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› An institutional framework existing in a country to

enable financial transactions
› Three main parts
Financial assets (loans, deposits, bonds, equities, etc.)
Financial institutions (banks, mutual funds, insurance
companies, etc.)
Financial markets (money market, capital market, forex
market, etc.)
› Regulation is another aspect of the financial system
(RBI, SEBI, IRDA, FMC)





› Central Bank (Reserve Bank of India)

› Commercial banks (222)
› Co-operative banks
Banks can be classified as:
Scheduled (Second Schedule of RBI Act, 1934) - 218
Non-Scheduled - 4
› Scheduled banks can be classified as:
Public Sector Banks (28)
Private Sector Banks (Old and New) (27)
Foreign Banks (29)
Regional Rural Banks (133)
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› The Reserve Bank of India was established on

April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act,
1934.
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Bank of Issue
Banker of Government
Bankersǯ Bank and Lender of the Last
Resort
Controller of Credit
Custodian of Foreign Reserves
Supervisory Functions
Promotional Functions




› As on March 2007 - 38,831 million pieces in
all denominations of banknotes valued at
Rs.4,96,138 crores are in circulation.
› At present, banknotes in India are issued in
the denomination of Rs.10, Rs.20, Rs.50,
Rs.100, Rs.500, Rs.1000.
› What is Basis for currency printing?
› Largest denomination currency note ever
printed in the world.
½   
 


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› The term monetary policy refers to actions

taken by central banks to affect monetary
magnitudes or other financial conditions
› Monetary Policy operates on monetary
magnitudes or variables such as money
supply, interest rates and availability of
credit.
 9 3

 

Full employment
Stable exchange rate
Healthy BoP
Economic growth
Reasonable Price Stability
Greater equality in distribution of income & wealth
Financial stability
3

  


› CRR Ȃ Cash reserve ratio Ȃ 6.00%

Cash reserve Ratio (CRR) is the amount of funds
that the banks have to keep with RB
› SLR Ȃ Statutory liquidity ratio -25%
This term indicates the minimum percentage of
deposits that the bank has to maintain in form of
gold, cash or other approved securities
3

  


› Bank rate : 6%
This is the rate at which central bank (RBI) lends
money to other banks or financial institutions.
› Repo rate : 5.75%
is the rate at which the RBI lends shot-term
money to the banks
› Reverse repo rate:4.50%
is the rate at which banks park their short-term
excess liquidity with the RBI
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› Fiscal policy refers to the overall effect of the

budget outcome on economic activity.
› The idea of using fiscal policy to combat
recessions was introduced by John Maynard
Keynes in the 1930s
› Two main instruments of fiscal policy
› Revenue Budget
› Expenditure Budget
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› A Õ
Õ of fiscal policy implies a

balanced budget where G = T (Government
spending = Tax revenue).
› An
ÕÕ Õ of fiscal policy involves
a net increase in government spending (G > T).
› A ÕÕ Õ of fiscal policy (G < T)