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Q2 (IAS/2025) Economy › Money, Banking & Inflation › Central banking functions Answer Verified

Which of the following are the sources of income for the Reserve Bank of India? I. Buying and selling Government bonds II. Buying and selling foreign currency III. Pension fund management IV. Lending to private companies V. Printing and distributing currency notes Select the correct answer using the code given below.

Result
Your answer: —  ·  Correct: D
Explanation

Analysis of Income Sources

  • I. Buying and selling Government bonds: (Correct) RBI conducts Open Market Operations (OMOs) where it buys and sells government securities (bonds) to regulate liquidity in the economy. It earns interest income on the bonds it holds and can realize capital gains from selling them at a higher price than the purchase price.
  • II. Buying and selling foreign currency: (Correct) The RBI manages India's foreign exchange reserves. It earns income through interest on foreign currency assets (typically invested in sovereign bonds of other countries like the US) and profits from currency trading and valuation gains.
  • III. Pension fund management: (Incorrect) RBI does not manage pension funds for the public or government employees; this is the role of the Pension Fund Regulatory and Development Authority (PFRDA) and specific pension fund managers. While the RBI manages its own internal employee pension funds, this is considered an operational expenditure, not a source of income.
  • IV. Lending to private companies: (Incorrect) The RBI acts as a "banker to banks" and "banker to the government". It lends to scheduled commercial banks (via Repo and MSF) and to central/state governments, but it does not lend directly to private companies.
  • V. Printing and distributing currency notes: (Correct) While the physical process of printing involves costs, the RBI earns what is known as Seigniorage. This is the profit earned from the difference between the face value of the currency issued and the actual cost of producing and distributing it.

Sources

  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.15 RBI's sources of Income and Economic Capital Framework > p. 76
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.15 RBI's sources of Income and Economic Capital Framework > p. 76
  3. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.15 RBI's sources of Income and Economic Capital Framework > p. 76
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Q. Which of the following are the sources of income for the Reserve Bank of India? I. Buying and selling Government bonds II. Buying and se…
At a glance
Origin: Mixed / unclear origin Fairness: Moderate fairness Books / CA: 6/10 · 0/10
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This is a classic 'Nature of Institution' question. It tests if you understand the fundamental difference between a Central Bank (Regulator/Issuer) and a Commercial Bank (Lender/Manager). It is highly fair and directly solvable from standard texts like Vivek Singh or Nitin Singhania.

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
Does the Reserve Bank of India earn income from buying and selling Government bonds (dealing in government securities)?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.15 RBI's sources of Income and Economic Capital Framework > p. 76
Presence: 5/5
“The following are the various sources of income of RBI: • The Foreign Currency Assets (FCA) are around 90% of the Forex reserves. This FCA RBI has invested in US govt. bonds and it earns interest on that. It has also deposited some FCA with other Central Banks.• When RBI purchase Indian Govt. bonds from the OMO, then it earns interest on the holding of govt bonds/securities• Lending at Repo rate to banks• RBI acts as 'Debt Manager' of Central Govt and State Govt for which it gets commission/income.• Seigniorage Economic capital is a measure of risk in terms of capital.”
Why this source?
  • Explicitly states RBI earns interest when it purchases Indian government bonds via OMO.
  • Also notes RBI invests foreign currency assets in government bonds and earns interest on those holdings.
  • Mentions RBI earns income from acting as debt manager, which is tied to government securities operations.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.5 Government Securities > p. 47
Presence: 4/5
“increased by the inflation index and the interest is offered on the increased principle. • Special Securities: Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of cash subsidies.• Bank recapitalization bonds: Government of India has also issued Bank Recapitalisation Bonds to specific Public Sector Banks in 2018. (Discussed in detail in bank recapitalization)• Sovereign gold bonds (SGB): SGBs are unique instruments, prices of which are linked to commodity price viz Gold.”
Why this source?
  • Describes government securities as interest-bearing instruments, implying holders (including RBI) receive interest income.
  • Lists different types of government securities that pay interest, supporting the idea of earnings from holdings.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
Presence: 3/5
“Notice that in the previous case, Rs 100 in reserves could support deposits of Rs 400. But the banking system would now be able to loan Rs 300 only. It would have to call back some loans to meet the increased reserve requirements. Hence, money supply would fall. Another important tool by which the RBI also influences money supply is Open Market Operations. Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.”
Why this source?
  • Defines Open Market Operations as the buying and selling of government bonds by the central bank.
  • Explains the RBI pays for purchases (increasing its holdings), linking the operational mechanism to potential income from those holdings.
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Statement analysis

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