RBI

RBI the central Bank of the country is the

center of the Indian financial and
montary system.
Started functioning from 1st April 1935.
Private shareholders institution till 1949.
Thereafter it became State owned
institution under the Reserve Bank
(Transfer of Public ownership) of India
Act, 1948.

Functions of RBI
1. TO MAINTAIN MONETARY STABILITY SO

THAT THE BUSINESS AND ECONOMIC

LIFE CAN DELIVER WELFARE GAINS OF
PROPERLY FUNCTIONING MIXED
ECONOMY
2. TO MAINTAIN FINANCIAL STABILITY
AND ENSURE SOUND FINANCIAL
INSTITUTIONS SO THAT MONETARY
STABILITY CAN BE SAFELY PURSUED AND
ECONOMIC UNITS CAN CONDUCT THEIR
BUSINESSES WITH CONFIDENCE .

3. TO MAINTAIN STABLE PAYMENTS SYSTEM

SO THAT FINANCIAL TRANSACTIONS CAN
BE SAFELY AND EFFECIENTLY EXECUTED.
4. TO PROMOTE THE DEVELOPMENT OF
FINANCIAL INFRASTRUCTURE OF MARKETS
AND SYSTEMS, AND TO ENABLE IT TO
OPERATE EFFECIENTLY I.E. TO PLAY A
LEADING ROLE IN DEVELOPING A SOUND
FINANCIAL SYSTEM SO THAT IT CAN
DISCHARGE ITS REGULATORY FUNCTION
EFFECIENTLY.

5. TO ENSURE THAT CREDIT ALLOCATION

BY THE FINANCIAL SYSTEM BROADLY

REFLECTS THE NATIONAL ECONOMIC
PRIORITIES AND SOCIETAL CONCERNS.
6. TO REGULATE THE OVERALL VOLUME OF
MONEY AND CREDIT IN THE ECONOMY
WITH A VIEW TO ENSURE REASONABLE
DEGREE OF PRICE STABILITY.

ROLE OF RBI
1. NOTE ISSUING AUTHORITY:
. ISSUES CURRENCY NOTES OTHER THAN
.
.
.
.

ONE RUPEE NOTE AND COINS.

WITHDRAW CURRENCY
EXCHANGE CURRENCY
ISSUE DEPT. LOOKS AFTER THE AFFAIRS
OF CURRENCY
CAN ISSUE NOTES AGAINST THE
SECURITY OF GOLD COINS AND GOLD
BULLION, FOREIGN SECURITES, RUPEE
COIN, GOVT. OF INDIA SECURITIES ETC.

2. GOVERNMENT BANKER:
BANKER TO CENTRAL AND STATE
GOVERNMENT.
PROVIDES BANKING SERVICES SUCH AS
ACCEPTANCE OF DEPOSIT, WITHDRAWL
OF FUNDS BY CHEQUES, MAKING
PAYMENT AND RECEIPTS, AND
COLLECTION OF PAYMENTS ON BEHALF
OF GOVT., TRANSFER OF FUNDS AND
MANAGEMENT OF PUBLIC DEBT.
BANK RECEIVES GOVT. DEPOSIT FREE
OF INTEREST.

3. SUPERVISING AUTHORITY:
SUPERVISE AND CONTROL COMMERCIAL
AND CO OPERATIVE BANKS.
THE POWERS OF RBI ARE:
a. ISSUE LISCENCE FOR NEW BANKS.
b. ISSUE LISCENCE FOR NEW BRANCHES.
c. PRESCRIBE MINIMUM FEQUIREMENTS
REGARDING PAID UP CAPITAL,
RESERVES, CASH RESERVE AND LIQUID
ASSETS.

d. INSPECTS WORKING OF BANKS IN

INDIA AND ABROAD.
e. CONDUCT AD HOC INVESTIGATIONS
FROM TIME TO TIME REGARDING
IRREGULARITIES, COMPLAINTS AND
FRAUDS IN RESPECT OF BANKS.
f. CONTROL METHODS OF OPERATIONS.
g. CONTROL APPOINTMENTS, RE
APPOINTMENT, TERMINATION OF
CHAIRMAN & CEOs OF PRIVATE BANKS.
h. APPROVE OR FORCE AMALGAMATIONS.

4. EXCHANGE CONTROL AUTHORITY:

ADMINISTER FOREIGN EXCHANGE
CONTROL.
CHOOSE THE EXCHANGE RATE SYSTEM
TO MANAGE EXCHANGE RESERVE.
TO INTERACT OR NEGOTIATE WITH
MONETARY AUTHORITIES.
EXCHANGE CONTROL IN TERMS OF
FERA AND FEMA.

5. PROMOTER OF FINANCIAL SYSTEM:

MONEY MARKET
AGRICULTURAL SECTOR.
INDUSTRIAL FINANCE.
CREDIT DELIVERY
FORMULATING PRUDENTIAL NORMS.
REGULATOR OF MONEY AND CREDIT.

Techiniques of Monetary Control:

1. Open Market Operations (OMO)
2. Bank rate & discretionary control of refinance
3. Direct regulation of interest rates
4. Cash Reserve ratio (CRR)
5. Statutory Liquidity ratio (SLR)
6. Direct credit allocation & credit rationing
7. Selective credit control
8. Credit authorisation scheme
9. Fixation of Inventory & credit norms
10. Credit planning

What is the Monetary Policy?

The Monetary and Credit Policy is the policy
statement, traditionally announced twice a year,
through which the Reserve Bank of India seeks
to ensure price stability for the economy.
These factors include - money supply, interest
rates and the inflation. In banking and
economic terms money supply is referred to as
M3 - which indicates the level (stock) of legal
currency in the economy.
Besides, the RBI also announces norms for the
banking and financial sector and the institutions
which are governed by it.

When is the Monetary Policy

announced?
Historically, the Monetary Policy is announced
twice a year - a slack season policy (AprilSeptember) and a busy season policy
(October-March) in accordance with agricultural
cycles. These cycles also coincide with the
halves of the financial year.
However, with the share of credit to agriculture
coming down and credit towards the industry
being granted whole year around, the RBI since
1998-99 has moved in for just one policy in
April-end. However a review of the policy does
take place later in

How is the Monetary Policy

different from the Fiscal Policy?
Two important tools of macroeconomic policy
are Monetary Policy and Fiscal Policy.
The Monetary Policy regulates the supply of
money and the cost and availability of credit in
the economy. It deals with both the lending and
borrowing rates of interest for commercial
banks.
The Monetary Policy aims to maintain price
stability, full employment and economic growth.

The Reserve Bank of India is responsible for

formulating and implementing Monetary Policy.
It can increase or decrease the supply of
currency as well as interest rate, carry out open
market operations, control credit and vary the
reserve requirements.
The Monetary Policy is different from Fiscal
Policy as the former brings about a change in
the economy by changing money supply and
interest rate, whereas fiscal policy is a broader
tool with the government.

The Fiscal Policy can be used to overcome recession

and control inflation. It may be defined as a deliberate
change in government revenue and expenditure to
influence the level of national output and prices.
For instance, at the time of recession the government
can increase expenditures or cut taxes in order to
generate demand.
On the other hand, the government can reduce its
expenditures or raise taxes during inflationary times.
Fiscal policy aims at changing aggregate demand by
suitable changes in government spending and taxes.
The annual Union Budget showcases the
government's Fiscal Policy.

What are the objectives of the

Monetary Policy?
The objectives are to maintain price stability and
ensure adequate flow of credit to the productive
sectors of the economy.
Stability for the national currency (after looking
at prevailing economic conditions), growth in
employment and income are also looked into.
The monetary policy affects the real sector
through long and variable periods while the
financial markets are also impacted through
short-term implications.

1.

2.
3.
4.

There are four main 'channels' which the RBI

looks at:
Quantum channel: money supply and credit
(affects real output and price level through
changes in reserves money, money supply
and credit aggregates).
Interest rate channel.
Exchange rate channel (linked to the
currency).
Asset price.

How does the Monetary

Policy impact the individual?
A reduction in interest rates would force banks to
lower their lending rates and borrowing rates. So if you
want to place a deposit with a bank or take a loan, it
would offer it at a lower rate of interest.
On the other hand, if there were to be an increase in
interest rates, banks would immediately increase their
lending and borrowing rates. Since the rates of
interest affect the borrowing costs of corporates and
as a result, their bottomlines (profits), the monetary
policy is very important to them also.

Since the financial sector reforms commenced,

the RBI has moved towards a marketdetermined interest rate scenario. This means
that banks are free to decide on interest rates on
term deposits and loans.
Being the central bank, however, the RBI would
have a say and determine direction on interest
rates as it is an important tool to control inflation.
The bank rate is a tool used by RBI for this
purpose as it refinances banks at the this rate. In
other words, the bank rate is the rate at which
banks borrow from the RBI.

What do the terms CRR and

SLR mean?
CRR, or cash reserve ratio, refers to a portion of
deposits (as cash) which banks have to keep/maintain
with the RBI. This serves two purposes. It ensures that
a portion of bank deposits is totally risk-free and
secondly it enables that RBI control liquidity in the
system, and thereby, inflation
Besides the CRR, banks are required to invest a
portion of their deposits in government securities as a
part of their statutory liquidity ratio (SLR)
requirements.

What impact does a cut in

CRR have on interest rates?
From time to time, RBI prescribes a CRR or the
minimum amount of cash that banks have to
maintain with it. The CRR is fixed as a
percentage of total deposits. As more money
chases the same number of borrowers, interest
rates come down.

Some Monetary Policy terms:

Bank Rate
Bank rate is the minimum rate at which the
central bank provides loans to the commercial
banks. It is also called the discount rate.
Usually, an increase in bank rate results in
commercial banks increasing their lending rates.
Changes in bank rate affect credit creation by
banks through altering the cost of credit.

Money Supply (M3)

This refers to the total volume of money
circulating in the economy, and conventionally
comprises currency with the public and demand
deposits (current account + savings account)
with the public.
The RBI has adopted four concepts of
measuring money supply. The first one is M1,
which equals the sum of currency with the
public, demand deposits with the public and
other deposits with the public. Simply put M1
includes all coins and notes in circulation, and
personal current accounts.

The second, M2, is a measure of money,

supply, including M1, plus personal deposit
accounts - plus government deposits and
deposits in currencies other than rupee.
The third concept M3 or the broad money
concept, as it is also known, is quite popular.
M3 includes net time deposits (fixed deposits),
savings deposits with post office saving banks
and all the components of M1.