RBI & its Monetary

Policy

LIST OF CONTENTS
RBIs History
Need for RBI
Functions of RBI
Non-Monitory functions of RBI
Monitory functions of RBI
Tools of Monitory Policy

Quantitative tools
Qualitative tools
Selective and Direct credit controls
Current Monitory Policy
Purchase Power Parity (PPP)

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Reserve Bank of India

The central bank of the country--Reserve Bank of India (RBI).

Established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission.

The share capital was divided into shares of Rs. 100 each fully paid up which
was entirely owned by private shareholders in the beginning.

The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalized in the year 1949

No of members on central board is 20 (incl. governor and 4 deputy governors)

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Need for the Reserve

Bank
The

Reserve Bank of India Act, 1934

was commenced on April 1, 1935.
The Act, 1934 (II of 1934) provides the
statutory basis of the functioning of the
Bank.
The Bank was constituted for the need
of following:
To regulate the issue of banknotes
To maintain reserves with a view to
securing monetary stability and
To operate the credit and currency
system of the country to its advantage.

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Functions of Reserve Bank

of India
The Reserve Bank of India Act of 1934 contains all the
important functions of a central bank to the Reserve Bank of
India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has
the sole right to issue bank notes of all denominations.
Banker to Government
The second important function of the reserve bank of India is to act
as government banker, agent and adviser. RBI carries out banking
operations (e.g. to receive and make payments, carry cash
reserves) for all governments except J&Kacts as advisor to govt
on all monetary and banking matters.
Bankers' Bank and Lender of the Last Resort
The scheduled banks can borrow from the Reserve Bank of India
on the basis of eligible securities or get financial accommodation
in times of need or stringency. Banks have been asked to keep
cash reserves equal to 3 percent of their aggregate deposit
liabilities.

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Functions of Reserve Bank

of India

Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it
has the power to influence the volume of credit created
by banks in India. It can do so through changing the Bank
rate or through open market operations.

Controller of money market

The Reserve Bank of India is armed with many more
powers to control the Indian money market

Custodian of foreign exchange reserves

Besides maintaining the rate of exchange of the rupee,
the Reserve Bank has to act as the custodian of India's
reserve of international currencies.

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A) TRADITIONAL
FUNCTIONS

1. Monopoly of currency notes issue

2. Banker to the Government(both the central and
state)
3. Agent and advisor to the Government
4. Bankers Bank
5. Acts as the clearing house of the country
6. Lender of the last resort (B R P)
7. Custodian of the foreign exchange reserves
8. Maintaining the external value of domestic
currency
9. Controller of forex and credit (Credit Policy)
10. Ensures the internal value of the currency
11. Publishes the Economic statistical data
12. Fight against economic crisis and ensures stability

B) PROMOTIONAL
FUNCTIONS

1. Promotion of banking habit and expansion of

banking systems.
2. Provides refinance for export promotion. (E P C G)
3. Expansion of the facilities for the provision of the
agricultural
credit through NABARD.
4. Extension of the facilities for the small scale
industries.
5. Helping the Co-operative sectors.

C) SUPERVISORY FUNCTIONS
1. Granting license to Banks.
2. Inspecting and making enquiry or determining
position in
respect of matters under various sections of RBI
and Banking
regulations.
3. Periodical review of the work of the commercial
banks.
4. Giving directives to commercial banks.
5. Control the non-banking finance corporations.
6. Ensuring the health of financial system through
on-site and

Non Monetary Functions

Role as Supervisor

RBI enjoys wide powers of supervision and control

over commercial and co-operative banks, relating to
licensing and establishments,
branch expansion,
liquidity of their assets,
management and methods of working,
amalgamation,
reconstruction,
and liquidation.
The RBI is authorized to carry out periodical
inspections of the banks and to call for returns and
necessary information from them..
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Non Monetary Functions

Promotional functions
The major function of Reserve Bank is to promote banking
habit, extend banking facilities to rural and semi-urban
areas, and establish and promote new specialized financing
agencies.
Accordingly, the Reserve Bank has helped in the setting up
of the

IFCI

SFC

Deposit Insurance Corporation in 1962

Unit Trust of India in 1964,

Industrial Development Bank of India in 1964

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Monetary Policy
What is monetary policy?
A macroeconomic policy tool used to
influence interest rates, inflation, and
credit availability through changes in
the supply of money available in the
economy. In India it is also called the
Reserve Bank of Indias Credit Policy
as the stress is primarily on directing
credit.

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Monetary Policy of RBI

CONTROLLED EXPANSION(1951-72)
Speed

up economic development in the country to raise

national income and standard of living.

To prevent

heavy depreciation of the rupee.

Maintaining

the momentum of economic growth. To

consider measures in a calibrated manner to respond to
evolving circumstances with a view to stabilizing
inflationary expectations.
RBIs ANTI-INFLATIONARY POLICY SINCE 1972
Economic aims given above were nearly the same but policy
of CONTROLLED EXPANSION was changed to CREDIT
RESTRAINT.
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TOOLS OF MONETARY POLICY

There are two kinds of tools:

Quantitative tools control the volume of

credit and inflation, indirectly.

Qualitative tools they control the supply

of money in selective sectors of the economy.

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Quantitative Tools
Bank

Rate

Bank Rate is the rate at which RBI allows finance to commercial banks.
Bank Rate is a tool, which RBI uses for short-term purposes. Any revision in
Bank Rate by RBI is a signal to banks to revise deposit rates as well as
Prime Lending Rate.
Role of bank rate is limited in India because
The structure of interest rates is administered by RBI
Commercial banks enjoy specific refinance facilities.

CRR
All scheduled commercial banks are required to maintain a fortnightly
minimum average daily cash reserve equivalent with RBI .The apex bank is
empowered to vary this ratio between 3 and 15 per cent. RBI uses CRR
either to impound the excess liquidity or to release funds needed for the
economy from time to time.

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 SLR

Every bank is required to maintain at the close of business every

day, a minimum proportion of their Net Demand and Time Liabilities
as liquid assets in the form of cash, gold etc, in addition to cash
reserve requirements. The ratio of liquid assets to demand and time
liabilities is known as Statutory Liquidity Ratio (SLR). Present
SLR is 24%.
Repos and Reverse Repo
RBI is empowered to enter a transaction in which two parties agree to sell
and repurchase the same security. Under such an agreement the seller sells
specified securities with an agreement to repurchase the same at a mutually
decided future date and a price. Similarly, the buyer purchases the securities
with an agreement to resell the same to the seller on an agreed date in future
at a predetermined price. Such a transaction is called a Repo when viewed
from the prospective of the seller of securities (the party acquiring fund) and
Reverse Repo when described from the point of view of the supplier of
funds. Thus, whether a given agreement is termed as Repo or a Reverse
Repo depends on which party initiated the transaction.
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OPEN MARKET OPERATIONS

An instrument of monetary policy
It involves buying and selling of govt. securities by the

RBI to influence the volume of cash reserves with

commercial banks and thus influence their loans and
advances
To contract the flow of credit ,RBI starts selling govt
securities
To increase the credit flow RBI starts purchasing the
govt securities.
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Selective and Direct Credit

Control Or Qualitative
Measures

The main objective is to check speculation and

rising prices
The RBI issues directives to banks relating to
the purpose for which advances may or may
not be made
The margins to be maintained in respect of
secured advances
The maximum amount of advance to any
borrower
The maximum amt. of guarantee that can be
given on behalf of any firm

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Kinds of Selective Credit

Controls
Specifies minimum margins for lending

against specific securities

Ceiling on amt of credit for certain purposes to
stem the flow of credit to speculative and non
productive sectors
Charges discriminatory rate of interest on
certain types of advances

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