Reserve Bank of India & Monetary Policy

RTGS (Real Time Gross Settlement) and NEFT (National Electronic Funds Transfer) are two major electronic payment systems in India, differing mainly in settlement speed and mechanism. ✅ Statement I: Correct RTGS processes transactions instantly in real time, while NEFT settles in hourly batches, causing a time lag. ❌ Statement II: Incorrect Inward transactions (receiving money) are not charged in either RTGS or NEFT as per RBI guidelines. ❌ Statement III: Incorrect Both RTGS and NEFT are available 24x7x365, including on holidays.

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.

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.

Statement 1 is correct: While NBFCs do not have routine, direct access to the Liquidity Adjustment Facility (LAF) like scheduled commercial banks, they can access RBI liquidity indirectly through eligible participants such as Primary Dealers and banks, and through special liquidity windows and RBI operations linked to LAF mechanisms. Statement 2 is correct: Foreign Institutional Investors (now FPIs) are permitted to invest in Government Securities (G-Secs) and Treasury Bills. The RBI has even introduced the Fully Accessible Route (FAR), which allows non-residents to invest in specified government bonds without any investment upper limit. Statement 3 is correct: To develop a robust corporate and government bond market, the RBI and SEBI have permitted Stock Exchanges to set up dedicated debt trading platforms. For example, the NSE's Wholesale Debt Market (WDM) and Retail Debt Market (RDM) provide transparent platforms for these transactions.

* 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.

* 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.

Statement 1 is incorrect: The statement claimed the range for a 'Medium' enterprise is between ₹15 crore and ₹25 crore. In reality, a Medium enterprise is defined by an investment of up to ₹50 crore (specifically more than ₹10 crore) and a turnover of up to ₹250 crore. The figures in the statement do not match any official bracket. Statement 2 is correct: According to the RBI Master Direction on Priority Sector Lending (PSL), all bank loans to MSMEs (Micro, Small, and Medium) qualify for classification under the priority sector. This ensures these enterprises receive a dedicated portion of bank credit to foster economic growth and employment.

* Sterilisation refers to the actions taken by a central bank to offset the impact of its foreign exchange operations on the domestic money supply.  * When a central bank intervenes in the foreign exchange market by buying or selling foreign currencies, it affects the domestic money supply.  * Open Market Operations (OMO) is one of the primary tools used by central banks, including the Reserve Bank of India (RBI), to conduct monetary policy.  * In OMO, the central bank buys or sells government securities (bonds) in the open market to influence the liquidity in the economy. When the RBI conducts OMO, it impacts the money supply in the economy. If the RBI buys government securities, it injects money into the system, increasing the money supply. To prevent this injection of money from creating inflationary pressures, the RBI engages in sterilisation.  * Sterilisation involves the simultaneous sale or purchase of other securities, typically treasury bills, to offset the impact of the initial open market operation.

* Transactions without US Dollar or SWIFT : Traditional digital payments often rely on the US dollar as a reserve currency and might involve the SWIFT system for international settlements. * A central bank digital currency (CBDC) is the digital form of a country's fiat currency. CBDCs have the potential to bypass these traditional channels. Transactions between countries using their own CBDCs could happen directly, reducing reliance on the US dollar and potentially making cross-border payments faster and cheaper. * Programmable Money with CBDCs : CBDCs can be programmed with certain features.  A central bank could issue a CBDC with a built-in spending time frame, for example, vouchers for specific purposes like public transport subsidies. These would expire after a certain period, ensuring the funds are used for the intended purpose.  * Therefore, CBDCs offer unique functionalities compared to traditional digital currencies. They can potentially streamline international payments and introduce programmable features for targeted uses.

Tight monetary policy is an action taken by a central bank, such as the Federal Reserve, to curb overheated economic growth. Central banks employ tight monetary policy when an economy is experiencing rapid acceleration or when inflation, which pertains to overall prices, is escalating too swiftly. Statement 1 is correct. A tight monetary policy by the US Federal Reserve means higher interest rates in the US. This attracts global investors to shift their capital towards US assets for better returns. As a result, there can be capital flight from emerging markets like India to the US. Statement 2 is correct. When capital flows out, the domestic currency tends to depreciate, and global interest rates rise. Firms that have borrowed in foreign currencies through External Commercial Borrowings (ECBs) will now face higher repayment costs in rupee terms. Thus, their cost of servicing these loans increases, raising their overall financial burden. Statement 3 is incorrect. Devaluation of the domestic currency actually increases the currency risk associated with ECBs. Since these loans are denominated in foreign currency (like USD), a weaker rupee means firms have to pay more in rupees to repay the same amount of foreign debt. Therefore, devaluation heightens, not reduces, currency risk. NOTE: The given question was dropped by UPSC from the Official Answer Key.