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Q31 (IAS/2021) Economy › Money, Banking & Inflation › Central banking functions Official Key

Consider the following statements : 1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government. 2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest. 3. The Governor of the RBI draws his power from the RBI Act. Which of the above statements are correct?

Result
Your answer: —  ·  Correct: C
Explanation

The correct answer is Option 3 (1 and 3 only) based on the following legal and constitutional framework:

  • Statement 1 is correct: As per Section 8 of the Reserve Bank of India (RBI) Act, 1934, the Governor and Deputy Governors are appointed by the Central Government. Specifically, the Financial Sector Regulatory Appointments Search Committee (FSRASC) shortlists candidates, and the Appointments Committee of the Cabinet (ACC) finalizes the selection.
  • Statement 2 is incorrect: The Constitution of India does not contain any provisions regarding the RBI or the power to issue directions to it. Instead, this power is derived from Section 7 of the RBI Act, 1934, which allows the Central Government to issue directions to the Bank in the public interest after consultation with the Governor.
  • Statement 3 is correct: The RBI is a statutory body, and the Governor derives all executive and administrative powers from the RBI Act, 1934, which governs the bank's functions and management.
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
50%
got it right
PROVENANCE & STUDY PATTERN
Full view
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Consider the following statements : 1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government. 2. Certain…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 6.7/10 · 3.3/10

This is a classic 'Current Affairs disguised as Static' question. The 2018-19 controversy regarding the invocation of Section 7 of the RBI Act (leading to Urjit Patel's resignation) was the hidden trigger. The trap lies in Statement 2: swapping 'RBI Act' with 'Constitution'. If you missed the legal nuance in the news, you missed the question.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Which authority appoints the Governor of the Reserve Bank of India (RBI)?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Reserve Bank of India > p. 130
Presence: 5/5
“He draws his powers from the RBI Act and not from the Central Board. He is appointed by the Prime Minister in consultation with the Finance Minister. The RBI Board has no say whatsoever in his appointment. In a company, the board of directors chooses one of its own to be appointed as the managing director. In the RBI, the Governor secures board membership only after he is appointed to the post. It is, thus, wrong to compare a corporate board to the RBI's and suggest that the Governor is subservient to it. In RBI, policy decisions are taken by the Governor with its 4 deputy governors and the (Central) Board is just engaged in providing a broader vision to the RBI.”
Why this source?
  • Directly states the Governor is appointed by the Prime Minister in consultation with the Finance Minister.
  • Specifies that the RBI Central Board has no role in the Governor's appointment, assigning appointment authority to the executive.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Presence: 4/5
“The objective of RBI is "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth; to maintain macroeconomic stability and financial stability." The RBI affairs are governed by a central board of directors (Maximum 21 in number including the governor and four deputy governors who are also on the central board) who are appointed by the government of India in keeping with the Reserve Bank of India Act 1934 for a period of 4 years.”
Why this source?
  • Says members of the Central Board, including the Governor and four deputy governors, are appointed by the Government of India under the RBI Act.
  • Provides statutory framing that the government (executive) makes these appointments and notes a four-year period for board appointments.
Statement 2
Do any provisions of the Constitution of India grant the Central Government the authority to issue directions to the Reserve Bank of India in the public interest, and if so which provisions?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"7. Management.—(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest."
Why this source?
  • Directly quotes the statutory provision (Reserve Bank of India Act, 1934 §7) that authorises the Central Government to give directions to the Bank.
  • Specifically states the Central Government may give such directions 'after consultation with the Governor' and 'consider necessary in the public interest', matching the user's phrasing.
Web source
Presence: 5/5
"7. Management.—(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest."
Why this source?
  • Repeats the same wording from the Reserve Bank of India Act, 1934 confirming the statutory source of the power.
  • Shows the authority is contained in the RBI Act (section 7) rather than a quoted constitutional article in these passages.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > 3.9 RBI Circular (June 2019) on Resolution of NPAs > p. 139
Strength: 5/5
“RBI may from time-to-time issue directions to any banking company for resolution of stressed assets As per Supreme Court judgement dated 2nd April 2019, "RBI can only direct banking institutions to move under the IBC Code 2016 if there is a central government authorization and it should be in respect of specific defaults. Thus, any directions which are in respect of debtors in general, would-be ultra vires Section 35AA of Banking Regulation Act 1949".”
Why relevant

Notes that RBI may issue directions to banking companies but cites a Supreme Court ruling that such directions (re IBC) require central government authorization—linking central government authorization to directions affecting banks/RBI actions.

How to extend

A student could check the Constitution and Banking Regulation Act/Section 35AA to see whether ‘central government authorization’ is constitutional or statutory and whether the Constitution itself contains such empowering provisions.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Strength: 4/5
“The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935. The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.”
Why relevant

Explains that the Reserve Bank of India’s powers and functions are grounded in the Reserve Bank of India Act, 1934 (statutory basis).

How to extend

A student can contrast statutory origin (RBI Act) with constitutional provisions to infer whether direction-power is likely to be statutory (RBI Act) or constitutional.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.10 Money Supply > p. 53
Strength: 4/5
“In an economy, money consists of mainly currency notes, coins and deposits of public in banks. In India coins and currency notes are issued for circulation by the Reserve Bank of India (RBI), which is the monetary authority (or Central Bank) in India. One-rupee note and all coins and subsidiary coins, the magnitude of which is relatively small, are minted/printed by the Government of India, while all the other currency notes are printed by the RBI. All the currency notes and coins are put into circulation only through the RBI, which is the sole authority for the issue of currency and coins in India.”
Why relevant

States RBI is the sole authority for issue of currency and is the monetary authority—showing RBI performs sovereign functions in areas (currency, monetary policy).

How to extend

One could examine constitutional entries on ‘currency and coinage’ to see if those grant direct control to the Centre that might imply a power to direct the RBI in public interest.

Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 16: India–Political Aspects > STRUCTURE OF INDIAN FEDERATION > p. 11
Strength: 4/5
“The federal character of the Indian Constitution involves a distribution of sovereignty between the Central Government and the states. The distribution of powers in general follows the Government of India Act of 1935. The Indian Constitution provides for a three-fold distribution of legislative powers between the Union and the States. The Central Government is given exclusive powers to make laws concerning 97 items including defence, national security, foreign affairs, banking, currency and coinage, transportation and communication, commerce, atomic energy, the general framework of criminal and civil laws, revenue collection, the ability to dissolve state governments during crisis, citizenship, immigration, and monetary policies.”
Why relevant

Lists that the Central Government has exclusive powers over items including banking, currency and monetary policies under the Constitution’s distribution of powers.

How to extend

A student could use this to test whether such exclusive legislative subjects confer on the Centre any express constitutional power to direct a statutory body like the RBI, by reading relevant Articles (e.g., entries in the Union List).

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 121
Strength: 3/5
“With reference to Foreign Direct Investment in India, which of the following is considered its major characteristics? [2020] • (a) It is the investment through capital instruments essentially in a listed company• (b) It is a largely non-debt creating capital flow• (c) It is the investment which involves debt-servicing• (d) It is the investment made by foreign institutional investors in the Government securities• 43. Consider the following statements: [2021] • (i) The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.• (ii) Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.• (iii) The Governor of the RBI draws his power from the RBI Act.”
Why relevant

Contains an exam-style assertion that ‘Certain provisions in the Constitution give the Central Government the right to issue directions to the RBI in public interest’—indicates this is a contested/asked claim in study materials.

How to extend

A student could treat this as a hypothesis and verify by locating the cited constitutional provisions or noting absence thereof, and comparing with statutory/regulatory provisions.

Statement 3
Does the Governor of the Reserve Bank of India derive his powers from the Reserve Bank of India Act, 1934?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Reserve Bank of India > p. 130
Presence: 5/5
“He draws his powers from the RBI Act and not from the Central Board. He is appointed by the Prime Minister in consultation with the Finance Minister. The RBI Board has no say whatsoever in his appointment. In a company, the board of directors chooses one of its own to be appointed as the managing director. In the RBI, the Governor secures board membership only after he is appointed to the post. It is, thus, wrong to compare a corporate board to the RBI's and suggest that the Governor is subservient to it. In RBI, policy decisions are taken by the Governor with its 4 deputy governors and the (Central) Board is just engaged in providing a broader vision to the RBI.”
Why this source?
  • Explicitly states the Governor 'draws his powers from the RBI Act' rather than from the Central Board.
  • Describes the Governor's appointment process (PM in consultation with FM) and that the Board has no role in appointment, implying statutory (Act-based) authority.
  • Explains that policy decisions are taken by the Governor (with deputies), reinforcing that his authority is rooted in the legal framework, not board control.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Presence: 4/5
“The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935. The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.”
Why this source?
  • Identifies the Reserve Bank of India Act, 1934 as the statutory basis for the Bank's functioning.
  • Notes the Act established the RBI and framed its operations from 1 April 1935, implying institutional powers originate in the Act.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Interpretation of RBI Act regarding its autonomy by previous Governors > p. 131
Presence: 4/5
“• Dr. Manmohan Singh: The dynamic between the RBI and the government is one of give and take but if the finance minister insists on a certain course of action, his view need to prevail and the governor may not refuse, unless he is willing to quit his job. The governor of the Reserve Bank is not superior to the finance minister.• Bimal Jalan: RBI is accountable to the government and should make policies within the framework set by the government.• D. Subbarao: RBI does not have the absolute autonomy but it is autonomous within the framework of RBI Act 1934.”
Why this source?
  • Specifies that the RBI (and by implication its Governor) operates 'within the framework of RBI Act 1934', linking the Governor's autonomy/powers to the Act.
  • Presents authoritative commentary that the Governor's autonomy is defined by the Act, supporting statutory derivation of powers.
Pattern takeaway: The 'Constitutional Bluff'. UPSC frequently inserts the phrase 'provisions in the Constitution' into statements about statutory bodies. 90% of the time, this is false. The Constitution lists 'Banking' in the Union List (Schedule 7) but does not define the operational powers of the RBI Governor; the RBI Act, 1934 does.
How you should have studied
  1. [THE VERDICT]: Trap (Statement 2). While Statement 1 & 3 are standard static facts found in Vivek Singh/Ramesh Singh, Statement 2 is a 'Source Swap' trap based on the Section 7 controversy.
  2. [THE CONCEPTUAL TRIGGER]: Central Bank Autonomy vs. Executive Control. The friction point where the Government (Fiscal) tries to direct the RBI (Monetary).
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Power Grid' of RBI: 1. Section 7 (Govt power to direct RBI). 2. Section 45ZB (Constitution of MPC). 3. Section 47 (Allocation of Surplus/Dividends). 4. Appointment of Governor (by ACC headed by PM). 5. Removal (Not fixed in Act, holds office at pleasure of President).
  4. [THE STRATEGIC METACOGNITION]: Whenever a statutory body (RBI, SEBI, CBI) is in the news for conflict with the Centre, immediately check the 'Source of Authority'. Does the power come from the Constitution (Article X) or the Parent Act (Section Y)? UPSC loves swapping these two.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Appointment authority for RBI Governor
💡 The insight

Identifies which executive office appoints the Governor and the consultative role of the Finance Minister.

High-yield for governance and economy questions: clarifies executive control over central bank leadership, links to debates on central bank autonomy, and helps answer direct factual and essay questions on appointment and oversight mechanisms.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Reserve Bank of India > p. 130
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
🔗 Anchor: "Which authority appoints the Governor of the Reserve Bank of India (RBI)?"
📌 Adjacent topic to master
S1
👉 Central Board vs Executive in RBI appointments
💡 The insight

Contrasts the government's appointment power with the absence of an appointment role for the RBI Central Board.

Useful for questions on institutional design and autonomy: explains who actually controls leadership choices and aids analysis of accountability tensions between the RBI and the government.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Reserve Bank of India > p. 130
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
🔗 Anchor: "Which authority appoints the Governor of the Reserve Bank of India (RBI)?"
📌 Adjacent topic to master
S1
👉 Tenure and statutory basis of RBI Board appointments
💡 The insight

Covers the Government of India's role under the RBI Act and the typical four-year term for board members including the Governor.

Helps answer questions about term limits, legal foundations of appointments, and comparative governance of central banks; links to topics on the RBI Act and committee compositions (e.g., MPC).

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
🔗 Anchor: "Which authority appoints the Governor of the Reserve Bank of India (RBI)?"
📌 Adjacent topic to master
S2
👉 Statutory basis of the Reserve Bank of India (RBI Act, 1934)
💡 The insight

RBI operates on a statutory foundation created by the RBI Act, 1934, which is the primary source of its powers and functions.

High-yield for distinguishing constitutional versus statutory institutions; helps answer questions on legal authority over central banking and the limits of governmental directions. Connects to topics on institutional design, financial law and administrative control.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
🔗 Anchor: "Do any provisions of the Constitution of India grant the Central Government the ..."
📌 Adjacent topic to master
S2
👉 Central government authorization under banking law (Banking Regulation Act / Sectional controls)
💡 The insight

Legal limits on issuing directions to banks involve statutory provisions (e.g., requirements for central government authorization) rather than explicit constitutional clauses.

Important for questions on the interplay between the RBI, Banking Regulation Act, and insolvency/resolution regimes; useful for legal interpretation and policy questions about who may compel action by banking institutions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > 3.9 RBI Circular (June 2019) on Resolution of NPAs > p. 139
🔗 Anchor: "Do any provisions of the Constitution of India grant the Central Government the ..."
📌 Adjacent topic to master
S2
👉 Union List powers: banking, currency and monetary policy
💡 The insight

The Constitution assigns banking, currency and related monetary matters to the Union (Central) government, framing legislative control over these domains.

Crucial for questions on Centre–State relations and federal distribution of powers; helps link constitutional distribution of subjects to regulatory control and policy-making in finance and currency.

📚 Reading List :
  • Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 16: India–Political Aspects > STRUCTURE OF INDIAN FEDERATION > p. 11
🔗 Anchor: "Do any provisions of the Constitution of India grant the Central Government the ..."
📌 Adjacent topic to master
S3
👉 Reserve Bank of India Act, 1934 as statutory basis
💡 The insight

The RBI Act, 1934 is the legal foundation from which the RBI and its officeholders derive institutional authority.

High-yield for governance and economic policy questions: explains the legal origin of central bank powers and is essential for understanding debates on RBI autonomy, executive relations, and statutory limits. Links to topics on institutional design and administrative law; useful for questions on power sources and legal constraints.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > Reserve Bank of India > p. 130
🔗 Anchor: "Does the Governor of the Reserve Bank of India derive his powers from the Reserv..."
🌑 The Hidden Trap

Who determines the 'Inflation Target'? It is NOT the RBI or the MPC alone. It is the Central Government, in consultation with the RBI, once every five years (Section 45ZA of RBI Act). This is a high-probability future trap.

⚡ Elimination Cheat Code

Use the 'Constitutional Granularity' heuristic. The Constitution is a broad framework; it rarely micromanages specific operational directions to a bank 'in public interest'. That language smells of a Statute (Act). If you identify Statement 2 as false (it's the RBI Act, not Constitution), options A, B, and D are eliminated instantly. Answer is C.

🔗 Mains Connection

Links to GS-2 (Statutory, Regulatory and Quasi-judicial bodies) and GS-3 (Indian Economy - Issues relating to planning and mobilization of resources). The question tests the 'Separation of Powers' principle applied to economic governance.

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SIMILAR QUESTIONS

IAS · 2001 · Q54 Relevance score: 5.58

Consider the following statements regarding Reserve Bank of India : I. It is a banker to the Central Government. II. It formulates and administers monetary policy. III. It acts as an agent of the Government in respect of India’s membership of IMF. IV. It handles the borrowing programme of Government of India. Which of these statements are correct ?

IAS · 2025 · Q54 Relevance score: 4.28

Consider the following statements : I. The Constitution of India explicitly mentions that in certain spheres the Governor of a State acts in his/her own discretion. II. The President of India can, of his/her own, reserve a bill passed by a State Legislature for his/her consideration without it being forwarded by the Governor of the State concerned. Which of the statements given above is/are correct?

NDA-II · 2008 · Q98 Relevance score: 3.31

Consider the following statements : 1. No person is eligible for appointment as Governor unless he has completed the age of thirty years. 2. The same person can be appointed as Governor for three States. Which of the statements given above is/are correct?

IAS · 2018 · Q96 Relevance score: 3.05

With reference to the governance of public sector banking in India, consider the following statements : 1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade. 2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected. Which of the statements given above is/are correct ?