RBI and monetary policy in UPSC Prelims: 14 questions on which tool does what

Most aspirants prepare monetary policy by noting the latest repo rate, CRR and SLR after every policy meeting. The past papers suggest that’s the wrong bet. UPSC has not asked for the value of a single rate. It asks which way a tool moves money, what a term like “sterilisation” means, and who holds the power to decide.

This post looks at the 14 questions on the RBI and monetary policy asked from 2016 to 2026 and turns them into a plan. Types of banks and their regulators are in our banking post and not counted here.

What the numbers say

Three things stand out.

It was steady for eight years, then went quiet. Every paper from 2016 to 2023 had at least one question, and those eight papers had 13 of the 14. The three papers since then had just one between them, in 2025.

Year	Questions
2016	1
2017	1
2018	1
2019	1
2020	2
2021	3
2022	2
2023	2
2024	0
2025	1
2026	0

One question was asked twice. “The money multiplier in an economy increases with which one of the following?” came in 2019 and again in 2021, in almost the same words and with the same right answer.

Half the questions are lists. 7 of the 14 gave you a numbered list of statements or actions to judge. Another 6 were one-line questions with four options. The 2023 paper added a Statement I and Statement II question on rate hikes.

What UPSC is really testing

By our count, the 14 questions fall into four groups:

• What the RBI is, and who controls it: 5 questions. How the Monetary Policy Committee is made up and who chairs it, where the Governor’s powers come from, what “lender of last resort” means, who is responsible for controlling inflation, and where the RBI’s income comes from.
• What counts as money, and how much there is: 4. The meaning of legal tender, the money multiplier (asked twice), and what a cash withdrawal does to money supply.
• Which way a tool moves money: 3. What the RBI would not do in an expansionary policy, what it does with government securities and dollars in different situations, and which activity counts as sterilisation.
• Why rates are set the way they are: 2. The purpose of the MCLR (Marginal Cost of Funds based Lending Rate) and why central banks raised rates after the pandemic.

The level of detail is low. No question asked for the current repo rate, CRR or SLR, or for any MPC decision. Only one statement hinged on a figure: a 2017 statement called the MPC a 12-member body. It has six members.

Open market operations, the buying and selling of government securities, came up in 3 questions: 2022, 2023 and 2025. For government securities as an investment, see our financial markets post.

The trap most questions share

The obvious direction is usually the wrong one. Printing notes sounds like the RBI making money, but for the RBI it is a cost. “Legal” tender sounds like money paid in courts. It is money a creditor must accept. Taking cash out of a bank sounds like it shrinks money supply, but cash with the public is also money. A higher CRR or SLR locks funds away and lowers the money multiplier.

The same thing happens with tools. Buying government securities pays money out, so it would feed inflation; to fight inflation the RBI sells them. And the 2020 question asked what the RBI would not do in an expansionary policy. Students who missed “not” picked the expansionary actions.

The other trap is putting power in the wrong hands. A 2017 statement said the Finance Minister chairs the MPC; the RBI Governor does. A 2021 statement said the Centre’s power to direct the RBI comes from the Constitution; it comes from the RBI Act. A 2022 option made the Department of Consumer Affairs responsible for controlling inflation because it tracks prices. That job is the RBI’s.

How to prepare

1. Build one direction table. For each tool, write what the RBI does to add money and what it does to take money out:

Tool	To add money	To take money out
Repo rate, Bank Rate, MSF rate	Cut	Raise
CRR and SLR	Cut	Raise
Open market operations	Buy government securities	Sell government securities
Foreign exchange	Buy dollars, releasing rupees	Sell dollars, absorbing rupees

This one table settles most of the direction group, and the CRR and SLR options in both multiplier questions.

2. Learn what counts as money. Money supply includes currency with the public and demand deposits, so moving money from one to the other changes nothing at that moment. The multiplier rises when people keep less cash and use banks more. It falls when CRR or SLR rises.

3. Make one card on the RBI’s legal base. The Central Government appoints the Governor under the RBI Act, 1934, and the Governor’s powers come from that Act. The Centre’s power to give the RBI directions in public interest is also in the Act (Section 7), not the Constitution. The MPC has six members: three from the RBI, including the Governor, who chairs it, and three appointed by the Centre.

4. Keep the RBI’s jobs apart. As lender of last resort, it gives emergency liquidity to banks in a temporary crisis. Lending to governments and managing their debt is a separate role, banker to the government. Sterilisation mainly uses open market operations to cancel the effect of its forex operations on money supply.

5. Read the stem twice. “Not” decided the 2020 question. In the 2023 Statement I and II question, the trap was deciding that a general statement could not explain a specific one.

6. Solve the past questions before reading more. Start with the must-do page for this area, then all RBI and monetary policy questions.

What to skip: the current repo rate, CRR and SLR values, MPC meeting dates and vote splits. None of the 14 questions turned on them.

Two questions that show the pattern

2022 · Which way a tool moves money. Three statements on what the RBI is likely to do when inflation is high, the rupee is falling, or US and EU interest rates fall. The first was wrong: to fight inflation it sells government securities. The other two were correct. It sells dollars to support a falling rupee, and buys dollars when lower rates abroad push foreign money into India. See the question

2025 · What the RBI is. Which of five activities are sources of income for the RBI? Only buying and selling government bonds and buying and selling foreign currency. It does not earn from pension fund management or lend to private companies. The trap was printing currency notes, which sounds like making money but is an expense for the RBI. See the question

For the other high-yield areas, see the must-do list. For the banks the RBI oversees, read our banking post.