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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: A

Explanation

The correct answer is A.

  • Statements I and II are correct: The primary sources of income for the RBI include interest and profits earned from buying and selling domestic government bonds, as well as managing and trading foreign currency assets.
  • Statements III and IV are incorrect: As a central bank, the RBI does not manage commercial pension funds and lends primarily to commercial banks and the government, not directly to private companies.
  • Statement V is incorrect: Printing and distributing currency notes is a major expenditure for the RBI, not an income source. Issued currency is recorded as a liability on the RBI's balance sheet. While the central bank earns income from the assets backing the currency, the physical printing of notes is a direct cost.
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PROVENANCE & STUDY PATTERN

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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. 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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In India, which of the following can trade in Corporate Bonds and Government Securities ? 1. Insurance Companies 2. Pension Funds 3. Retail Investors Select the correct answer using the code given below :

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Which one of the following is not a function of Reserve Bank of India ?

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The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following? 1. Other banks retain their deposits with the RB I. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below: