Credit-Deposit Wedge
The disparity between credit and deposit growth, where credit outpaces deposits, indicating potential funding challenges for banks and impacting financial st...
Rate cuts transmission moderated in May 2026: RBI
The Reserve Bank of India's (RBI) May 2026 bulletin highlighted that the transmission of recent rate cuts (March-April 2026) was uneven across sectors. It noted that private sector banks exhibited more pronounced pass-through to lending rates, while public sector banks showed stronger transmission to deposit rates. The report also indicated that credit growth continued to outpace deposit growth, a trend widening since August 2025.
Syllabus mapping
Mains syllabus topics
Indian Culture Art Architecture
Modern Indian History
Indian Society Diversity
Globalization Indian Society
Indian Constitution
Prelims takeaways
- Monetary policy transmission is often uneven across different sectors and types of banks (public vs. private).
- Private sector banks may show stronger transmission of rate cuts to lending rates.
- Public sector banks may show stronger transmission of rate changes to deposit rates.
- Credit growth outpacing deposit growth can indicate liquidity dynamics and potential funding challenges for banks.
- Understanding the difference in transmission during rate hike cycles versus easing cycles is important.
Elimination traps
- Assuming uniform transmission of RBI's monetary policy across all banks and sectors.
- Confusing the impact of rate changes on lending rates versus deposit rates.
- Misinterpreting the implications of credit growth being faster than deposit growth.
Static concepts
- Monetary Policy Transmission
- Repo Rate
- Basis Points (bps)
- Lending Rates
- Deposit Rates
- Credit Growth
- Deposit Growth
- Weighted Average Lending Rate (WALR)
- Weighted Average Deposit Rate (WADR)
Probable question areas
Question areas
- Factors affecting the effectiveness of monetary policy transmission in India.
Question areas
- Role of RBI in managing liquidity and interest rate dynamics in the economy.
Question areas
- Comparative performance of public sector banks vs. private sector banks in monetary policy transmission.
Question areas
- Implications of a widening wedge between credit and deposit growth for the banking sector and economy.
UPSC concepts in this story
Durable syllabus ideas for revision — not article memory.
Monetary Policy Transmission
The process by which RBI's policy rate changes affect market interest rates and economic activity, often facing challenges like unevenness across banks and l...
Previous year Prelims questions on overlapping themes and topics.
India Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve.
2. Actions of the Reserve Bank of India.
3. Inflation and short-term interest rates.
Which of the statements given above is/are correct?
Explanation
Correct answer
D. 1, 2 and 3
Statement 1 is correct: The Federal Reserve's monetary policy decisions, particularly regarding interest rates, can impact global capital flows. If the Fed raises interest rates, it can make US investments more attractive, potentially leading to some outflow of capital from India. This could affect demand for Indian government bonds and influence their yield. Statement 2 is correct: The RBI's monetary policy plays a crucial role in influencing Indian government bond yields. The RBI's actions like setting repo rates, open market operations, and cash reserve ratio (CRR) can affect the overall liquidity in the banking system. Higher liquidity can lead to lower yields, and vice versa. Statement 3 is correct: Inflation expectations and short-term interest rates are important factors for investors when considering the return on government bonds. Higher inflation expectations can lead investors to demand higher yields to compensate for the potential erosion of purchasing power. Similarly, short-term interest rates can act as a benchmark for bond yields. Therefore, all three factors significantly influence the yields of Indian government bonds.
Indian Economy
Reserve Bank Of India & Monetary Policy
Macroeconomic Trends & Inflation
External Sector & Capital Flows
Correct the following statements:
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
Explanation
Correct answer
A. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
* Statement I- correct: In the aftermath of the COVID-19 pandemic, many central banks around the world observed rising inflation. To combat this inflation, they resorted to raising interest rates. This is a well-established monetary policy tool to curb inflation by making borrowing more expensive and encouraging saving, thereby reducing the money supply in circulation. * Statement II- correct: Central banks are entrusted with maintaining price stability and managing inflation. Raising interest rates is one of the primary instruments they use to achieve this objective. While other factors can influence inflation, central banks do have the ability to significantly impact it through monetary policy measures. Therefore, both statements accurately reflect the role of central banks and their use of interest rates to manage inflation and statement 2 is the correct explanation for statement 1.
Indian Economy
Current Affairs
Reserve Bank Of India & Monetary Policy
Macroeconomic Trends & Inflation
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?
Explanation
Correct answer
B. 2 and 3 only
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.
Indian Economy
Reserve Bank Of India & Monetary Policy
Macroeconomic Trends & Inflation
External Sector & Capital Flows
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
Explanation
Correct answer
D. Reserve Bank of India
The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI). The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy. As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.
Indian Economy
Reserve Bank Of India & Monetary Policy
Macroeconomic Trends & Inflation
Which reference to inflation in India, which of the following statements is correct?
Explanation
Correct answer
C. Decreased money circulation helps in controlling the inflation
Option A and B are incorrect: RBI plays a key/primary role in controlling inflation through its monetary policy. Option C is correct: Decreased money circulation can help control inflation, while increased circulation can contribute to it. Option D is incorrect: Increased money supply shall only increase inflation.
Indian Economy
Reserve Bank Of India & Monetary Policy
Macroeconomic Trends & Inflation
Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
Explanation
Correct answer
A. 1 and 2 only
Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.
Indian Economy
Macroeconomic Trends & Inflation
Reserve Bank Of India & Monetary Policy
Which one of the following is likely to be the most inflationary in its effect?
Explanation
Correct answer
D. Creating new money to finance a budget deficit
Creating new money to finance a budget deficit will be the most inflationary effect. Because it increases the money supply without any increase in the production of goods and services.
Indian Economy
Macroeconomic Trends & Inflation
Fiscal Policy & Public Debt
Reserve Bank Of India & Monetary Policy
When the Reserve Bank of India reduces the Statutory Liquidity by 50 basis points, which of the following is likely to happen?
Explanation
Correct answer
C. Scheduled Commercial Banks may cut their lending rates
Reducing the SLR by the RBI is likely to lead to increased liquidity in the banking system in the short term, and potentially lower lending rates by commercial banks. This can contribute to increased economic activity but wouldn't drastically alter GDP growth or directly impact FIIs.
Indian Economy
Reserve Bank Of India & Monetary Policy
If the interest rate is decreased in an economy, it will
Explanation
Correct answer
C. increase the investment expenditure in the economy
* Lower Interest rates encourage additional investment spending , which gives the economy a boost in times of slow economic growth. * Changes in interest rates affect the public's demand for goods and services and, thus, aggregate investment spending. * A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending. * Lower interest rates also give banks more incentive to lend to businesses and households, allowing them to spend more.
Indian Economy
Reserve Bank Of India & Monetary Policy
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
Explanation
Correct answer
B. 2 only
Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates. Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more. Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity. Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity. Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.
Indian Economy
Reserve Bank Of India & Monetary Policy
Financial Markets & Instruments
Previous year Mains questions mapped to overlapping GS syllabus topics.
Does tribal development in India centre around two axes, those of displacement and of rehabilitation? Give your opinion.
Salient features of Indian Society and Diversity
Women, population, poverty, urbanization and development
View Mains PYQ
Achieving sustainable growth with emphasis on environmental protection could come into conflict with poor people’s needs in a country like India – Comment.
Salient features of Indian Society and Diversity
Women, population, poverty, urbanization and development
View Mains PYQ
How do you account for the growing fast food industries given that there are increased health concerns in modern society? Illustrate your answer with the Indian experience.
Salient features of Indian Society and Diversity
Women, population, poverty, urbanization and development
Effects of globalization on Indian society
View Mains PYQ
Discuss the evolution of collegium system in India. Critically examine the advantages and disadvantages of the system of appointment of the Judges of the Supreme Court of India and that of the USA.
Indian Constitution — evolution, features, amendments, basic structure
Comparison of Indian constitutional scheme with other countries
Executive, Judiciary and pressure groups
View Mains PYQ
Indian Constitution has conferred the amending power on the ordinary legislative institutions with a few procedural hurdles. In view of this statement, examine the procedural and substantive limitations on the amending power of the Parliament to change the Constitution.
Indian Constitution — evolution, features, amendments, basic structure
Parliament and State legislatures
View Mains PYQ
Mahatma Jotirao Phule’s writings and efforts of social reforms touched issues of almost all subaltern classes. Discuss.
Modern Indian history (mid-18th century to present)
Salient features of Indian Society and Diversity
Social empowerment, communalism, regionalism and secularism
View Mains PYQ
Based on the RBI's May 2026 bulletin regarding the transmission of recent rate cuts, which of the following statements is correct?
Explanation
The article states: 'During the current easing cycle, the pass-through to lending rates was more pronounced in private sector banks, while public sector banks exhibited relatively stronger transmission to deposit rates.' This directly supports option C and contradicts A, B, and D (as transmission was 'uneven').
According to the RBI's May 2026 bulletin, a significant macroeconomic trend observed was:
Explanation
The article explicitly states: 'Credit grew at a rate of 17.7% and deposits at just 12.2% in May 2026. The wedge has been widening since August 2025.' This directly supports option B.
Consider the following statements regarding the transmission of RBI's monetary policy actions as per the May 2026 bulletin: 1. During the rate hike cycle (May 2022 - Jan 2025), the Weighted Average Deposit Rates (WADR) increased more than the repo rate increase. 2. During the rate easing cycle (Feb 2025 - April 2026), the Weighted Average Lending Rates (WALR) dipped by a greater margin than the repo rate cut. Which of the statements given above is/are correct?
Explanation
Statement 1: The article mentions, 'In the times when RBI increased rates, weighted average deposit rates increased 259 basis points, more than the repo rate increase of 250 points in the period.' This makes statement 1 correct. Statement 2: The repo rate decreased by 85 basis points (Feb 2025 - April 2026). The article states, 'weighted average lending rates overall... dipped 83 bps in easing cycle.' Since 83 bps is less than 85 bps, the WALR did not dip by a greater margin than the repo rate cut. This makes statement 2 incorrect.
"The transmission of rate cuts has been uneven across sectors, and credit growth continues to outpace deposit growth." In light of this statement from the RBI's May 2026 bulletin, discuss the challenges faced by the Reserve Bank of India in ensuring effective monetary policy transmission and maintaining financial stability.
Introduce the context of uneven transmission and the credit-deposit gap. Discuss the reasons for uneven transmission (e.g., bank balance sheets, market competition, liquidity conditions). Explain the implications for monetary policy effectiveness (inflation control, growth stimulus) and financial stability risks arising from the widening credit-deposit gap. Conclude with potential policy measures or reforms.
The RBI's May 2026 bulletin highlighted differential responses of public and private sector banks to monetary policy changes. Examine the reasons behind this differential transmission and its implications for the overall banking sector and economic growth in India.
Define differential transmission in the context of public vs. private banks. Explain the underlying reasons for these differences (e.g., ownership structure, operational efficiency, customer base, balance sheet health, competitive pressures). Discuss the implications for credit availability, cost of funds, profitability of banks, and overall economic growth and stability. Conclude with policy considerations for harmonizing transmission.