ETN News TNPSC Group IV – Day 16 | General Studies
Date: Wednesday, 28 October 2026 | Time: 1:00 PM IST Category: TNPSC Grp IV | Unit: V – Indian Economy and Development Administration in Tamil Nadu Topic: Money, Credit, Reserve Bank of India and Monetary Policy Sequence: Day 16/90 | Language: Complete English edition
1. Money and the Barter System
Barter means exchanging one good directly for another without using money. For example, a farmer may exchange rice for salt. Barter requires a double coincidence of wants: each person must want what the other person offers. Finding such a match can be difficult.
Money is a generally accepted medium of exchange. Its four important functions are: (1) medium of exchange, (2) unit of account, (3) store of value, and (4) standard of deferred payment. For example, saying that a book costs ₹200 shows how money measures value.
2. Forms of Money and Bank Accounts
Historically, people used grains, salt, metals and other items in exchange. Coins, paper notes, bank deposits and electronic payment methods developed later.
Savings account: Used for savings and routine transactions. Current account: Commonly used by businesses with frequent transactions. Fixed or term deposit: Money deposited for a specified period. Demand deposit: A deposit that can be withdrawn on demand.
UPI (Unified Payments Interface) is a payment system that helps transfer money between bank accounts and other supported sources; it is not a separate currency. Digital Rupee (e₹) is a Central Bank Digital Currency (CBDC) issued by RBI. Therefore, UPI and e₹ are not the same thing.
3. Reserve Bank of India: Important History
RBI stands for Reserve Bank of India. It is India’s central bank. It began operations on 1 April 1935 under the Reserve Bank of India Act, 1934. Its Central Office was initially in Kolkata and moved permanently to Mumbai in 1937. RBI was nationalised in 1949. Its Central Office remains in Mumbai.
Exam distinction: 1934 – RBI Act; 1935 – operations began; 1937 – move to Mumbai; 1949 – nationalisation.
4. Main Functions of RBI
1. Currency issue and management: RBI has the legal right to issue Indian banknotes other than the ₹1 note. The Government of India issues ₹1 notes and coins; RBI distributes coins into circulation. 2. Banker’s bank: Banks maintain prescribed reserves with RBI, which can also provide liquidity support to eligible institutions. 3. Banker and debt manager to government: RBI manages banking transactions and public-debt operations for the Union government, and performs banking functions for state governments under agreements. 4. Regulation and supervision: RBI helps maintain a sound and stable banking and financial system. 5. Monetary policy: RBI aims to maintain price stability while keeping economic growth in mind. 6. Foreign exchange and payments: RBI manages foreign exchange reserves and oversees important payment and settlement arrangements.
Avoid this mistake: RBI is a central bank, not a normal commercial bank where the general public routinely opens savings accounts.
5. Commercial Banks, Credit and Interest
Commercial banks accept deposits and provide loans subject to eligibility and banking rules. Credit is money borrowed with an obligation to repay it. Important loan terms include the interest rate, repayment period, documents and, where required, collateral.
Productive credit can help a farmer buy seeds or a business buy equipment and earn income. Consumption credit is borrowed for personal spending. A debt trap can arise when a borrower cannot repay and repeatedly borrows to meet existing obligations.
Formal sources of credit include banks and co-operative credit institutions. Informal sources include private moneylenders and similar arrangements. Interest rates and borrower protection can differ. Not all formal loans carry the same rate of interest.
6. Monetary Policy versus Fiscal Policy
Monetary policy is conducted by the central bank. It influences interest rates, liquidity, credit conditions and price stability, while keeping growth in view.
Fiscal policy refers to government decisions about taxation, expenditure, borrowing and budgets. For example, government spending on roads is a fiscal decision; RBI changing the policy repo rate is a monetary decision.
7. Important Monetary Policy Instruments
----------------------------------------------------------------------- Instrument Meaning Usual effect ----------------------- ----------------------- ----------------------- Repo rate Rate at which RBI An increase can raise provides liquidity to borrowing costs eligible participants against approved securities
CRR – Cash Reserve Prescribed cash balance An increase can reduce Ratio banks must maintain funds available for with RBI as a lending percentage of specified liabilities
SLR – Statutory Minimum prescribed An increase can affect Liquidity Ratio proportion of specified funds available for liabilities maintained lending in eligible liquid assets
SDF – Standing Deposit RBI accepts Helps absorb excess Facility uncollateralised liquidity overnight deposits from eligible participants
OMO – Open Market RBI buys or sells Purchases generally add Operations government securities liquidity; sales absorb it -----------------------------------------------------------------------
Memory aid: CRR is a cash reserve held with RBI; SLR is held in eligible liquid assets by banks. The policy repo rate is not automatically identical to the interest rate a bank charges a retail borrower.
8. Inflation, CPI and the 2026–2031 Target
Inflation is a sustained increase in the general price level. CPI – Consumer Price Index helps measure changes in prices paid by consumers for a basket of goods and services.
Under the Government of India Gazette notification dated 25 March 2026, the CPI inflation target for 1 April 2026 through 31 March 2031 is 4%, with a lower tolerance limit of 2% and an upper tolerance limit of 6%. This means 4% ± 2 percentage points.
MPC – Monetary Policy Committee: A six-member committee chaired by the RBI Governor. It determines the policy repo rate. The Governor has a casting vote in the event of a tie.
Illustration: If one item increases from ₹100 to ₹105, that item’s price has risen by 5%. This does not prove that India’s overall CPI inflation rate is 5%.
9. Tamil Nadu Connections
Co-operative banks and Self-Help Groups (SHGs) can help rural households and small businesses gain access to savings and credit. Farmers may borrow to purchase seeds, fertilisers and irrigation equipment. Eligible banks and financial institutions provide these loans; RBI does not routinely give individual crop loans directly to every farmer.
RBI has a currency issue office in Chennai within its national banknote distribution network. Bank transfers, UPI payments and co-operative credit provide everyday examples of monetary activity in Tamil Nadu.
10. Important Timeline
----------------------------------------------------------------------- Year Event ----------------------------------- ----------------------------------- 1934 RBI Act enacted
1 April 1935 RBI began operations
1937 RBI Central Office moved to Mumbai
1949 RBI nationalised
2016 Statutory inflation-targeting framework and MPC introduced
25 March 2026 Government notified the inflation target for 2026–2031 -----------------------------------------------------------------------
11. Essential Examination Facts
- RBI Central Office – Mumbai; began operations – 1935; nationalised – 1949. - Functions of money – exchange, measurement of value, saving value, future payment standard. - ₹1 note – Government of India; other banknotes – RBI. - Repo – policy rate for collateralised RBI liquidity support. - CRR is different from SLR; monetary policy differs from fiscal policy. - CPI inflation target for 2026–2031 – 4%, tolerance band 2%–6%. - UPI is a payment interface; e₹ is central bank digital currency.
12. Textbooks, Chapter References and Book-Back Progress