Reserve Bank of India's Role in Green Finance
Indian Economy
- PYQs8
- Articles1
Background
The RBI's actions are critical for shaping the financial sector's response to climate change, ensuring financial stability, and channeling capital towards sustainable development, directly impacting economic policy and banking.
The Reserve Bank of India (RBI), as the central bank and financial regulator, is increasingly integrating climate-related risks into its supervisory framework and actively promoting green finance to facilitate India's transition to a sustainable economy.
Facts & tables
- Climate Finance Directions (2025)
- Mandates banks to integrate climate risks into lending and risk management.
- Priority Sector Lending (PSL)
- Eligible green activities can qualify for PSL, directing credit to green sectors.
- Sovereign Green Bonds
- Investments in SGBs are recognized under RBI's framework, with potential for flexible collateral.
- Future Regulatory Steps
- Proposed differentiated capital requirements for brown vs. green lending, mandatory climate stress testing.
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Conceptual area | Environment & Ecology |
| Body | Role |
|---|---|
| Reserve Bank of India (RBI) | Regulator, policy maker, supervisor |
Prelims angle
Prelims angle: Factual recall
Prelims angle: Multi-statement analysis
- RBI mandates climate risk integration for banks.
- Green activities qualify for PSL.
- Recognizes sovereign green bonds.
- Proposes differentiated capital requirements.
- Developing climate stress-testing framework.
Check if created by Constitution or by Parliament.
| Year | Framing tags |
|---|---|
| 2025 | Multi-statement analysis, Factual recall |
| 2024 | Statement-based questions, Conceptual understanding |
| 2024 | Factual recall, Multi-statement analysis |
| 2022 | Factual recall, Multi-statement analysis |
| 2022 | Multi-statement analysis, Conceptual understanding |
| 2021 | Statement-based questions, Factual recall |
| 2018 | Statement-based questions, Institutional roles and functions |
| 2014 | Purpose or function of a policy tool, Multi-statement analysis |
Timeline
-
Indian Economy
Conceptual area
-
Environment & Ecology
Conceptual area
-
Prelims 2014
Purpose or function of a policy tool, Multi-statement analysis
-
Prelims 2018
Statement-based questions, Institutional roles and functions
-
Prelims 2021
Statement-based questions, Factual recall
-
Prelims 2022
Factual recall, Multi-statement analysis
-
Prelims 2022
Multi-statement analysis, Conceptual understanding
-
Prelims 2024
Statement-based questions, Conceptual understanding
-
Prelims 2024
Factual recall, Multi-statement analysis
-
Prelims 2025
Multi-statement analysis, Factual recall
-
Funding India’s climate future, the trillion-dollar question’
RBI is actively promoting green finance by mandating climate risk integration for banks, including green activities in PSL, recognizing sovereign green bonds, and proposing differentiated capital requirements and climate stress testing.
See also
Past papers
2014–2025 · 8 questions
In the news
Funding India’s climate future, the trillion-dollar question’
RBI is actively promoting green finance by mandating climate risk integration for banks, including green activities in PSL, recognizing sovereign green bonds, and proposing differentiated capital requirements and climate stress testing.
Try these PYQs
With reference of the ‘Banks Board Bureau (BBB)’, which of the following statements are correct?
1. The Governor of RBI is the Chairman of BBB.
2. BBB recommends for the selection of heads for Public Sector Banks.
3. BBB helps the Public Sector Banks in Developing strategies and capital raising plans.
Select the correct answer using the code given below:
Statement 1 is incorrect: BBB was set up in February 2016 as an autonomous body based on the recommendations of the RBI-appointed Nayak Committee. It was part of the Indradhanush Plan aimed at revamping public sector banks (PSBs). The Ministry of Finance takes the final decision on the appointments in consultation with the Prime Minister's Office. Statement 2 is correct: It makes recommendations for the appointment of whole-time directors as well as non-executive chairpersons of Public Sector Banks (PSBs) and state-owned financial institutions. Statement 3 is correct: Assisting banks with the strategies to deal with issues of bad loans or stressed assets is the agenda of BBB. Note: The Banks Board Bureau (BBB) was abolished and replaced by the Financial Services Institutions Bureau (FSIB) in 2022. The FSIB is an autonomous body of the Government of India.
Consider the following statements:
1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2. CAR is decided by each individual bank.
Which of the statements given above is/are correct?
Statement 1 is correct. Capital Adequacy Ratio (CAR): This is a crucial regulatory tool used by central banks to ensure banks have sufficient capital reserves to absorb potential financial losses. It acts as a buffer to protect depositors' funds in case of loan defaults or other financial risks. Statement 2 is Incorrect. CAR is not decided by individual banks. The CAR is mandated and regulated by the central bank of a country, in India's case, the Reserve Bank of India (RBI). The RBI sets a minimum CAR that all banks operating in the country must adhere to. This ensures a level playing field and safeguards the financial system's stability.
With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:
1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.
Which of the statements given above is/are correct?
Statement 1 is incorrect: Under the RBI’s 2013 Scheme for Setting up of Wholly Owned Subsidiaries (WOS), a foreign bank must have a minimum paid-up voting equity capital of ₹500 crore (₹5 billion). The claim that there is "no minimum capital" is factually false. Statement 2 is incorrect: This is the high-nuance part. The actual RBI rule states that not less than 50% of the directors should be Indian nationals/NRIs/PIOs. Because the statement in the question restricted the 50% requirement only to "Indian nationals," it excluded NRIs and PIOs, making the statement legally inaccurate. Furthermore, there is a separate sub-condition that at least one-third of the directors must be Indian nationals who are specifically resident in India.
Consider the following statements in respect of the digital rupee :
1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
2. It appears as a liability on the RBI's balance sheet.
3. It is insured against inflation by its very design.
4. It is freely convertible against commercial bank money and cash.
Which of the statements given above are correct?
* Statement 1 is correct. The digital rupee, also known as the e-rupee or Central Bank Digital Currency (CBDC), is indeed a sovereign currency issued by the RBI. It's a digital representation of India's fiat currency and is part of the RBI's monetary policy toolkit. * Statement 2 is correct. Like physical currency, the digital rupee is a liability on the RBI's balance sheet. When you hold digital rupees, it's essentially a claim you have on the RBI, similar to holding physical banknotes. * Statement 3 is incorrect. The digital rupee, by itself, doesn't come with inherent inflation protection. Its value, like physical currency, is subject to inflationary pressures. The RBI manages inflation through its monetary policy measures, not through the inherent design of the digital rupee. * Statement 4 is correct. The digital rupee is designed to be freely convertible. This means you can easily exchange it with bank deposits (commercial bank money) and cash at a 1:1 ratio without any restrictions. Therefore, the correct answer is (D) 1, 2 and 4.
Which of the following are the sources of income for the Reserve Bank of India?
I. Buying and selling Government bonds
II. Buying and selling foreign currency
III. Pension fund management
IV. Lending to private companies
V. Printing and distributing currency notes
Select the correct answer using the code given below.
The Reserve Bank of India earns income through financial operations such as managing government securities, foreign exchange, and issuing currency. It does not operate like a commercial bank or a pension fund manager. ✅ Statement I: Correct Buying and selling Government bonds through Open Market Operations earns the RBI interest and trading profits. ✅ Statement II: Correct Forex operations and investment of foreign exchange reserves generate income for the RBI. ❌ Statement III: Incorrect RBI does not manage pension funds; that is done by entities like PFRDA. ❌ Statement IV: Incorrect RBI does not lend directly to private companies; it lends to banks, which in turn lend to companies. ✅ Statement V: Correct Printing and distributing currency notes yields income through seigniorage—the profit from face value minus production cost.
Show 3 more PYQs
In the context of Indian economy which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
1. To enable the Central Bank to control the amount of advances the banks can create
2. To make the people’s deposits with banks safe and liquid
3. To prevent commercial banks from making excessive profits
4. To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
Statement 1 is correct: This is the primary purpose of CRR and SLR. By changing these ratios, the RBI can control the credit-creating capacity of banks:
- ↑ Higher reserve ratios → ↓ lending capacity → contraction of credit.
- ↓ Lower reserve ratios → ↑ lending capacity → expansion of credit. Statement 2 is correct: These reserves ensure that banks keep a portion of deposits as cash or liquid assets, providing liquidity and safety to depositors. This helps maintain confidence in the banking system. Statement 3 is incorrect: The purpose of CRR and SLR is monetary stability, not profit regulation. Profit levels are influenced by market conditions, not central bank policy instruments directly. Statement 4 is incorrect: Banks maintain working cash voluntarily for daily operations. Statutory reserves are not meant to force vault cash but to meet regulatory liquidity requirements.
With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given below is/are correct?
Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.
Consider the following statements:
1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
Statement 1 is correct. The Governor of RBI is appointed by the Central Government under the RBI Act, 1934. The Appointments Committee of the Cabinet (ACC), led by the Prime Minister, finalizes the selection. The tenure is typically four years, but the government has the authority to extend or terminate the term. Statement 2 is incorrect. The Constitution of India does not have any direct provision allowing the Central Government to issue directions to the RBI. However, Section 7 of the RBI Act, 1934, gives the Central Government the power to issue directions to the RBI in the public interest, but this is a statutory provision, not a constitutional one. Statement 3 is correct. The powers, functions, and responsibilities of the RBI Governor come from the Reserve Bank of India Act, 1934. The Act defines the Governor's role, monetary policy responsibilities, and overall authority over banking regulations.