Banking Sector in India: UPSC Previous Year Questions (Indian Economy)

Explanation

Statement 1 is incorrect: When inflation is higher than the RBI aims to reduce liquidity in the market. Buying government securities injects money into the economy by increasing liquidity, which would worsen inflation. On the contrary the RBI is more likely to sell government securities to absorb excess liquidity.

Statement 2 is correct: When the rupee depreciates rapidly its value falls relative to the U.S. dollar. This means more rupees are required to purchase one dollar, indicating a weakening rupee. To stabilize the rupee and prevent excessive depreciation, the Reserve Bank of India (RBI) can intervene in the foreign exchange market by selling dollars from its reserves. When the RBI sells dollars in the market, it increases the available supply of dollars in the foreign exchange market. Market participants (importers, banks, and investors) exchange rupees to buy these newly available dollars. This increases the demand for rupees. As demand for rupees rises, the pressure on the rupee to depreciate reduces. This can help stabilize or even strengthen the rupee.

Statement 3 is correct: A fall in US or EU interest rates makes Indian assets more attractive, prompting foreign investors to seek higher returns in India. This increases demand for the rupee, causing it to appreciate. A stronger rupee can hurt exports by making Indian goods more expensive globally. To stabilize the currency and protect export competitiveness, the RBI may intervene by buying dollars, increasing forex reserves and preventing excessive rupee appreciation.

Explanation

Credit Rating is assessment of the creditworthiness of a borrower. Individuals are given ‘credit scores’, while corporations and governments receive ‘credit ratings’.

Statement 1 is incorrect: Credit rating agencies in India are regulated by the Securities and Exchange Board of In-dia (SEBI) under SEBI (Credit Rating Agencies) Regulations, 1999, not the Reserve Bank of India (RBI).

Statement 2 is correct: ICRA (Investment Information and Credit Rating Agency of India Ltd.) was set up in 1991 by IFCI, LIC, SBI and select banks as well as financial institutions to rate debt instruments. The ICRA consists of a group of Companies including its subsidiaries. ICRA Limited is a public limited company listed on stock exchanges.

Statement 3 is correct: In India credit rating agencies registered under Securities and Exchange Board of India (SEBI) are CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Globally, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) control approximately 95% of ratings business.

Explanation

The Banks Board Bureau (BBB) was formed on the recommendations of ‘P. J. Nayak Committee to Review Governance of Boards of Banks.

Statement 1 is incorrect: The Banks Board Bureau (BBB) was headed by a prominent professional or former senior government official, rather than the Governor of the Re-serve Bank of India (RBI). Notably, its first Chairman was Shri Vinod Rai, who previously served as the Comptroller and Auditor General of India.

Statement 2 is correct: Its primary role was to recommend appointments for senior positions in Public Sector Banks (PSBs), Financial Institutions (FIs), and Public Sector Insurance Companies. In 2022, the BBB was replaced by the Financial Services Institutions Bureau (FSIB), which continues to carry out similar functions.

Statement 3 is correct: The BBB advises PSBs on various strategic matters such as: Business strategies, Capital raising plans, Governance reforms, etc. It also assists banks in addressing issues related to non-performing assets (NPAs) and improving operational efficiency.

Explanation

The Reserve Bank of India (RBI) is primarily responsible for maintaining price stability and controlling inflation in India. It does this through its monetary policy framework, which includes tools like the repo rate, reverse repo rate, open market operations, and cash reserve ratio (CRR). Under the Monetary Policy Framework Agreement (2016), the RBI, in collaboration with the Government of India has a mandate to maintain inflation at 4% (with a tolerance band of ±2%), i.e., between 2% to 6%.