Money and Banking
Introduction
Money and banking is one of the most important and high-scoring topics in the Economy section of almost all competitive exams like UPSC, SSC, Railways, Banking (IBPS, SBI), State PCS and other government exams. It connects directly with real life – how money is created, how banks work, how RBI controls inflation, and how digital payments like UPI are changing India’s economy.
In simple words, money is anything that is generally accepted as a medium of exchange, and banking is the organised system of accepting deposits and giving loans through banks. By understanding concepts like functions of money, money supply (M1, M2, M3, M4), RBI’s role, CRR, SLR, Repo Rate, types of banks and digital payments, you can easily answer many theory as well as current affairs based questions in your exam. This blog will explain all these topics in very simple English with tables, examples and exam-focused keywords so that you can revise quickly and remember for a long time.
Table of Contents
Introduction to Money and Banking
Money is anything widely accepted as a medium of exchange for goods and services. Banking refers to the system where banks accept deposits, provide loans and facilitate payments.
Why Money & Banking is important for exams:
· High weightage in UPSC (Economy), SSC CGL, Banking exams (IBPS PO/Clerk)
· Current affairs heavy – RBI policies, repo rate changes, digital payments
· Direct questions on money supply (M1, M2, M3, M4), CRR, SLR, Repo Rate
Evolution of Money (Barter to Digital)
|
Stage |
Description |
Problems |
|
Barter System |
Direct exchange of goods |
Double coincidence of wants |
|
Commodity Money |
Gold, silver, grains |
Difficult to carry, store |
|
Metallic Money |
Coins (gold, silver, copper) |
Expensive to mint |
|
Paper Money |
Notes issued by central bank |
None (fiat money) |
|
Digital Money |
UPI, mobile wallets, CBDC |
Cyber security risks |
Modern
Money: Today we use fiat
money (currency notes with no intrinsic value, backed by government trust).
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Functions and Types of Money
Primary Functions (4 main):
1. Medium of Exchange – Buy goods without barter
2. Measure of Value – Price everything in rupees
3. Store of Value – Save for future use
4. Transfer of Value – Send money easily
Secondary Functions:
· Standard of deferred payment
· Basis of credit system
· Liquidity provider
Types of Money:
|
Type |
Examples |
|
Full Bodied Money |
Gold coins |
|
Representative Money |
Gold certificates |
|
Fiat Money |
₹10, ₹100 notes |
|
Credit Money |
Cheques, drafts |
|
Digital Money |
UPI, Paytm wallet |
Money Supply Measures (M1, M2, M3, M4)
RBI defines 4 measures of money supply:
|
Measure |
Components |
Formula |
|
M1 (Narrow Money) |
Currency + Demand deposits |
C + DD |
|
M2 |
M1 + Post office savings |
M1 + POS |
|
M3 (Broad Money) |
M2 + Time deposits of banks |
M2 + TD |
|
M4 |
M3 + Post office time deposits |
M3 + POTD |
Where:
· C = Currency with public
· DD = Demand deposits with banks
· TD = Time deposits with banks
· POS = Post office savings deposits
· POTD = Post office time deposits
Exam Shortcut: M1 < M2 < M3 < M4 (narrowest to broadest)
Sample
Question: Which
is the narrowest measure of money supply?
Ans: M1
Role of Reserve Bank of India (RBI)
RBI
established: 1
April 1935 (nationalised 1949)
Headquarters:
Mumbai
Governor:
(Current governor name – update before publishing)
Main Functions (6 key areas):
1. Issuer of Currency – Prints ₹ notes
2. Banker to Government – Manages government accounts
3. Banker to Banks – Lender of last resort
4. Controller of Credit – Regulates money supply
5. Custodian of Forex Reserves – Manages $ reserves
6. Regulator – Licenses banks, sets rules
RBI
Tools: CRR, SLR,
Repo Rate, Reverse Repo, Bank Rate, Open Market Operations
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Monetary Policy Tools (CRR, SLR, Repo, Reverse Repo)
Quantitative Tools (control money supply):
|
Tool |
Full Form |
Purpose |
RBI Action |
|
CRR |
Cash Reserve Ratio |
Control liquidity |
Increase CRR → Less money → Controls inflation |
|
SLR |
Statutory Liquidity Ratio |
Govt security investment |
Increase SLR → Less lending capacity |
|
Repo Rate |
Repurchase Agreement Rate |
Short-term loans to banks |
Increase Repo → Borrowing cost ↑ → Inflation ↓ |
|
Reverse Repo |
Reverse Repurchase Rate |
RBI borrows from banks |
Increase Reverse Repo → Takes money out |
|
Bank Rate |
Long-term lending rate |
Penal rate |
Rarely changed |
|
OMO |
Open Market Operations |
Buy/sell govt securities |
Buy bonds → Money supply ↑ |
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Commercial Banks vs Cooperative Banks vs RRBs
|
Feature |
Commercial Banks |
Cooperative Banks |
Regional Rural Banks |
|
Ownership |
Private/Public |
Cooperative societies |
Govt + Sponsor bank |
|
Area |
National |
Local/Regional |
Specific district |
|
Products |
Full range |
Limited |
Rural focus |
|
Regulation |
RBI |
RBI + Registrar |
RBI + NABARD |
|
Examples |
SBI, HDFC, ICICI |
Saraswat, Cosmos |
Gramin Banks |
14 Public Sector Banks (after mergers):
1. SBI, PNB, BoB, BoI, Canara Bank, UCO, Union Bank, Indian Bank, etc.
Payment and Settlement Systems
|
System |
Full Form |
Purpose |
|
RTGS |
Real Time Gross Settlement |
High-value transactions (>₹2 lakh) |
|
NEFT |
National Electronic Funds Transfer |
Low-medium value (batches) |
|
IMPS |
Immediate Payment Service |
24x7 instant mobile payments |
|
UPI |
Unified Payments Interface |
Phone-based instant payments |
|
Cheque Truncation |
Digital cheque clearing |
No physical cheques |
UPI
Success: India leads
world with 14+ billion monthly transactions (2025 data).
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Digital Banking and UPI Revolution
Key Digital Initiatives:
· Jan Dhan Yojana – Zero balance accounts
· BHIM UPI – Govt UPI app
· Aadhaar Enabled Payment System (AEPS)
· e-KYC – Paperless verification
· CBDC – Digital Rupee (pilot launched)
UPI Features:
· PhonePe, Google Pay, Paytm dominance
· QR code payments
· Merchant payments, P2P transfers
· Cross-border UPI (international expansion)
Banking Reforms and Nationalisation
Nationalisation Rounds:
|
Year |
Banks Nationalised |
Total PSBs |
|
1969 |
14 major banks |
14 |
|
1980 |
6 more banks |
20 |
|
1991+ |
Narasimham Committee reforms |
Liberalisation |
|
2019-20 |
10 PSB mergers |
12 PSBs |
Important Exam Tables and Facts
|
Fact |
Value |
|
RBI established |
1 April 1935 |
|
First RBI Governor |
Sir Osborne Smith |
|
Currency notes issued |
₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000 |
|
₹1 note issued by |
Ministry of Finance |
|
Coins issued by |
RBI |
|
Smallest denomination |
50 paise (discontinued) |
MCQs
Q1. What is the main defect of the Barter System?
(A) No standard of
value
(B) Double coincidence of wants
(C) Cannot store value
(D) All of the above
Answer: B
Explanation:
The biggest problem of barter system was double
coincidence of wants — both parties had to need exactly what
the other offered at the same time.
Q2. Currency notes
(paper money) are an example of which type of money?
(A) Commodity
money
(B) Metallic money
(C) Representative money
(D) Fiat money
Answer: D
Explanation:
Paper notes have no intrinsic value — they are accepted by government order (fiat).
Hence they are called fiat money.
Q3. Which of the
following is NOT a primary function of money?
(A) Medium of
exchange
(B) Measure of value
(C) Standard of deferred payment
(D) Store of value
Answer: C
Explanation:
Standard of deferred payment is a secondary
function of money. The four primary functions are: medium of
exchange, measure of value, store of value, transfer of value.
Q4. Which of the
following is the narrowest measure of money supply in India?
(A) M2
(B) M3
(C) M1
(D) M4
Answer: C
Explanation:
M1
(Currency with public + Demand deposits) is the narrowest measure. Order: M1
< M2 < M3 < M4.
Q5. M3 money supply is
also known as:
(A) Narrow Money
(B) Broad Money
(C) Reserve Money
(D) High Powered Money
Answer: B
Explanation:
M3 = M1
+ Time deposits of commercial banks. It is the most commonly used broad money
measure by RBI for policy purposes.
Q6. Which of the
following is included in M2 but NOT in M1?
(A) Demand
deposits
(B) Time deposits
(C) Post office savings deposits
(D) Currency with public
Answer: C
Explanation:
M2 = M1 + Post office
savings deposits. Post office savings are added over M1 to get
M2.
Q7. When was the Reserve
Bank of India (RBI) established?
(A) 1 April 1947
(B) 1 April 1935
(C) 26 January 1950
(D) 15 August 1949
Answer: B
Explanation:
RBI was established on 1
April 1935 under the RBI Act 1934. It was nationalised in 1949.
Q8. Who was the first
Governor of the Reserve Bank of India?
(A) C.D. Deshmukh
(B) James Braid Taylor
(C) Sir Osborne Smith
(D) Benegal Rama Rau
Answer: C
Explanation:
Sir Osborne Smith
was the first Governor of RBI (1935–1937). C.D. Deshmukh was the first Indian
Governor.
Q9. The RBI acts as
"Lender of Last Resort." This means:
(A) RBI gives
loans to public
(B) RBI provides emergency funds to commercial banks
(C) RBI lends money to foreign governments
(D) RBI gives loans to state governments
Answer: B
Explanation:
As lender of last resort,
RBI provides emergency liquidity to commercial banks when they cannot raise
funds from any other source.
Q10. Which of the
following is NOT a function of RBI?
(A) Issue of
currency notes
(B) Banker to the government
(C) Accepting deposits from public
(D) Custodian of foreign exchange reserves
Answer: C
Explanation:
RBI does not
accept deposits from the general public — that is the function of commercial
banks. RBI deals only with banks and the government.
Q11. The ₹1 note in India is issued by:
(A) Reserve Bank
of India
(B) State Bank of India
(C) Ministry of Finance
(D) NABARD
Answer: C
Explanation:
All currency notes except ₹1 are issued by RBI. The ₹1 note is issued by the Ministry of Finance,
Government of India.
Q12. The headquarters of
the Reserve Bank of India is located in:
(A) New Delhi
(B) Kolkata
(C) Chennai
(D) Mumbai
Answer: D
Explanation: RBI's headquarters is in Mumbai (shifted from
Kolkata in 1937).
Q13. Who is the
Chairperson of the Monetary Policy Committee (MPC) of India?
(A) Finance
Minister
(B) Prime Minister
(C) RBI Governor
(D) Chief Economic Advisor
Answer: C
Explanation:
The RBI Governor
chairs the Monetary Policy Committee (MPC), which decides Repo Rate and other
policy rates every 2 months.
Q14. What is the full
form of CRR?
(A) Central
Reserve Rate
(B) Credit Regulation Ratio
(C) Cash Reserve Ratio
(D) Currency Reserve Ratio
Answer: C
Explanation:
CRR (Cash Reserve Ratio)
is the percentage of deposits that commercial banks must keep as cash with RBI.
Q15. When RBI increases
the CRR, what happens to money supply?
(A) Money supply
increases
(B) Money supply decreases
(C) No change in money supply
(D) Inflation increases
Answer: B
Explanation:
Higher CRR → Banks keep more cash with RBI →
Less money available for lending → Money supply decreases →
Inflation is controlled.
Q16. What is the full
form of SLR?
(A) Standard
Lending Ratio
(B) Statutory Liquidity Ratio
(C) Standard Liquidity Reserve
(D) Scheduled Lending Rate
Answer: B
Explanation:
SLR (Statutory Liquidity
Ratio) is the percentage of deposits that banks must maintain
in the form of gold, cash or approved government securities.
Q17. Which of the
following counts under SLR?
(A) Cash in hand
(B) Gold owned by the bank
(C) Balance with RBI
(D) All of the above
Answer: D
Explanation:
SLR can be maintained in cash
in hand + gold + approved government securities + net balance with RBI.
Q18. Repo Rate is the
rate at which:
(A) Banks lend to
RBI
(B) RBI lends to commercial banks
(C) RBI lends to foreign banks
(D) Banks lend to public
Answer: B
Explanation:
Repo Rate
= Rate at which RBI
lends short-term money to commercial banks (against government
securities as collateral).
Q19. Reverse Repo Rate
is the rate at which:
(A) RBI lends to
banks
(B) Banks lend to public
(C) Banks lend (deposit) money with RBI
(D) RBI lends to government
Answer: C
Explanation:
Reverse Repo Rate
= Rate at which commercial
banks park their excess money with RBI. It is always lower than
Repo Rate.
Q20. An increase in Bank
Rate generally indicates that:
(A) Money supply
will increase
(B) Credit will become cheaper
(C) Borrowing will become costlier
(D) Inflation will increase
Answer: C
Explanation:
Higher Bank Rate → Loans from RBI become expensive →
Commercial banks raise their interest rates →
Borrowing becomes costlier → Money supply contracts.
Q21. Open Market
Operations (OMO) means:
(A) Opening new
bank branches
(B) RBI buying/selling government securities in open market
(C) Banks lending to public in open market
(D) Government selling shares in market
Answer: B
Explanation:
In OMO,
RBI buys or sells government securities in the open market to inject or absorb liquidity
from the banking system.
Q22. In which year were
14 major commercial banks nationalised in India?
(A) 1947
(B) 1955
(C) 1969
(D) 1980
Answer: C
Explanation:
14 major commercial
banks were nationalised on 19 July 1969 by the Indira Gandhi
government to bring banking to the masses.
Q23. How many banks were
nationalised in the second round of nationalisation in 1980?
(A) 4
(B) 5
(C) 6
(D) 8
Answer: C
Explanation:
6 more banks
were nationalised in 1980,
taking the total number of public sector banks to 20.
Q24. What percentage of
loans must be given to Priority Sector by commercial banks?
(A) 20%
(B) 30%
(C) 40%
(D) 50%
Answer: C
Explanation:
RBI mandates that all scheduled commercial banks must lend at least 40% of their Adjusted Net Bank Credit
(ANBC) to priority sectors like agriculture, MSMEs and weaker
sections.
Q25. Which committee
recommended major banking sector reforms in 1991?
(A) Kelkar
Committee
(B) Narasimham Committee
(C) Rangarajan Committee
(D) Chakravarty Committee
Answer: B
Explanation:
The Narasimham Committee
(1991) recommended liberalisation, entry of private banks,
reduction of CRR/SLR and strengthening of banking regulation.
Q26. Regional Rural
Banks (RRBs) in India are regulated by:
(A) RBI only
(B) NABARD only
(C) RBI and NABARD
(D) Finance Ministry
Answer: C
Explanation:
RRBs are
jointly regulated by RBI
(for banking operations) and NABARD
(for development and refinancing). They were established in 1975.
Q27. Which of the
following is NOT a payment bank in India?
(A) Airtel
Payments Bank
(B) India Post Payments Bank
(C) HDFC Bank
(D) Fino Payments Bank
Answer: C
Explanation:
HDFC Bank
is a full-service commercial bank, not a payment bank. Payment banks can accept
deposits up to ₹2 lakh but cannot issue loans.
Q28. RTGS is used for
which type of transactions?
(A) Small value
retail transactions
(B) Post office savings
(C) High-value transactions above ₹2 lakh
(D) International wire transfers only
Answer: C
Explanation:
RTGS (Real Time Gross
Settlement) is used for high-value
transactions (minimum ₹2
lakh) and
settles them in real time on a gross basis.
Q29. UPI (Unified
Payments Interface) was developed by which organisation?
(A) RBI
(B) SBI
(C) NPCI
(D) Ministry of Finance
Answer: C
Explanation:
UPI was
developed and launched by NPCI
(National Payments Corporation of India) in 2016. It enables
instant bank-to-bank transfers using mobile phones.
Q30. Digital Rupee
(CBDC) was piloted by which organisation in India?
(A) SBI
(B) SEBI
(C) Ministry of Finance
(D) RBI
Answer: D
Explanation:
RBI
launched the pilot of India's Central
Bank Digital Currency (CBDC) — the Digital Rupee (e₹)
— in 2022–23 for wholesale and retail segments.
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FAQs-
Q1. What are the 4 measures of money
supply?
M1, M2, M3, M4 where M1 is narrowest (currency + demand deposits) and M4 is
broadest.
Q2. What is the difference between
Repo Rate and Reverse Repo Rate?
Repo Rate: RBI lends to banks (higher rate). Reverse Repo: Banks
lend to RBI (lower rate).
Q3. What is CRR and how does it
control inflation?
CRR (Cash Reserve Ratio) is % of deposits banks must keep with RBI. Higher
CRR = less lending = controls inflation.
Q4. Which is the banker to banks in
India?
Reserve Bank of India (RBI) acts as banker to banks and lender of last resort.
Q5. What is M3 money supply?
M3 = M1 + Time deposits with banks (broad money).
Q6. Name any 3 digital payment systems
in India.
RTGS, NEFT, UPI are major digital payment systems.
Q7. When was RBI nationalised?
RBI was established in 1935 and nationalised in 1949.
Q8. What is Priority Sector Lending?
40% of total loans must go to agriculture, MSMEs, weaker sections (PSB
target).
Conclusion
Money and banking is not just a theory chapter – it is the backbone of the modern economy and a permanent favourite of paper setters in UPSC, SSC, Railways and Banking exams. Once you clearly understand the basic ideas of money, different measures of money supply, the role of RBI, monetary policy tools (CRR, SLR, Repo, Reverse Repo), types of banks and digital payment systems like UPI, you can handle both static and current affairs questions with confidence.
You do not need advanced economics to score well here. What you really need is: clear definitions, key formulas (like money supply measures), current RBI rates, important years (1935, 1949, 1969, 1980), and 2–3 rounds of MCQ practice. Revise the tables from this blog, relate them with news (like changes in repo rate or new RBI guidelines), and solve previous year questions. If you do this sincerely, Money and Banking will become a sure-shot scoring chapter in your exam and help you boost your overall marks in the Economy / General Awareness section.