Money and Banking for UPSC Prelims 2025

Comprehensive Notes with Exam-Relevant Facts and Vibrant

Highlights

Tailored for UPSC Civil Services Preliminary Examination

Last Updated: July 2025

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Contents
1 Introduction to Money and Banking 2

2 Evolution and Functions of Money 2

2.1 Evolution of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Functions of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Types of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

3 Money Supply and Measurement 2

3.1 Components of Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Factors Affecting Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Recent Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4 Monetary Policy 3
4.1 Definition and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.2 Tools of Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.3 Monetary Policy Committee (MPC) . . . . . . . . . . . . . . . . . . . . . . . . . . 4

5 Banking System in India 4

5.1 Structure of Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Non-Banking Financial Companies (NBFCs) . . . . . . . . . . . . . . . . . . . . . 4
5.3 Recent Banking Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

6 Reserve Bank of India (RBI) 4

6.1 Overview and Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 Key Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

7 Financial Inclusion and Government Schemes 5

7.1 Key Schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.2 Digital Financial Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

8 Key Exam-Relevant Facts and Current Affairs 5

9 Common UPSC Prelims Questions 6

10 Preparation Strategy for UPSC Prelims 6

11 Quick Revision Table 6

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Money and Banking for UPSC Prelims 2025 July 26, 2025

1. Introduction to Money and Banking

Money and Banking is a pivotal topic in the UPSC Prelims syllabus under Indian Economy. It covers
the evolution, functions, and measurement of money, the role of the Reserve Bank of India (RBI),
monetary policy, banking systems, and recent developments like digital banking and financial inclu-
sion. This document provides a detailed, colorful, and exam-focused guide to mastering this section,
incorporating static concepts and dynamic current affairs relevant to the 2025 exam.

Key Exam Point: Expect 58 questions in UPSC Prelims on Money and Banking,
blending static knowledge with current economic developments.

2. Evolution and Functions of Money

2.1 Evolution of Money
Money has evolved from the barter system to modern digital currencies. Early forms included com-
modity money (e.g., grains, cattle), followed by metallic money (gold, silver coins), paper money,
and now digital money like UPI-based transactions. The RBIs introduction of plastic notes and ex-
periments with Central Bank Digital Currency (CBDC) mark recent advancements.

2.2 Functions of Money

Money serves multiple roles in an economy:
• Medium of Exchange: Eliminates barters double coincidence of wants.
• Unit of Account: Measures value of goods and services.
• Store of Value: Enables savings for future use.
• Standard of Deferred Payment: Facilitates credit and debt repayment.

2.3 Types of Money

Money is classified as:
• Fiat Money: Government-backed currency (e.g., Indian Rupee).
• Commodity Money: Intrinsic value-based (e.g., gold).
• Representative Money: Backed by reserves (e.g., gold certificates).
• Cryptocurrency: Decentralized digital currency (e.g., Bitcoin, regulated but not legal tender
in India).

Key Exam Point: The 2020 Supreme Court ruling lifted RBIs 2018 ban on cryp-
tocurrency trading, a frequent UPSC question. CBDC pilot launched by RBI in 2022
is also exam-relevant.

3. Money Supply and Measurement

3.1 Components of Money Supply

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The RBI measures money supply using:

• M0: Monetary base (currency in circulation + bankers deposits with RBI + other deposits).
• M1: Narrow money (M0 + demand deposits + other deposits with RBI).
• M2: M1 + post office savings deposits.
• M3: Broad money (M1 + time deposits with banks).
• M4: M3 + all post office deposits (rarely used).

3.2 Factors Affecting Money Supply

Money supply is influenced by RBIs monetary policy, government fiscal policy, and banking opera-
tions. Demonetization (2016) reduced M0 temporarily, while digital transactions boosted M1 growth.

3.3 Recent Trends

As of 2025, M3 growth is around 1012% annually, reflecting economic recovery post-COVID. The
RBIs focus on controlling inflation impacts M3 management.

Key Exam Point: M3 is the most tested money supply measure in UPSC. Memorize
its components and link to inflation control policies.

4. Monetary Policy
4.1 Definition and Objectives
Monetary policy is RBIs tool to regulate money supply, targeting:
• Price stability (inflation target: 4% ś 2%).
• Economic growth.
• Financial stability and exchange rate stability.

4.2 Tools of Monetary Policy

Key tools include:
• Cash Reserve Ratio (CRR): 4.5% (2025), mandates banks to keep reserves with RBI.
• Statutory Liquidity Ratio (SLR): 18% (2025), requires investment in government securities.
• Repo Rate: 6.5% (2025), rate for RBI lending to banks.
• Reverse Repo Rate: 6.25% (2025), rate for RBI borrowing from banks.
• Open Market Operations (OMO): Buying/selling securities to adjust liquidity.
• Marginal Standing Facility (MSF): Emergency borrowing at 6.75% (2025).
• Bank Rate: Long-term lending rate, aligned with MSF.

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4.3 Monetary Policy Committee (MPC)

Established in 2016 under the RBI Act, 1934, the MPC has six members (3 from RBI, 3 external)
and sets repo rates to achieve inflation targets. Meetings occur bimonthly.

Key Exam Point: UPSC often tests repo rate changes, CRR/SLR impacts, and MPCs
role. Check RBIs latest policy statements for updates.

5. Banking System in India

5.1 Structure of Banking
Indias banking system includes:
• Scheduled Commercial Banks: Public sector (e.g., SBI), private sector (e.g., ICICI), foreign
banks (e.g., HSBC).
• Cooperative Banks: Urban and rural, regulated by RBI and state registrars.
• Regional Rural Banks (RRBs): 43 RRBs (2025), focused on rural credit.
• Small Finance Banks: For microfinance (e.g., AU Small Finance Bank).
• Payments Banks: For digital transactions (e.g., Airtel Payments Bank).
• Development Banks: E.g., NABARD, SIDBI for agriculture and MSMEs.

5.2 Non-Banking Financial Companies (NBFCs)

NBFCs provide loans and financial services but cannot accept demand deposits. Regulated by RBI,
e.g., Bajaj Finance.

5.3 Recent Banking Reforms

• Bank Mergers: 2020 merger reduced public sector banks from 27 to 12.
• NPA Management: Gross NPA ratio improved to 2.8% in 2025.
• Digital Banking: UPI transactions reached 130 billion annually by 2025.
• Basel III Norms: Banks maintain capital adequacy ratio (CAR) of 11.5%.

Key Exam Point: NPAs, bank mergers, and UPI growth are high-yield topics. Focus
on recent data and reforms.

6. Reserve Bank of India (RBI)

6.1 Overview and Functions
Established in 1935, RBI is Indias central bank with key roles:
• Monetary Authority: Controls money supply and interest rates.
• Currency Issuer: Issues notes under Minimum Reserve System (200 crore gold + foreign
exchange).

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• Bank Regulator: Supervises banks and NBFCs.

• Governments Banker: Manages public debt and government accounts.
• Developmental Role: Promotes financial inclusion and rural credit.

6.2 Key Initiatives

• UPI: Unified Payments Interface, launched in 2016, dominates digital payments.
• PMJDY: Pradhan Mantri Jan Dhan Yojana, over 50 crore accounts by 2025.
• CBDC: Digital Rupee pilot launched in 2022, expanded to retail in 2024.
• IBC 2016: Insolvency and Bankruptcy Code to resolve NPAs.

Key Exam Point: RBIs initiatives like UPI, CBDC, and PMJDY are frequently
tested. Link them to financial inclusion goals.

7. Financial Inclusion and Government Schemes

7.1 Key Schemes
• PMJDY: Zero-balance accounts for unbanked populations.
• MUDRA Yojana: Loans up to 10 lakh for micro-enterprises.
• Stand-Up India: Loans for SC/ST and women entrepreneurs.
• PM Suraksha Bima Yojana: Affordable insurance for low-income groups.

7.2 Digital Financial Inclusion

India Stack (Aadhaar, UPI, mobile) has driven financial inclusion, with 80% of adults accessing
banking services by 2025.

Key Exam Point: Financial inclusion schemes are a UPSC favorite. Memorize key
features and impact statistics.

8. Key Exam-Relevant Facts and Current Affairs

• Demonetization (2016): Removed 86% of currency (500, 1000 notes) to curb black money.
• GST (2017): Simplified tax collection, impacting banking operations.
• PMC Bank Crisis (2019): Exposed cooperative bank vulnerabilities.
• Cryptocurrency Regulation: Dinesh Sharma Committee (2019) recommended a ban; bill
pending in 2025.
• RBI Governors: Shaktikanta Das (2018present).
• Economic Survey 202425: Highlights banking sector resilience and digital growth.
• Budget 2025: Emphasis on MSME credit and digital banking infrastructure.

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Key Exam Point: Connect static concepts (e.g., CRR) with current affairs (e.g.,
Budget 2025) for analytical questions.

9. Common UPSC Prelims Questions

Below are question types frequently asked:
• Difference between CRR and SLR.
• Impact of repo rate hike on inflation.
• Role of RBI in financial inclusion.
• Features of Small Finance Banks vs. Payments Banks.
• Implications of demonetization on money supply.

Key Exam Point: Practice previous 57 years UPSC papers to master question pat-
terns.

10. Preparation Strategy for UPSC Prelims

• NCERTs: Read Class 1112 Economics for fundamentals.
• Standard Books: Indian Economy by Ramesh Singh, Macroeconomics by Mankiw.
• Current Affairs: Follow Economic Survey, Union Budget, RBI annual reports.
• Mock Tests: Solve 50100 questions on Money and Banking.
• Revision: Use these colorful notes for quick recall.

Key Exam Point: Revise these notes weekly and stay updated via PIB and The
Hindu for dynamic topics.

11. Quick Revision Table

Topic Key Points

Money Supply M0 (reserve money), M1 (narrow), M3 (broad, most tested).

Monetary Policy CRR (4.5%), SLR (18%), Repo (6.5%), Reverse Repo
(6.25%) in 2025.

RBI Functions Currency issuer, monetary policy, bank regulator, financial

inclusion.

Banking Types Commercial, Cooperative, RRBs, Small Finance, Payments

Banks.

Recent Trends UPI (130 billion transactions), NPAs ( 2.8%), CBDC pilot.

Schemes PMJDY, MUDRA, Stand-Up India, PM Suraksha Bima.

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Key Exam Point: Use this table for last-minute revision before the exam.

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