Banking Awareness
✨ Login to trackReserve Bank of India (RBI)
✨ Login to trackThe Reserve Bank of India (RBI) is India's central bank. The RBI Act, 1934 created it, and it began work on 1 April 1935. It was nationalised on 1 January 1949. A six-member Monetary Policy Committee now sets the repo rate to keep inflation near 4%.
What the RBI is
The RBI is the central bank of India. It is the banker to the government and to all banks.
The Hilton Young Commission (1926) recommended a central bank. The RBI Act, 1934 created it. It began work on 1 April 1935.
Its first head office was in Kolkata. It moved to Mumbai in 1937.
Private shareholders owned the RBI at first. The government nationalised it on 1 January 1949. So the RBI is now fully owned by the Government of India.
The first Governor was Sir Osborne Smith. C.D. Deshmukh was the first Indian Governor.
Note: Sanjay Malhotra is the 26th Governor, in charge since December 2024. Office-holders change, so re-check before your exam.
What the RBI does
| Function | Meaning |
|---|---|
| Monetary authority | Sets interest rates and the money supply |
| Issue of currency | Issues notes, except the ₹1 note and coins |
| Banker to the government | Keeps government accounts, manages its debt |
| Banker's bank | Holds banks' cash reserves, settles their payments |
| Lender of last resort | Lends to banks when no one else will |
| Custodian of forex reserves | Manages the country's foreign exchange reserves |
| Regulator | Licenses and supervises banks |
Rule: The ₹1 note and all coins come from the Finance Ministry. The RBI issues every other note.
The policy rate corridor
The repo rate is the rate at which the RBI lends short-term money to banks against government securities. 'Repo' means repurchase: the bank sells securities and agrees to buy them back.
Repo is the middle of the corridor.
| Rate | Position | Level (Aug 2026) |
|---|---|---|
| MSF = Bank Rate | Repo + 0.25 (ceiling) | 5.50% |
| Repo | Policy rate | 5.25% |
| SDF | Repo - 0.25 (floor) | 5.00% |
The SDF (Standing Deposit Facility) takes banks' surplus cash overnight, with no collateral. The MSF (Marginal Standing Facility) lends banks overnight cash, even letting them dip into their SLR holdings.
The old reverse repo (3.35%) is dormant. Since April 2022 the SDF is the operative floor.
Watch: These levels change. At the August 2026 review, repo was 5.25% and the stance neutral. Verify current figures before your exam.
CRR and SLR
- CRR (Cash Reserve Ratio): the share of deposits a bank keeps as cash with the RBI. It earns no interest. It was cut from 4% to 3% in four steps during September-November 2025.
- SLR (Statutory Liquidity Ratio): the share a bank keeps with itself in liquid assets, such as government securities and gold. It stands at 18%.
Tip: CRR goes to the RBI. SLR stays in the bank's own chest.
Cutting either ratio frees money for lending. Raising them squeezes credit.
The Monetary Policy Committee
The RBI (Amendment) Act, 2016 created the MPC, after the Urjit Patel Committee (2014) recommended inflation targeting.
- Six members: the Governor (chair), a Deputy Governor, one RBI officer, and three outside experts named by the government.
- Decisions are by majority. The Governor holds the casting vote.
- At least four meetings a year; in practice one every two months.
- Target: CPI inflation of 4%, with a band of 2% on each side.
- If inflation stays outside the band for three straight quarters, the RBI must report to the government.
Other monetary tools
The RBI also uses OMOs (buying or selling government securities) and forex swaps. A purchase adds liquidity; a sale drains it.
Day-to-day liquidity runs through the LAF (Liquidity Adjustment Facility), using variable-rate repo and reverse repo auctions.
Example: The RBI buys ₹50,000 crore of bonds in an OMO. Cash flows to banks, so liquidity rises.
Question types you will see
Each type: how to recognise it, the method step by step, and one question to try.
RBI: dates, Acts and people
The question asks under which Act the RBI was set up, when it was nationalised, who the first Governor was, or where the head office is.
Fix the ladder: 1926 commission, 1934 Act, 1 April 1935 start, 1949 nationalised.
The HQ moved from Kolkata to Mumbai in 1937.
People: Osborne Smith first Governor, C.D. Deshmukh first Indian Governor.
These few anchors repeat in almost every paper.
The Reserve Bank of India was nationalised on which date?
Show solutionHide solution
Private shareholders owned it at first.
Ownership passed to the Government of India in 1949.
1 January 1949
Currency issue and the ₹1 note
The question asks who issues the one-rupee note, which notes the RBI issues, or who issues coins.
The RBI issues all notes except the ₹1 note.
The Finance Ministry issues the ₹1 note and all coins.
The ₹1 note is signed by the Finance Secretary.
The exception is the whole question.
Coins in India are issued by whom?
Show solutionHide solution
Notes and coins have different issuers.
Coins belong to the government side.
The Government of India (Finance Ministry)
Corridor: SDF, MSF and Bank Rate positions
The question asks how far the MSF or SDF sits from the repo rate, what the Bank Rate equals, or which rate is the corridor floor.
Place repo in the middle.
SDF = repo - 0.25 is the floor.
MSF = Bank Rate = repo + 0.25 is the ceiling.
The reverse repo (3.35%) is dormant; the SDF is the operative floor.
Positions never change, only levels do.
The Standing Deposit Facility sits how far from the repo rate?
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SDF is the corridor floor.
It is 25 basis points below repo.
25 basis points (0.25%) below repo
MPC composition and rules
The question asks how many members sit on the MPC, who holds the casting vote, or what the inflation target is.
Six members: three from the RBI, three from outside.
The Governor chairs and holds the casting vote.
Target: CPI 4% with a 2% band.
Three straight quarters outside the band forces a report to the government.
It is a short, fixed list from the 2016 amendment.
The Monetary Policy Committee was created by which amendment?
Show solutionHide solution
Inflation targeting was adopted in 2015-16.
The RBI Act was amended in 2016.
The RBI (Amendment) Act, 2016
CRR versus SLR
The question asks where CRR is kept, what SLR consists of, or which reserve earns no interest.
CRR is cash with the RBI; it earns nothing.
SLR is liquid assets kept by the bank itself.
A cut in either ratio adds lendable funds.
Neither is the policy rate; the repo rate is.
The two ratios are the classic swap trap.
Which reserve must a bank keep with itself in government securities and gold?
Show solutionHide solution
Ask where the asset sits.
With the bank itself means SLR.
SLR (Statutory Liquidity Ratio)
Which tool tightens or eases liquidity
The question asks which action will reduce or add liquidity, or gives a statement set on repo, CRR and OMO directions.
Making money dearer or locking cash away tightens.
A repo or CRR rise tightens; a cut eases.
An OMO sale removes cash; an OMO purchase adds it.
Only the direction of cash movement matters.
Which RBI action adds liquidity to the banking system?
Show solutionHide solution
Follow the cash.
Buying securities pays cash to banks.
Buying government securities in an OMO
Formula sheet
SDF is the floor of the LAF corridor; banks park surplus cash there without any collateral
MSF is the ceiling of the corridor; Bank Rate is kept equal to MSF
Shortcuts that save time
Repo sits in the middle. SDF is repo minus 0.25 (floor). MSF and Bank Rate are repo plus 0.25 (ceiling).
If the repo rate is 5.25%, what is the SDF rate?
Show solutionHide solution
SDF is the floor.
It sits 0.25 below repo.
5.25 - 0.25 = 5.00.
5.00%
1926 commission. 1934 Act. 1 April 1935 start. 1937 shift to Mumbai. 1 January 1949 nationalised.
When did the RBI begin operations?
Show solutionHide solution
The Act was passed in 1934.
The bank opened on 1 April 1935.
1 April 1935
Mistakes to avoid
Where most students lose marks on this subtopic.
Wrong: Saying the RBI prints the one-rupee note. Right: The Finance Ministry issues the ₹1 note and all coins. The RBI issues every other note.
Wrong: Calling CRR and SLR 'policy rates'. Right: The policy rate is the repo rate. CRR and SLR are reserve ratios.
Wrong: Mixing up 1934 and 1935. Right: 1934 is the Act. 1 April 1935 is when the bank started work.
Wrong: Saying the RBI was nationalised in 1935. Right: It stayed privately held until 1 January 1949.
Wrong: Placing the SDF above the repo rate. Right: SDF is 0.25 below repo (floor). MSF is 0.25 above repo (ceiling).
Wrong: Saying the MPC meets once a year. Right: The Act asks for at least four meetings; in practice there are six.
Quick revision
Read this the night before the exam.
Hilton Young Commission 1926. RBI Act 1934. Started 1 April 1935. Nationalised 1 January 1949.
First Governor: Osborne Smith. First Indian Governor: C.D. Deshmukh. HQ Mumbai since 1937.
The RBI issues all notes except ₹1; the Finance Ministry issues the ₹1 note and coins.
SDF = repo - 0.25 (floor). MSF = Bank Rate = repo + 0.25 (ceiling).
CRR: cash with the RBI, no interest. SLR: liquid assets with the bank. Repo is the policy rate.
MPC: 6 members, Governor's casting vote, CPI 4% plus or minus 2%, at least 4 meetings a year.
OMO purchase adds liquidity; OMO sale drains it.
Practice: 12 questions
Sets of 10, mixed across the question types above. Every answer has a step-by-step explanation.
Topic test · 12 questions
Suggested time 6 min · wrong answers go to your mistake notebook automatically.