Here’s a structured, UPSC-focused topic list for Banking & Monetary Policy—designed for Prelims 2026, with conceptual clarity and exam relevance.

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Banking & Monetary Policy – UPSC Prelims 2026

Banking and monetary policy form a core part of the Economy section in UPSC Prelims. Questions are often conceptual, policy-oriented, and linked with current developments.

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1. Central Banking in India

Role and Functions of Reserve Bank of India (RBI)

• Monetary authority of India
• Issuer of currency
• Banker to Government and Banks
• Custodian of foreign exchange reserves
• Regulator of banking and financial system
• Controller of credit (quantitative & qualitative tools)

Prelims Focus: Functions, objectives, autonomy, recent policy actions

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2. Monetary Policy Framework

Monetary Policy Committee (MPC)

• Established under RBI Act (amended in 2016)
• 6 members: 3 from RBI + 3 appointed by Government
• Decides policy rates like repo rate
• Voting-based decision (Governor has casting vote)

Prelims Focus: Composition, voting system, inflation target

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3. Policy Interest Rates

Key tools used by RBI to control liquidity:

• Repo Rate: Rate at which RBI lends to banks
• Reverse Repo Rate: Rate at which RBI borrows from banks
• Marginal Standing Facility (MSF): Emergency borrowing by banks
• Bank Rate: Long-term lending rate of RBI

Prelims Insight:

• Repo ↑ → borrowing costly → inflation ↓
• Repo ↓ → liquidity ↑ → growth ↑

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4. Liquidity Management Tools

Cash Reserve Ratio (CRR)

• Percentage of deposits banks keep with RBI (no interest)

Statutory Liquidity Ratio (SLR)

• Percentage of deposits kept in liquid assets (gold, govt securities)

Prelims Focus: Differences between CRR & SLR, impact on money supply

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5. Open Market Operations (OMO)

• Buying/selling of government securities by RBI
• Injects or absorbs liquidity from the system

Prelims Focus:

• RBI buys securities → liquidity increases
• RBI sells securities → liquidity decreases

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6. Inflation Targeting

• Introduced in 2016 (Flexible Inflation Targeting)
• Target: 4% ± 2% (i.e., 2%–6%)
• CPI (Consumer Price Index) used as benchmark

Prelims Focus:

• Who sets target? → Government of India
• Who implements? → RBI via MPC

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7. Digital Currency (CBDC)

Central Bank Digital Currency (CBDC)

• Digital form of fiat currency issued by RBI
• Legal tender like physical currency
• Types:
  1. Retail CBDC (for public)
  2. Wholesale CBDC (for banks)

Prelims Focus:

• Difference from cryptocurrency
• Benefits: reduced cost, transparency
• Risks: privacy, cybersecurity

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8. Banking Sector Issues

Non-Performing Assets (NPAs)

• Loans where interest/principal overdue > 90 days

Types:

• Substandard
• Doubtful
• Loss assets

Prelims Focus:

• Causes: bad lending, economic slowdown
• Solutions: Insolvency and Bankruptcy Code (IBC), asset reconstruction

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9. Global Banking Standards

Basel Norms (by Bank for International Settlements)

• International banking regulations
• Ensure financial stability

Basel I, II, III:

• Capital adequacy
• Risk management
• Liquidity norms

Prelims Focus: Basel III requirements, capital ratios

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10. Financial Inclusion Initiatives

Efforts to bring banking to all:

• Pradhan Mantri Jan Dhan Yojana (PMJDY)
• Digital payments (UPI ecosystem)
• Small Finance Banks
• Payments Banks
• Direct Benefit Transfer (DBT)

Prelims Focus:

• Objectives and features
• Link with JAM Trinity (Jan Dhan–Aadhaar–Mobile)

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11. Additional Important Concepts

• Money supply (M1, M2, M3)
• Inflation types (Demand-pull, Cost-push)
• Liquidity Adjustment Facility (LAF)
• Standing Deposit Facility (SDF)
• Yield curve and bond markets
• Banking reforms and recapitalization

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How UPSC Asks Questions

• Concept-based (e.g., repo vs reverse repo)
• Statement-based MCQs
• Current affairs integration (e.g., MPC decisions, CBDC pilots)
• Matching-type questions

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Preparation Strategy

• Focus on concept clarity over memorization
• Link static concepts with current RBI updates
• Read RBI reports selectively (Monetary Policy, Financial Stability Report)
• Practice PYQs (Previous Year Questions)

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