CDS Economics · Free notes
Money, Banking and Public Finance: CDS Economics
Money, Banking and Public Finance has 72 past-year questions in CDS General Knowledge, from 2016 (II) to 2026 (II), and 23 of them are HARD. The papers of 2023 and 2024 alone hold 25 of them, so this chapter is asked more now than it used to be. Many questions test a definition that never changes: what M1 includes, what the primary deficit subtracts, which taxes the States share. The rest test a figure or a scheme from the news, such as a GST rate, a Budget item or a new payment system. Rates and limits change, so learn each figure with the year it holds for.
The handout has every subtopic, worked example, formula and trap with answers shown. The formula sheet is the chapter’s formulas and traps alone, on one page.
Subtopic notes
Money and Monetary Policy
13 PYQsWhat money does, how India measures it from M1 to M3, how banks multiply it, and the tools the RBI uses to control it.
Inflation and Price Indices
14 PYQsThe kinds of inflation and their names, how to work out an inflation rate from a price index, what WPI, CPI and core inflation measure, and how inflation is fought.
Banks and Financial Markets
16 PYQsWhat commercial banks, NBFCs, payments banks and microfinance lenders may and may not do, the instruments and agencies of the financial markets, new payment systems, and the NIIF.
Budget, Deficits and Fiscal Policy
16 PYQsHow the Union Budget is passed and where its money goes, the four deficits and how to work each one out, and what government borrowing does to interest rates and private investment.
Taxes, GST and the Finance Commission
13 PYQsThe principles of a good tax and who really pays it, how GST works and what it leaves out, and how the Finance Commission shares the Union's taxes with the States.
Formula & revision sheet
4 formulas · 15 reference tables · 33 gotchas across all subtopics — the exam-eve cheat-sheet
Formula & revision sheet
4 formulas · 15 reference tables · 33 gotchas across all subtopics — the exam-eve cheat-sheet
Money and Monetary Policy
Reference tables (3)
Functions of money and the terms of credit5 rows
| 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 M45 rows
| 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 policy6 rows
| 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. |
Watch out for (7)
- Nominal, not real, is the plain percentage→ Functions of money and the terms of credit
- Bankers' deposits with the RBI are not in M1→ Measures of money: M1 to M4
- Time deposits make the jump from M1 to M3→ Measures of money: M1 to M4
- More cash in hand means a smaller multiplier→ Credit creation and the money multiplier
- CRR with the RBI, SLR with the bank→ The RBI's tools of monetary policy
- Selling removes money, buying adds it→ The RBI's tools of monetary policy
- Bank rate and public debt are different worlds→ The RBI's tools of monetary policy
Inflation and Price Indices
Reference tables (3)
Kinds of inflation and their effects6 rows
| 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 inflation4 rows
| 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 indexation5 rows
| 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. |
Watch out for (6)
- Deflation is not devaluation or recession→ Kinds of inflation and their effects
- Inflation makes borrowing dearer, not cheaper→ Kinds of inflation and their effects
- Divide by last year, not by the base year→ Price index and the inflation rate
- Fuel and power is the smallest WPI group→ WPI, CPI and core inflation
- Core removes food and fuel, nothing else→ WPI, CPI and core inflation
- Indexation protects, it does not cure→ Fighting inflation and indexation
Banks and Financial Markets
Reference tables (4)
Banks, NBFCs and other lenders4 rows
| 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 agencies4 rows
| 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, Vostro4 rows
| 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 Fund5 rows
| 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 |
Watch out for (6)
- NBFCs do lend→ Banks, NBFCs and other lenders
- Collecting taxes is an agency function→ Banks, NBFCs and other lenders
- ETFs are the more liquid, cheaper option→ Financial market instruments and agencies
- e-RUPI needs neither a bank account nor a smartphone→ Payment systems: e-RUPI, SWIFT, Nexus, Vostro
- Vostro is yours, held for them→ Payment systems: e-RUPI, SWIFT, Nexus, Vostro
- NIIF is not NIF→ National Investment and Infrastructure Fund
Budget, Deficits and Fiscal Policy
Reference tables (2)
The Union Budget: process and main items5 rows
| 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 mix4 rows
| 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). |
Watch out for (6)
- Vote on account, not vote of credit→ The Union Budget: process and main items
- Interest beats defence and pensions→ The Union Budget: process and main items
- Primary deficit removes interest, nothing else→ Fiscal, revenue and primary deficits
- Fiscal deficit excludes borrowings from receipts→ Fiscal, revenue and primary deficits
- Out means less private investment, in means more→ Crowding out, crowding in and the policy mix
- Spending beats an equal transfer→ Crowding out, crowding in and the policy mix
Taxes, GST and the Finance Commission
Reference tables (3)
Canons of taxation and the Union's tax mix5 rows
| 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 Tax6 rows
| 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 pool5 rows
| 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% |
Watch out for (8)
- Fiscal adequacy is not one of Adam Smith's four→ Canons of taxation and the Union's tax mix
- The order of tax receipts depends on the year→ Canons of taxation and the Union's tax mix
- The less elastic side pays→ Who bears a tax: incidence
- The State GST Act is not Parliament's→ Goods and Services Tax
- Inter-State GST is collected by the Centre→ Goods and Services Tax
- Know which year's slabs a question means→ Goods and Services Tax
- Cesses and surcharges stay with the Centre→ Finance Commission and the divisible pool
- 14th and 15th Commission weights differ→ Finance Commission and the divisible pool
PYQ weightage by concept
19 concepts · 72 PYQs — where the marks actually sit, so you know what to drill first
PYQ weightage by concept
19 concepts · 72 PYQs — where the marks actually sit, so you know what to drill first
Money and Monetary Policy13 PYQs · 18%
| Concept | PYQs | Share |
|---|---|---|
| The RBI's tools of monetary policy | 6 | 8% |
| Functions of money and the terms of credit | 3 | 4% |
| Measures of money: M1 to M4 | 3 | 4% |
| Credit creation and the money multiplier | 1 | 1% |
Inflation and Price Indices14 PYQs · 19%
| Concept | PYQs | Share |
|---|---|---|
| Kinds of inflation and their effects | 7 | 10% |
| WPI, CPI and core inflation | 3 | 4% |
| Price index and the inflation rate | 2 | 3% |
| Fighting inflation and indexation | 2 | 3% |
Banks and Financial Markets16 PYQs · 22%
| Concept | PYQs | Share |
|---|---|---|
| Banks, NBFCs and other lenders | 5 | 7% |
| Financial market instruments and agencies | 5 | 7% |
| Payment systems: e-RUPI, SWIFT, Nexus, Vostro | 4 | 6% |
| National Investment and Infrastructure Fund | 2 | 3% |
Budget, Deficits and Fiscal Policy16 PYQs · 22%
| Concept | PYQs | Share |
|---|---|---|
| The Union Budget: process and main items | 6 | 8% |
| Fiscal, revenue and primary deficits | 5 | 7% |
| Crowding out, crowding in and the policy mix | 5 | 7% |
Taxes, GST and the Finance Commission13 PYQs · 18%
| Concept | PYQs | Share |
|---|---|---|
| Goods and Services Tax | 5 | 7% |
| Finance Commission and the divisible pool | 5 | 7% |
| Canons of taxation and the Union's tax mix | 2 | 3% |
| Who bears a tax: incidence | 1 | 1% |
Test yourself on Money, Banking and Public Finance
20 past CDS questions from this chapter, timed at 20 minutes and marked the way the exam marks it. You see your score and every answer the moment you finish. Free to start.