UPSC Mains Answer Practice — GS 3: Excess liquidity in banking system and different satellite orbits (Week 171)

QUESTION 1

Excess liquidity in the banking system can weaken the transmission of monetary policy even when the policy rate remains unchanged. Discuss in the context of the Reserve Bank of India’s recent liquidity management challenges.

QUESTION 2

Different satellite orbits offer different trade-offs between coverage, resolution, latency and energy requirements. Explain with reference to Low Earth Orbit (LEO), Medium Earth Orbit (MEO) and Geosynchronous Orbit (GSO).

QUESTION 1: Excess liquidity in the banking system can weaken the transmission of monetary policy even when the policy rate remains unchanged. Discuss in the context of the Reserve Bank of India’s recent liquidity management challenges.

Relevance: The topic links directly with GS Paper 3: Indian Economy, monetary policy and banking system. It also connects liquidity management with inflation, interest rates, credit growth and monetary transmission. The question is relevant for analysing the RBI’s use of CRR, VRRR, OMO and other liquidity-management tools.

Note: This is not a model UPSC answer. It only provides you with a thought process which you may incorporate into the answers.

Introduction:

— Excess liquidity occurs when banks have more funds available than they need for normal operations and settlements. Even if the RBI maintains the repo rate, ample liquidity might cause short-term money-market rates to fall below the policy rate, reducing the transmission of the intended monetary policy.

— The RBI is currently facing a challenge as banking-system liquidity reached a four-year high of ₹10.3 lakh crore on September 3, 2026. The daily average surplus increased to ₹3.67 lakh crore in August from ₹1.07 lakh crore in July.

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You may incorporate some of the following points in your answer:

Impact of excess liquidity in the banking system

— The massive foreign-currency inflows created by the RBI’s special US dollar-rupee swap facility, along with liquidity provided through the RBI’s foreign-exchange operations, have contributed significantly to the current surplus. By August 31, the facility had garnered $136.377 billion in deposits, the vast majority of which were FCNR(B). While such inflows boost the rupee’s external position and sustain its value, conversion and similar activities can inject significant rupee liquidity into the domestic banking sector.

— The issue occurs because excessive liquidity puts downward pressure on overnight money-market rates. If these rates fall far below the repo rate, the operating aim of monetary policy becomes less effective: banks can obtain ample funds at lower market rates even if the RBI’s policy rate remains unchanged. As a result, the repo rate’s signalling function may weaken, and the transmission of the RBI’s policy stance to other interest rates may be distorted.

— As a result, the RBI must balance absorbing excess liquidity with avoiding undue tightening. It can use instruments like Variable Rate Reverse Repo (VRRR) operations and Open Market Operations (OMOs) to absorb excess funds, and the Cash Reserve Ratio (CRR) can also affect how much money banks can deploy. The selection and calibration of these instruments are critical because an overly aggressive withdrawal of liquidity could lead interest rates to rise significantly, thereby disrupting the government securities market.

— The difficulty is exacerbated by the possibility that core liquidity would rise higher in the absence of proper liquidity control procedures. At the same time, seasonal currency demand during the holiday season and the maturation of the RBI’s forward positions may absorb some of the surplus. Thus, the RBI must strike a balance between maintaining efficient monetary policy transmission, managing inflationary pressures, preserving the orderly operation of financial markets, and avoiding excessive interest rate volatility.

Conclusion:

— The current incident indicates that monetary policy effectiveness is determined not only by the amount of the policy repo rate, but also by the liquidity conditions under which it functions. The RBI’s aim is to ensure sufficient liquidity for orderly lending and economic activity while avoiding a surplus so substantial that market rates deviate from the desired monetary policy stance.

(Sources: Why too much money in the banking system is a problem for the RBI, RBI’s forex swap draws $136.37 billion, FCNR(B) deposits drive surge, Needed: More stable foreign capital)

Points to Ponder

What is excess liquidity in the banking system?

How do CRR, VRRR and OMOs help absorb liquidity?

Related Previous Year Questions

Examine the view that financial inclusion is an integral part of social and economic inclusion in a country like India. Also throw light on the usefulness of the R.B.I.’s Financial Inclusion Index. (2026)

What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation. (2024)

QUESTION 2: Different satellite orbits offer different trade-offs between coverage, resolution, latency and energy requirements. Explain with reference to Low Earth Orbit (LEO), Medium Earth Orbit (MEO) and Geosynchronous Orbit (GSO).

Relevance: The topic is directly linked with GS Paper 3: Space Technology and applications. The question tests understanding of how orbital characteristics determine satellite capabilities and mission design. It is also useful for analysing India’s expanding satellite and launch-vehicle capabilities and their strategic applications.

Note: This is not a model UPSC answer. It only provides you with a thought process which you may incorporate into the answers.

Introduction:

— The area that a satellite may see or communicate with is determined by the satellite’s orbit, as is the quality and frequency of data received, signal delay, and the energy required to attain and sustain the orbit.

— As a result, the three major orbital categories—Low Earth Orbit (LEO), Medium Earth Orbit (MEO), and Geosynchronous Orbit (GSO)—serve distinct technological and operational functions.

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You may incorporate some of the following points in your answer:

LEO, MEO and GSO: Key trade-offs

Parameter	LEO	MEO	GSO
Altitude	160–2,000 km	2,000–35,786 km	Roughly 35,786 km and above
Coverage	Relatively limited at any given time	Wider than LEO	Very large coverage
Resolution	Generally higher	Intermediate	Relatively lower because of greater distance
Latency	Lowest	Moderate	Higher
Energy requirement	Relatively lower to reach	Higher than LEO	Very high; orbit-raising and station-keeping require energy
Major applications	Earth observation, communications, satellite constellations	Navigation systems	Communications, broadcasting, meteorology and persistent observation

— LEO: It has high resolution and low latency but has limited continuous coverage. Large satellite constellations can bypass some of these restrictions, but they require a large number of satellites. LEO satellites are smaller and less expensive to launch than GEO or MEO satellites, but larger constellations are necessary for better coverage.

— MEO: It’s appropriate for navigation systems. The Indian Express reports that global navigation satellite systems like Galileo operate in this orbital region. Thus, MEO can give far more coverage than LEO while maintaining lower latency than much higher orbits.

The GSLV flight sequence. (ISRO)

— GSO: The greater distance from Earth results in a trade-off: image resolution is lower than in LEO, but signal delay is larger. Reaching GSO also demands a lot more energy. ISRO employed a sub-geosynchronous transfer orbit for EOS-05 before the satellite’s own propulsion system raised and circularised its orbit, rather than attempting to send the heavy satellite directly into its operating orbit.

Conclusion:

— As a result, no single satellite orbit is uniformly superior. LEO prioritises resolution and low latency, MEO strikes a balance between coverage and latency, while GSO prioritises wide-area and persistent coverage at the expense of increased energy consumption, latency, and lower resolution. India’s use of EOS-05 in GSO highlights how orbit selection is ultimately determined by the unique mission objective, such as the necessity for ongoing monitoring of weather, floods, forest fires, agriculture, natural resources, and strategic locations.

(Sources: ISRO launches EOS-05: What are the different types of satellite orbits, and why do they matter?, EOS-05 satellite: Why Isro chose geosynchronous orbit over circular geostationary orbit)

Points to Ponder

What are the key characteristics of LEO, MEO and GSO?

Why are GSO satellites useful for continuous communication and weather monitoring?

Related Previous Year Questions

Mention salient features of ‘Mission Drishti’. Discuss the imaging techniques used in the satellite launched on 3rd May 2026. Why it is being considered world’s first satellite of its kind? (2026)

What do you understand by ‘Standard Positioning System’ and ‘Precision Positioning System’ in the GPS era? Discuss the advantages India perceives from its ambitious IRNSS programme employing just seven satellites. (2015)

Previous Mains Answer Practice

UPSC Essentials: Mains answer practice — GS 3 (Week 170)

UPSC Essentials: Mains answer practice — GS 3 (Week 169)

UPSC Essentials: Mains answer practice — GS 2 (Week 170)

UPSC Essentials: Mains answer practice — GS 2 (Week 169)

UPSC Essentials: Mains answer practice — GS 1 (Week 167)

UPSC Essentials: Mains answer practice — GS 1 (Week 168)

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