BPSC 70th CCE Re-exam Prelims General Studies · Question 125 of 142

Correct — D, All of the above. Each of the three items named is a textbook function of a central bank, and in India each is discharged by the Reserve Bank. Banking facilities to government: the RBI is banker to the Union and to the state governments, keeps their accounts, receives and pays money on their behalf, manages their market borrowing and public debt, and acts as the government's agent in its dealings with the International Monetary Fund. Managing the repo rate: as the monetary authority the RBI formulates and implements monetary policy, and the repo rate is its principal policy instrument, set by the Monetary Policy Committee. Lending to commercial banks: the repo rate is precisely the rate at which banks borrow short-term funds from the RBI, and beyond that the central bank stands as lender of last resort, the institution a solvent but illiquid bank can turn to when no one else will lend. Notice how tightly the second and third items are connected — the repo rate is the price of exactly the lending described in the third option, so a candidate who accepts either must accept both. With all three true, the only complete answer is (d). This is the positive form of the same test that governs 'more than one of the above': an 'all of the above' option is correct when you can defend every listed item, and here you can.

• (a)Bank facilities to Government — True, and therefore wrong as a standalone answer on a question that offers 'All of the above'. Acting as banker to government is one of the oldest central-banking functions — keeping the government's accounts and managing its debt — but it is one function among several, and choosing it alone means overlooking two other statements that are equally true.
• (b)Manage the Repo-rate — Also true, and also incomplete. The repo rate is the policy rate at the centre of the monetary framework, decided by the Monetary Policy Committee. Picking it alone usually reflects a candidate whose reading is confined to news about rate decisions, which is the most visible but not the only thing a central bank does.
• (c)Lending to Commercial Bank — True again — the central bank is banker to banks and lender of last resort, and repo lending is exactly this function in operation. Since this statement and the previous one are two descriptions of the same operation seen from different sides, a candidate who thinks either is correct has already established that at least two options are true, which by itself rules out any single-item answer.

A central bank is defined by the functions it performs rather than by its ownership. The standard list is: issuing currency, acting as banker to the government, acting as banker to banks and lender of last resort, conducting monetary policy, regulating and supervising the financial system, managing foreign exchange and the country's reserves, and performing developmental roles. The Reserve Bank of India does all of these. It was established on 1 April 1935 under the Reserve Bank of India Act, 1934, following the recommendation of the Hilton Young Commission, and was nationalised on 1 January 1949. Its policy instruments divide into quantitative and qualitative. The quantitative tools are the repo and reverse repo rates and the standing facilities, the Bank Rate, the Cash Reserve Ratio and the Statutory Liquidity Ratio, and open market operations. The qualitative tools are selective credit controls — margin requirements, credit ceilings, moral suasion and direct action. Note that all of these are monetary instruments, operated by the central bank; taxation and public spending are fiscal instruments, and they belong to the government, not to the RBI.

The examiner's design here is worth naming, because it recurs. Two of the three items — managing the repo rate and lending to commercial banks — are the same transaction described twice, since the repo rate is the rate at which the RBI lends to banks. Once you see that, you have two true statements from one piece of knowledge, and no single-item option can survive. The general rule for an 'All of the above' option is the mirror image of the rule for 'None of the above': choose 'all' when you can defend every listed item, and 'none' when you can refute every listed item; in both cases the work is item by item, never by impression. A second habit worth carrying into every economy question is to keep the monetary and fiscal boxes separate — repo, CRR, SLR, Bank Rate and open market operations on the monetary side, taxes, expenditure, deficits and public borrowing on the fiscal side — because the same paper will often ask one question from each and rely on candidates blurring them.

• The Reserve Bank of India was established on 1 April 1935 under the Reserve Bank of India Act, 1934, on the recommendation of the Hilton Young Commission, and was nationalised on 1 January 1949
• As banker to government the RBI keeps the accounts of the Union and the states, manages their borrowing and public debt, and acts as the government's agent in relation to the International Monetary Fund
• The repo rate is the rate at which banks borrow short-term funds from the RBI; it is the principal instrument of monetary policy and is decided by the Monetary Policy Committee
• As banker to banks the RBI maintains the accounts of scheduled banks and acts as lender of last resort
• Quantitative instruments include the repo and reverse repo rates, the Bank Rate, the Cash Reserve Ratio, the Statutory Liquidity Ratio and open market operations; qualitative instruments include margin requirements, credit ceilings, moral suasion and direct action
• The Bank Rate is defined in section 49 of the RBI Act as the standard rate at which the Bank is prepared to buy or rediscount eligible bills of exchange

• Choosing a single true statement on a question that offers 'All of the above'; the option is a real answer whenever every item stands up
• Confusing monetary instruments with fiscal ones — the RBI sets the repo rate, the government levies taxes
• Treating the repo rate and lending to banks as separate facts when they are one transaction described from two sides

BPSC asks the functions as a checklist with an 'All of the above' close, so the mark depends on verifying each item rather than on recognising one. UPSC asks the same institution through consequences and definitions — what the repo rate is, what the RBI would not do under an expansionary policy, what its accounting year is — so a candidate needs the mechanism as well as the list.

• practice — not a real PYQ

  Which of the following is NOT an instrument of monetary policy in India ?

  • (a)Cash Reserve Ratio
  • (b)Open market operations
  • (c)Income tax rates
  • (d)Repo rate

  Answer(c) Income tax rates — a fiscal instrument set by the government; CRR, open market operations and the repo rate are all monetary instruments operated by the Reserve Bank.

• practice — not a real PYQ

  The Reserve Bank of India acts as 'lender of last resort' means that it

  • (a)lends to the Union Government when tax revenues fall short
  • (b)provides credit to banks that are solvent but temporarily short of liquidity
  • (c)lends directly to individuals when commercial banks refuse them
  • (d)guarantees all deposits held with commercial banks

  Answer(b) provides credit to banks that are solvent but temporarily short of liquidity — the function that makes the central bank the banker to banks.