s Dictum

VERY HIGH PRIORITY

5. Macroeconomic Stability vs Financial Stability

Macroeconomic stability

Financial stability

Comparison

6. Monetary Policy as a Stabilisation Tool

7. Lender of Last Resort and Regulation/Supervision

Ex-post support

Ex-ante prevention

8. Basel Committee

Memory trigger

9. Unconventional Monetary Policy

10. COVID-19 and Central Banking

11. FinTech, BigTech and Cyber Risk

12. Climate Risk and Central Banking

13. Evolution of RBI

1926 — Hilton-Young Commission

1934 — RBI Act

1935 — Commencement

1949 — Nationalisation

Critical chronology

14. RBI’s Broad Mandates

1. Monetary stability

2. Inclusive growth and development

3. Financial stability

15. RBI and Foreign Exchange

16. 1991 Balance of Payments Crisis

17. RBI and Payment Systems

18. COVID-era RBI Balance Sheet Figures