UPSC Prelims 2012 Q75: Indian Economy – Banking & Financial Sector
The Reserve Bank of India (RBI) acts as a bankers' bank. This would imply which of the
following?
1. Other banks retain their deposits with the RBI.
2. The RBI lends funds to the commercial banks in times of need.
3. The RBI advises the commercial banks on monetary matters.
Select the correct answer using the codes given below:
- (a) 2 and 3 only
- (b) 1 and 2 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Explanation
The RBI as the bankers' bank
The RBI does for banks what banks do for the public.
| Statement | Verdict | Reason |
|---|---|---|
| 1. Other banks retain their deposits with the RBI | Correct | Banks keep the Cash Reserve Ratio and other balances with the RBI |
| 2. The RBI lends funds to the commercial banks in times of need | Correct | It is the lender of last resort; it lends through the repo window and the Marginal Standing Facility |
| 3. The RBI advises the commercial banks on monetary matters | Correct | It guides and supervises banks |
Functions of the RBI:
| Function | Detail |
|---|---|
| Issue of currency | All notes except the one-rupee note |
| Banker to the Government | Manages public debt and accounts |
| Bankers' bank | Holds reserves, lends, settles inter-bank payments |
| Controller of credit | Repo rate, Cash Reserve Ratio, open market operations |
| Custodian of foreign exchange | Manages reserves under FEMA |
Answer: (d) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. Statement 1 is also true; banks retain deposits with the RBI.
- (b) Incorrect. Statement 3 is also true; the RBI advises banks on monetary matters.
- (c) Incorrect. Statement 2 is also true; the RBI lends funds to banks in need.
- (d) CORRECT. Holding deposits, lending and advising are all part of being the bankers' bank.
Key point
RBI as bankers' bank: holds bank reserves (Cash Reserve Ratio), lender of last resort, clearing house, adviser and supervisor of banks.
Remember
Bankers' bank: holds, lends, advises.
Common mistakes
- Limiting 'bankers' bank' to lending alone.
- Confusing banker to the Government with banker to the banks.
- Forgetting that the Cash Reserve Ratio is held as deposits with the RBI.
Exam tip
Think of what your bank does for you: keeps your money, lends to you, advises you. The RBI does the same for banks.
Sources
- Reserve Bank of India — Functions and Working of the RBI
- NCERT Class XII — Introductory Macroeconomics, Ch 3 (Money and Banking)