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April 18, 2017

GK : Money & Banking

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Money is that commodity which is generally acceptable (legally) as a me-ans of payment in the settlement of all transaction including debt. Money performs following functions.
  • Medium of exchange 
  • Unit of account 
  • Standard of deferred payment 
  • Store of value 
  • Basis of credit creation
  • Basis of distribution of national income, etc.

Indian Currency

  • Indian currency is also known as Fiat Money i.e. Money on the Fiat (order) of the government. It is also Known as Legal Tender Money. 
  • Reserve Bank of India manages the currency of India while the responsibility of coinage vests with Government of India. 
  • Presently Indian currency system is based on the "Minimum Reserve System". 
  • This means if RBI is willing to print additional currency, than after from considering technical front, it has to keep only a mini-mum amount of reserve which will allow it to print as much currency as it willing to print. 
Gresham's Law : Bad money (wornout notes and currencies) drives good money out of the market.

New Monetary Aggregates

It was suggested by the working group constituted in December 1997 under the Chairmanship of Dr.Y.V.Reddy in 1998. 

M1= Currency in circulation + demand deposits with banks + other deposits with RBI

Note : RBI has two types of deposits. One is the deposits of the commercial banks and other is the deposit of certain individuals such as Ex. Governors of RBI who are permitted to use RBI like any commercial bank. President of India can also open an account with RBI. 

M2 = Ml + Time liabilities portion of saving deposit with banks + certificate of deposits issued by banks + term deposits with banks maturing within one year. 

M3 = M2+ term deposits with banks over one year maturity + call/term borrowing of banks. 

M4 = Abolished 

M0 = Currency in circulation + other deposits with RBI + Cash reserves of bank with the bank itself and with the RBI. 


  • The first commercial bank was established in 1770 by the Alexander & Company, named Bank of Hindustan. 
  • The Bank of Bengal was established in 1806 at Calcutta. The Bank of Bombay was established in 1840 at Bombay and Bank of Madras in 1843 at Madras. 
  • These Three Presidency banks were amalgamated on 27 January 1921 and Imperial Bank of India was established. 
  • On July 1, 1955 the imperial Bank of India was partially nationalized and it named State Bank of India.
  • In 2006 State Bank of India celebrated its 200th year of establishment as the founder bank was established in 1806. 
  • At present State Bank of India is the largest commercial bank of India. 
  • Punjab National bank was established in 1894 and it is known as the first truly Indian bank as it was established by Indians only. 
  • Banks in India can be classified into : 
    • Public Sector Banks
    • Private Sector Banks
    • Co-operative Banks
    • Regional Rural Banks 
    • Foreign Banks

Reserve Bank of India

  • The Reserve Bank of India was established on April 1, 1935 under the Reserve Bank of India Act, 1934. 
  • RBI was established with 5 Crore as its capital on the basis of the recommendations of the Hilton Young Commission. 
  • RBI was nationalized on January 1, 1949. 
  • The Central office of the Reserve Bank of India was initially established in Kolkata but was permanently moved to Mumbai in 1937. 
  • The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of Directors including the Governor four Deputy Governors. 
  • The first Indian Governor of RBI was C.D. Deshmukh. 
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