Previous Year Question
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:
I and II only
II, III and IV
I, III, IV and V
I, II and V
Correct Answer: D
Detailed Solution
Statement I is correct. The Reserve Bank of India holds and trades in government securities as part of its monetary-policy operations and functions associated with public-debt management.
RBI earns interest income from its holdings of government securities. Trading gains may also arise from the purchase and sale of government securities through Open Market Operations—OMO.
Statement II is correct. RBI manages India’s foreign-exchange reserves. Foreign-currency assets are invested in foreign government securities, deposits with central banks and other approved instruments. They can generate interest, exchange gains and gains from revaluation or sale of securities.
RBI may also buy and sell foreign currency in the foreign-exchange market to manage excessive volatility in the value of the rupee.
Statement III is incorrect. The pension sector is regulated by the Pension Fund Regulatory and Development Authority—PFRDA. Pension funds are managed by authorised pension-fund managers. Pension-fund management is not a normal income-earning activity of RBI.
Statement IV is incorrect. RBI does not ordinarily provide commercial loans directly to private companies in the manner of a commercial bank. It functions as banker to the government, banker to banks and lender of last resort. Liquidity provided to banks or financial institutions must not be confused with direct commercial lending to private companies.
Statement V is correct. RBI possesses the authority to issue banknotes in India. The economic benefit arising from currency issuance is known as seigniorage.
It is not merely a fee for physically printing notes. Banknotes constitute a generally non-interest-bearing liability of RBI, while the corresponding assets held against currency issuance can generate income. The cost of printing, distributing and managing currency is deducted from this benefit.