Economic Environment of Business

RBI, Commercial Banks, Monetary Policy, Unemployment & Inflation

RBI

Reserve Bank of India is Indias central bank It was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

: PGM, 2011

Commercial Banks

Commercial Banking in India came under RBIs control in 1949 with the passing of the Banking Regulation Act. SBI was set up in 1955 & in 1969 banks were nationalized - the goal of profit maximization was replaced by economic development On the one hand, resources had to be mobilized through branch expansion (esp. in rural & semi-urban areas) On the other, financial assistance had to be given to priority sectors like agriculture, small scale enterprises, retail, education, housing

: PGM, 2011

Commercial Banks

But soon banks started becoming financially weak & unprofitable Increased expenditure on branches Subsidized credit to priority sectors Lack of competition Bad management 1991 Narasimham Committee was set up to suggest reforms Regulation but not control Reduction in SLR & CRR Deregulation of Interest Rates Opening up to Private Sector
: PGM, 2011

Monetary Policy

Policy adopted by monetary authority (RBI) to control availability, cost & use of money & credit with the help of monetary measures to achieve specific goals The principal objectives of monetary policy are Price stability; Exchange rate stability; Control of business cycles; Achievement of full employment; Accelerating economic growth

: PGM, 2011

Monetary Policy

Instruments of Monetary Policy Reserve Requirements CRR & SLR Cash Reserve Ratio 4.00% (w.e.f. 30/01/2013) & Statutory Liquidity Ratio 23% (w.e.f. 11/08/2012) Repo Rate 7.75% (w.e.f. 30/01/2013) Reverse Repo Rate 6.75% (w.e.f. 30/01/2013) Open Market Operations Selective Credit Controls
: PGM, 2011

Monetary Policy

Limitations of Monetary Policy Time Lags Problem of Forecasting Role of Non-banking Financial Intermediaries Contradiction in Objectives Underdeveloped Money & Capital Markets Trade-off between Unemployment & Inflation Controlled Expansion
: PGM, 2011

Indias Unemployment rate

Year 2003 2004 2005 2006 2007 2008 2009 2010

Unemployment rate 8.80 % 9.50 % 9.20 % 8.90 % 7.80 % 7.20 % 6.80 % 10.70 %

Definition: The percent of the labor force that is without jobs. Substantial underemployment might be noted.

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as of December 30, 2010 : PGM, 2011

Indias Inflation rate

Year 2003 2004 2005 2006 2007 2008 2009 2010

Inflation rate (consumer prices) 5.40 % 3.80 % 4.20 % 4.20 % 5.30 % 6.40 % 8.30 % 10.90 %

Definition: This entry furnishes the annual percent change in consumer prices compared with the previous year's consumer prices.

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as of December 30, 2010 : PGM, 2011