CDS Economics · Formula sheet

Money, Banking and Public Finance formulas

4 formulas, 15 reference tables and 33 common traps for CDS Economics Money, Banking and Public Finance, grouped by subtopic.

Full notes with worked examples

Money and Monetary Policy

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Credit creation and the money multiplier

Money multiplier

m = \dfrac{1 + cdr}{cdr + rdr} \qquad M = m \times H

$cdr$ currency-deposit ratio
$rdr$ reserve-deposit ratio
$H$ high-powered (reserve) money
$M$ money supply

Functions of money and the terms of credit

Term	Meaning
Medium of exchange	Accepted in payment for goods and services
Store of value	Can be saved and spent later
Collateral	Asset pledged to guarantee repayment of a loanQ CDS 2021 (I).
Nominal interest rate	Percentage by which repayment exceeds the amount borrowedQ CDS 2021 (I), asked in the same paper as collateral.
Real interest rate	Nominal interest rate minus inflation

Measures of money: M1 to M4

Measure	Made up of
M1 (narrow money)	Currency with the public, demand deposits, other deposits with the RBIQ Asked twice: CDS 2023 (II) and CDS 2024 (I). Time deposits and bank reserves are the wrong options both times.
M2	M1 plus post office savings bank deposits
M3 (broad money)	M1 plus time deposits with banks; the most used measureQ CDS 2022 (II): M3 is the most widely used measure.
M4	M3 plus all post office savings deposits
M0 (reserve money)	Currency in circulation, bankers' deposits with the RBI, other deposits with the RBI

The RBI's tools of monetary policy

Tool	What it is
Repo rate	RBI's overnight lending rate to banks, against securitiesQ CDS 2020 (I): the repo rate is NOT the cost of the collateral.
Standing Deposit Facility	Floor of the corridor since April 2022, replacing the fixed reverse repoQ CDS 2024 (I): both facts were correct.
Cash Reserve Ratio	Share of NDTL kept as a balance with the RBI
Statutory Liquidity Ratio	Share of NDTL kept by the bank itself in liquid assets
Open market operations	Selling securities or foreign exchange removes money; buying adds itQ CDS 2023 (II): sale of Treasury Bills and of foreign exchange contract money supply.
Transmission indicators	Weighted average lending rate, weighted average term deposit rate, 1-year median MCLRQ CDS 2024 (I), a HARD question: the SDF rate is a tool, not an indicator.

Common traps

Nominal, not real, is the plain percentage

The rate by which the money repaid exceeds the money borrowed is the nominal interest rate. The real rate subtracts inflation. The bank rate is a rate the RBI charges banks, not the rate on your loan.

Bankers' deposits with the RBI are not in M1

M1 has 'other deposits' with the RBI, but bankers' deposits with the RBI belong to reserve money. Counting them in M1 would count the same money twice.

Time deposits make the jump from M1 to M3

M1 holds only demand deposits. Adding time deposits gives M3. An option putting time deposits in M1 is wrong.

More cash in hand means a smaller multiplier

Cash kept at home cannot be lent again, so it breaks the chain of credit creation. A higher currency-deposit ratio lowers the money multiplier; it does not raise it.

CRR with the RBI, SLR with the bank

The CRR is a cash balance kept with the RBI. The SLR is kept by the bank itself in liquid assets. An option saying CRR is held 'as liquid assets' or 'as cash reserves' describes the wrong ratio.

Selling removes money, buying adds it

When the RBI sells Treasury Bills or foreign exchange, buyers pay it rupees, so money leaves circulation. When it buys, it pays rupees out and money supply expands.

Bank rate and public debt are different worlds

The bank rate and open market operations are monetary tools run by the RBI. Public debt and public revenue belong to fiscal policy, run by the government.

Inflation and Price Indices

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Price index and the inflation rate

Inflation rate

\pi_t = \dfrac{P_t - P_{t-1}}{P_{t-1}} \times 100

$\pi_t$ inflation rate in year t (per cent)
$P_t$ price index in year t
$P_{t-1}$ price index in the previous year

Kinds of inflation and their effects

Term	What happens
Demand-pull inflation	Demand grows faster than supply
Cost-push inflation	Rising costs such as crude oil, freight and supply disruptionsQ CDS 2023 (II): the causes of high wholesale inflation in 2021-22 were crude oil, supply chains and freight, not falling activity.
Deflation	Sustained fall in the general price levelQ CDS 2023 (I).
Stagflation	Slow growth with rapid inflation
Shrinkflation	Smaller pack at the same priceQ CDS 2025 (II).
Disinflation	Inflation positive but slowing down

WPI, CPI and core inflation

Index or measure	Key fact
WPI weights (base 2011-12)	Manufactured about 64%, primary about 23%, fuel and power about 13%Q CDS 2024 (I), a HARD question: fuel and power weigh LESS than primary articles.
CPI (combined)	The index the RBI targets: 4%, band 2% to 6%
Core inflation	Headline CPI minus food and fuel
Housing in CPI	A core serviceQ CDS 2025 (I), a HARD question.

Fighting inflation and indexation

Measure	Effect on inflation
Higher interest on savings and fixed deposits	Reduces it (people save instead of spend)
Raising the repo rate or CRR	Reduces it
Cutting the CRR	Adds to it
More government spending	Adds to it
Indexation	Protects wages against it; used to fix wage compensationQ CDS 2019 (II): indexation is associated with fixing wage compensation, not with controlling inflation.

Common traps

Deflation is not devaluation or recession

Deflation is a fall in prices. Devaluation is a fall in the external value of a currency, and a recession is a fall in output. Disinflation means prices still rise, only more slowly.

Inflation makes borrowing dearer, not cheaper

With prices rising, the central bank tightens and lenders ask more, so the cost of borrowing rises. Lenders and bondholders lose because they are repaid in money worth less.

Divide by last year, not by the base year

If an index goes from 100 to 125 to 150, inflation in the third year is 25 ÷ 125 = 20%, not 50%. Using the base-year 100 gives the total rise since the base year.

Fuel and power is the smallest WPI group

In the WPI, manufactured products (about 64%) outweigh primary articles (about 23%), which outweigh fuel and power (about 13%). A statement that fuel and power outweigh primary articles is false.

Core removes food and fuel, nothing else

Core inflation strips out only the volatile food and fuel (energy) items from CPI headline inflation. It is not built on WPI, and it does not remove all non-food items.

Indexation protects, it does not cure

Indexation raises wages as prices rise, so it protects incomes. It is linked with fixing wage compensation, not with controlling inflation.

Banks and Financial Markets

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Banks, NBFCs and other lenders

Lender	Key rule
NBFC	Can lend; cannot take demand deposits or issue cheques; no deposit insuranceQ CDS 2022 (II): 'NBFCs cannot give loans' is the wrong statement.
India Post Payments Bank	Public limited company; pilot branches in Raipur and RanchiQ CDS 2018 (I), a HARD question: the pilots were NOT in Hyderabad and Varanasi.
Microfinance lender	Loans without collateral to low-income households
Bank run	Panic withdrawal of deposits by many depositors at onceQ CDS 2016 (II).

Financial market instruments and agencies

Item	Key fact
Exchange-Traded Fund	Traded all day on an exchange; higher liquidity, lower fees than mutual fundsQ CDS 2018 (I), a HARD question: the false statement says ETFs have lower liquidity and higher fees.
Green bonds	Fund environmentally sustainable, climate-friendly projectsQ CDS 2026 (I).
SEBI (Index Providers) Regulations, 2024	Cover significant indices only; aim at transparency and accountabilityQ CDS 2026 (II), a HARD question: both statements were correct.
Sub-prime crisis	US mortgage collapse of 2007-08 that led to a global recessionQ CDS 2019 (I).

Payment systems: e-RUPI, SWIFT, Nexus, Vostro

System	What it does
e-RUPI	Pre-paid voucher by SMS or QR code; no bank account or smartphone needed
SWIFT	Global messaging network for cross-border payments
Project Nexus	BIS initiative for instant cross-border retail paymentsQ CDS 2025 (I), a HARD question.
Rupee Vostro account	Account an Indian bank keeps for a foreign bank, in rupeesQ CDS 2024 (II), a HARD question.

National Investment and Infrastructure Fund

Fund	Purpose
National Investment Fund (2005)	Holds disinvestment proceeds
NIIF (Budget 2015-16)	Invests in infrastructure through several fundsQ CDS 2016 (II), a HARD question: NIIF and NIF are NOT the same organisation.
NIIF Master Fund	Invests in core infrastructure
NIIF Fund of Funds	Invests in funds run by other managers
NIIF Strategic Opportunities Fund	Invests in businesses beyond core infrastructure

Common traps

NBFCs do lend

Lending is an NBFC's main business. What it cannot do is take demand deposits, issue cheques on itself, or offer DICGC deposit insurance.

Collecting taxes is an agency function

Accepting deposits, giving overdrafts and investing surplus funds are a bank's primary functions. Collecting income tax or cheques for someone else is an agency function.

ETFs are the more liquid, cheaper option

Because an ETF trades on an exchange all day, it is more liquid and usually cheaper than a mutual fund. A statement giving it lower liquidity and higher fees is the false one.

e-RUPI needs neither a bank account nor a smartphone

The voucher reaches the phone as an SMS string or QR code, so a basic phone is enough and no bank account is needed. A statement that a smartphone with internet is required is false.

Vostro is yours, held for them

A vostro account is held in India, in rupees, for a foreign bank. A nostro account is an Indian bank's account abroad, in foreign currency.

NIIF is not NIF

The NIF (2005) holds disinvestment money. The NIIF (Budget 2015-16) finances infrastructure. A statement that they are the same body is false.

Budget, Deficits and Fiscal Policy

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Fiscal, revenue and primary deficits

The deficits

FD = TE - (RR + NDCR) \qquad PD = FD - \text{Interest} \qquad RD = RE - RR

$TE$ total expenditure
$RR$ revenue receipts
$NDCR$ non-debt capital receipts (recovery of loans, disinvestment)
$RE$ revenue expenditure

The Union Budget: process and main items

Item	Key fact
Largest item of revenue expenditure	Interest paymentsQ Asked twice: CDS 2024 (II) and CDS 2026 (I, about Budget 2025-26).
Largest major subsidy	Food subsidy (2019-20 Budget Estimates)Q CDS 2020 (II).
Effective capital expenditure	Capital expenditure plus grants for creation of capital assetsQ CDS 2025 (II), a HARD question: it rose as a share of GDP from 2020-21 to 2023-24; revenue expenditure did not.
FDI cap in insurance	Raised from 74% to 100% in Budget 2025-26Q CDS 2025 (II).
Vote on account	Advance grant until the demands for grants are passed

Crowding out, crowding in and the policy mix

Situation	Result
Government spending induces private investment	Crowding inQ CDS 2021 (I).
Tight money with expansionary fiscal policy	Interest rate rises unambiguously; currency appreciatesQ CDS 2023 (I), a HARD question.
Extra spending without more money supply	Smaller rise in income (interest rates go up)Q CDS 2024 (II), a HARD question: spending has a LARGER effect than an equal transfer, not smaller.
Deficit widened by subsidies, taxes unchanged	Inflation rises, interest rates may rise, private investment may slowQ CDS 2026 (II).

Common traps

Vote on account, not vote of credit

An advance to keep the government running until the Budget is passed is a vote on account. A vote of credit is a blank grant for an unexpected need, such as a war.

Interest beats defence and pensions

In the Union Budget the largest revenue expense is interest payments, not defence, salaries or pensions.

Primary deficit removes interest, nothing else

Primary deficit = fiscal deficit − interest payments. Defence, subsidies or pensions are never the item subtracted.

Fiscal deficit excludes borrowings from receipts

The fiscal deficit compares spending with receipts other than borrowing, so it measures how much must be borrowed. Including borrowings in receipts would make every budget balance.

Out means less private investment, in means more

Crowding out: government borrowing pushes up interest rates and reduces private investment. Crowding in: government spending encourages private investment. Pump priming means spending to restart a slack economy.

Spending beats an equal transfer

A rupee of government purchase is spent in full in the first round. A rupee of transfer is partly saved, so its multiplier is smaller. A statement that spending has less impact than an equal transfer is false.

Taxes, GST and the Finance Commission

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Who bears a tax: incidence

Share of a tax borne by buyers

\text{Buyers' share} = \dfrac{e_s}{e_s + e_d}

$e_s$ price elasticity of supply
$e_d$ price elasticity of demand (without its minus sign)

Canons of taxation and the Union's tax mix

Canon	Meaning
Equality	Tax in proportion to ability to pay
Certainty	The amount, time and manner of payment are clear
Convenience	Collected at a time and in a way convenient to the taxpayer
Economy	Cost of collection is small
Fiscal adequacy (later writers)	Tax raises enough revenue for the state

Goods and Services Tax

Item	Status under GST
Petrol and diesel	Not yet taxed under GSTQ CDS 2022 (I): petrol is the item not covered.
Alcohol for human consumption	Kept outside by the Constitution
Basic customs duty	Not subsumed; still levied on imports
Precious metals	Taxed at 3%, not 1%Q CDS 2024 (I), a HARD question.
Rough (unworked) diamonds	Taxed at 0.25%
Inter-State supply	Levied by the Union under Article 269A and shared with the StatesQ CDS 2026 (II): all three statements were correct (UPSC's provisional key).

Finance Commission and the divisible pool

14th FC criterion	Weight
Income distance	50%Q Asked twice: CDS 2017 (II) wanted the highest weight, CDS 2018 (II) the descending order.
Population (1971)	17.5%
Area	15%
Demographic change	10%
Forest cover	7.5%

Common traps

Fiscal adequacy is not one of Adam Smith's four

Smith's canons are equality, certainty, convenience and economy. Productivity, elasticity and fiscal adequacy were added by later writers.

The order of tax receipts depends on the year

Corporation tax led in 2019-20; personal income tax led in the 2025-26 Budget Estimates. Read which Budget the question names before ranking the taxes.

The less elastic side pays

Students often think the side with more market power pays less. The rule is about elasticity: whichever side responds less to price bears more of the tax.

The State GST Act is not Parliament's

Parliament passed the Central, Integrated and Union Territory GST Acts and the Compensation Act. Each State GST Act is passed by the State legislature.

Inter-State GST is collected by the Centre

On supplies between States, GST is levied and collected by the Government of India (Article 269A) and only then apportioned. A State cannot levy it.

Know which year's slabs a question means

The four slabs of 5, 12, 18 and 28% applied from 2017. Since 22 September 2025 the main slabs are 5% and 18%, with 40% for luxury and sin goods.

Cesses and surcharges stay with the Centre

Income tax, corporation tax and basic excise duty go into the divisible pool. Cesses and surcharges do not, which is why the Centre's road cess on petrol is not shared.

14th and 15th Commission weights differ

Income distance was 50% under the 14th and 45% under the 15th Commission, and the 15th used the 2011 population instead of 1971. Check which Commission the question names.

Money, Banking and Public Finance formulas

Money and Monetary Policy

Credit creation and the money multiplier

Functions of money and the terms of credit

Measures of money: M1 to M4

The RBI's tools of monetary policy

Common traps

Inflation and Price Indices

Price index and the inflation rate

Kinds of inflation and their effects

WPI, CPI and core inflation

Fighting inflation and indexation

Common traps

Banks and Financial Markets

Banks, NBFCs and other lenders

Financial market instruments and agencies

Payment systems: e-RUPI, SWIFT, Nexus, Vostro

National Investment and Infrastructure Fund

Common traps

Budget, Deficits and Fiscal Policy

Fiscal, revenue and primary deficits

The Union Budget: process and main items

Crowding out, crowding in and the policy mix

Common traps

Taxes, GST and the Finance Commission

Who bears a tax: incidence

Canons of taxation and the Union's tax mix

Goods and Services Tax

Finance Commission and the divisible pool

Common traps

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