Economics · Chapter 02

💰 Money & Banking

RBI, monetary policy tools, types of banks.

💰 From Barter to Banking

Before money existed, people used the barter system — direct exchange of goods. Problem: required a "double coincidence of wants." Money solved this.

Functions of Money (4):
1. Medium of Exchange — used to buy/sell goods (most important function)
2. Unit of Account / Measure of Value — prices expressed in money
3. Store of Value — wealth can be saved in money form
4. Standard of Deferred Payment — loans/credit settled in money

Types of money: Commodity money (gold, silver) → Representative money (gold-backed notes) → Fiat money (current paper currency — no gold backing, declared legal tender by government) → Digital money (UPI, CBDC).

RBI (Reserve Bank of India) — India's central bank, established April 1, 1935. Nationalized 1949. HQ: Mumbai. Governor: Currently Sanjay Malhotra (2024).

🏦 RBI functions — SSC/Banking must-know

• Issue of currency — RBI issues all notes. ₹1 coin issued by Government (Finance Ministry).
• Banker to government — manages government accounts, debt
• Banker to banks — lender of last resort to commercial banks
• Monetary policy — controls money supply and inflation using Repo Rate, CRR, SLR
• Foreign exchange management — manages India's forex reserves
• Regulator of banks — licenses, supervises all banks (except cooperative banks — under RCS)

Reserve Bank of India, Mumbai — India's central bank (est. 1935)Wikimedia Commons / CC BY-SA 3.0

Indian Rupee notes — legal tender of IndiaWikimedia Commons / CC BY-SA 3.0

📊 Key monetary policy tools — exam favorites

• Repo Rate — rate at which RBI lends to commercial banks. Higher repo = costlier loans = less money = lower inflation. Currently ~6.5%.
• Reverse Repo Rate — rate at which RBI borrows from banks.
• CRR (Cash Reserve Ratio) — % of deposits banks must keep as cash with RBI. Currently 4%.
• SLR (Statutory Liquidity Ratio) — % of deposits banks must keep in gold/govt securities. Currently 18%.
• Bank Rate — rate at which RBI provides long-term loans to banks.
• Open Market Operations (OMO) — RBI buys/sells govt securities to control money supply.

🎬

How RBI Controls Inflation

Animation

RBI is the conductor of India's monetary orchestra — every tool affects money supply and inflation.

💹

Types of Banks in India

Interactive

Public sector banksSBI, PNB, Bank of Baroda, Canara Bank (12 banks)

Private sector banksHDFC, ICICI, Axis, Kotak Mahindra

Foreign banksCitibank, Standard Chartered, HSBC

Largest bankState Bank of India (SBI) — public sector

Largest private bankHDFC Bank (after merger with HDFC Ltd)

Practice (Banking exam): What is the difference between Repo Rate and Bank Rate?

Repo Rate vs Bank Rate:

Repo Rate:
• Short-term borrowing rate (overnight to 14 days)
• Banks provide collateral (government securities) to RBI
• More frequently used and adjusted
• Currently: 6.5%

Bank Rate:
• Long-term borrowing rate (no specific tenure)
• No collateral provided
• Less frequently used
• Currently: 6.75% (always higher than Repo Rate)
• Used for rediscounting commercial bills of exchange

Both are used to control money supply but for different time horizons. Repo rate is the primary tool for monetary policy signaling.

Practice (SSC): What is the difference between CRR and SLR?

CRR (Cash Reserve Ratio):
• Banks keep a % of deposits as cash with RBI
• Currently 4% of Net Demand and Time Liabilities (NDTL)
• Earns NO interest — purely idle
• RBI can use it for emergency purposes
• Directly reduces banks lending capacity

SLR (Statutory Liquidity Ratio):
• Banks keep a % of deposits in liquid assets — cash, gold, or approved government securities
• Currently 18% of NDTL
• Earns some interest (from government securities)
• Ensures banks are always liquid enough to meet obligations
• Helps government borrow from banks (banks must buy govt bonds)

Combined impact: 4% CRR + 18% SLR = 22% of deposits are "reserved" — only 78% can be lent out.