GS 3 Mains Practice Questions: Money and Banking | Indian Economy for UPSC CSE PDF Download

Q1. Define money. What are the essential functions of money in a modern economy? (150 words)

Answer: 

Introduction
Money is anything widely accepted as a medium of exchange, measure of value, and store of wealth. In a modern economy like India, money facilitates economic activities, driving growth and stability.

Body
Definition and Functions of Money:

• Medium of Exchange: Money simplifies trade by eliminating barter’s inefficiencies, e.g., using rupees for purchasing goods in Delhi markets.

• Unit of Account: It provides a standard to measure value, enabling price comparisons, like costing a smartphone in rupees.

• Store of Value: Money retains value over time, allowing savings for future use, as seen in bank deposits.

• Standard of Deferred Payment: It facilitates credit transactions, like loans for farmers in Punjab, repayable over time.

Sustainable Practices:

• Digital Transactions: Promoting UPI reduces cash dependency, enhancing efficiency.

• Financial Literacy: Educating rural communities about savings strengthens economic stability.

Conclusion
Money’s functions as a medium, measure, store, and deferred payment standard streamline economic transactions. As John Maynard Keynes noted, “Money is a link between the present and future,” vital for India’s growth.

Q2. Differentiate between Repo Rate and Reverse Repo Rate. How does the RBI use them to control inflation? (150 words)

Answer: 

Introduction
Repo Rate and Reverse Repo Rate are monetary policy tools used by the Reserve Bank of India (RBI) to regulate money supply and control inflation, ensuring economic stability.

Body
Differences and Inflation Control:

• Repo Rate: The rate at which RBI lends to commercial banks, e.g., 6.5% in 2024, influencing loan availability.

• Reverse Repo Rate: The rate at which RBI borrows from banks, e.g., 6.25%, encouraging banks to park funds.

RBI’s Use in Inflation Control:

• Controlling Money Supply: Raising Repo Rate reduces money supply by increasing borrowing costs, curbing inflation, as seen during 2022 price rises.

• Liquidity Management: Higher Reverse Repo Rate absorbs excess liquidity, stabilizing prices, e.g., during high food inflation.

• Economic Balance: Adjusting rates ensures balanced growth, preventing overheating in urban markets like Mumbai.

Sustainable Practices:

• Transparent Policy: Clear RBI communication aids market stability.

• Financial Inclusion: Low rates support affordable loans for small businesses.

Conclusion
Repo and Reverse Repo Rates help RBI manage inflation by controlling liquidity. As Raghuram Rajan emphasized, effective monetary policy fosters sustainable growth in India.

Q3. What is the significance of the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) in banking regulation? (150 words)

Answer: 

Introduction
The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are key tools used by the Reserve Bank of India to regulate banking operations, ensuring financial stability and public trust.

Body
Significance of CRR and SLR:

• Cash Reserve Ratio (CRR): The percentage of deposits banks must hold with RBI, e.g., 4.5% in 2024, controlling money supply.

• Statutory Liquidity Ratio (SLR): The portion of deposits banks must invest in government securities, e.g., 18%, ensuring liquidity and safety.

Role in Banking Regulation:

• Liquidity Management: CRR regulates funds available for lending, stabilizing markets during crises, like the 2008 financial meltdown.

• Financial Security: SLR ensures banks hold safe assets, protecting depositors, as seen in rural banks in Uttar Pradesh.

• Monetary Policy Support: Both tools help RBI control inflation and credit flow, balancing growth.

Sustainable Practices:

• Digital Banking: Promoting e-transactions reduces cash dependency, enhancing CRR efficiency.

• Public Awareness: Educating depositors ensures trust in banking systems.

Conclusion
CRR and SLR are vital for banking stability, managing liquidity, and supporting monetary policy. As Urjit Patel noted, robust regulation drives economic resilience in India.

Q4. Discuss the role of the Reserve Bank of India (RBI) in maintaining monetary stability. How has its role evolved in the post-liberalization era? (250 words)

Answer: 

Introduction

The Reserve Bank of India (RBI), established in 1935, is pivotal in ensuring monetary stability by regulating money supply and inflation. Post-liberalization in 1991, its role has evolved to meet the demands of a globalized economy, balancing growth and stability.

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Role in Monetary Stability:

• Monetary Policy: RBI uses tools like Repo Rate to control inflation, e.g., raising rates in 2022 to curb rising prices in urban markets.

• Currency Management: It issues and stabilizes the rupee, ensuring trust in transactions, as seen in rural banking in Bihar.

• Banking Regulation: RBI supervises banks, ensuring financial stability through measures like the Cash Reserve Ratio (CRR).

Evolution Post-Liberalization:

• Market-Oriented Approach: Post-1991, RBI shifted from direct controls to market-based tools like open market operations, fostering private sector growth.

• Inflation Targeting: Since 2016, RBI adopted a 4% inflation target, enhancing policy transparency, unlike earlier ad-hoc measures.

• Global Integration: RBI manages foreign exchange reserves, stabilizing the rupee during global crises, like the 2008 financial meltdown.

Sustainable Practices:

• Digital Innovation: Promoting UPI ensures efficient, inclusive financial systems.

• Financial Literacy: Campaigns in rural areas enhance public trust in monetary policies.

Conclusion

The RBI’s role in monetary stability involves regulating money supply, currency, and banks. Post-liberalization, it embraced market-oriented policies and inflation targeting, fostering sustainable growth. As Raghuram Rajan noted, “Strong institutions like RBI are key to economic resilience.”

Q5. Financial inclusion is a critical component of equitable growth. Examine the role of commercial banks and digital banking initiatives in deepening financial inclusion in India. (250 words)

Answer: 

Introduction

Financial inclusion ensures access to banking services for all, promoting equitable growth in India. Commercial banks and digital banking initiatives play a vital role in bridging financial gaps, particularly in underserved regions.

Role of Commercial Banks:

• Branch Expansion: Banks like SBI have opened branches in rural areas, e.g., in Jharkhand, providing savings and loan facilities to farmers.

• Microfinance: Banks offer small loans to self-help groups, empowering women in villages like those in Tamil Nadu to start businesses.

• Priority Sector Lending: Mandated lending to agriculture and MSMEs supports rural economies, boosting income in states like Uttar Pradesh.

Role of Digital Banking Initiatives:

• Unified Payments Interface (UPI): UPI enables instant transactions, increasing financial access in remote areas, e.g., small vendors in Assam using mobile apps.

• Jan Dhan Yojana: This scheme opened millions of bank accounts, providing zero-balance accounts and insurance to the poor in Bihar.

• Digital Literacy: Programs like PMGDISHA train rural users, enhancing digital banking adoption in areas like Rajasthan.

Sustainable Practices:

• Mobile Banking: Expanding mobile banking reduces branch dependency, saving resources.

• Financial Education: Awareness campaigns ensure inclusive and responsible banking practices.

Conclusion

Commercial banks and digital initiatives like UPI and Jan Dhan Yojana drive financial inclusion, fostering equitable growth. As Amartya Sen emphasized, “Economic opportunity is freedom,” and inclusive banking empowers India’s marginalized for sustainable development.

Q6. Critically analyze the impact of Non-Performing Assets (NPAs) on the Indian banking sector. What policy measures have been taken to address this issue? (250 words)

Answer: 

Introduction

Non-Performing Assets (NPAs), loans defaulted for over 90 days, pose a significant challenge to India’s banking sector, affecting financial stability and growth. Policy measures aim to mitigate their impact, ensuring a robust banking system.

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Impact of NPAs:

• Financial Strain: High NPAs, e.g., in public sector banks like PNB in 2018, reduce profitability, limiting lending capacity.

• Credit Crunch: NPAs restrict banks’ ability to provide loans, impacting MSMEs in states like Gujarat, hindering economic growth.

• Erosion of Trust: Rising NPAs undermine public confidence in banks, affecting deposits in rural branches in Bihar.

Policy Measures to Address NPAs:

• Insolvency and Bankruptcy Code (IBC): Introduced in 2016, IBC facilitates debt resolution, recovering funds from defaulters like Essar Steel.

• Recapitalization: Government infused capital into banks, e.g., ₹2.11 lakh crore in 2017, strengthening their balance sheets.

• Asset Quality Review (AQR): RBI’s 2015 AQR identified hidden NPAs, enforcing transparency in banks like SBI.

• Prompt Corrective Action (PCA): RBI’s PCA framework monitors weak banks, ensuring recovery plans for institutions like IDBI.

Sustainable Practices:

• Risk Assessment: Improved loan appraisal reduces future NPAs.

• Digital Monitoring: Technology tracks loan repayments, enhancing accountability.

Conclusion

NPAs strain India’s banking sector, limiting credit and trust. Policies like IBC and recapitalization address these issues, promoting stability. As Urjit Patel noted, “A healthy banking system is vital for growth,” emphasizing sustainable reforms.