RBI

The Reserve Bank of India was

established on April 1, 1935 in
accordance with the provisions of
the Reserve Bank of India Act,
1934.
Since nationalization in 1949,
the
Reserve Bank is fully owned by the
Government of India.
 Preamble
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."
 Central Board
The Reserve Bank's affairs are governed by a
central board of directors. The board is appointed
by the Government of India in keeping with the
Reserve Bank of India Act. Appointed/nominated
for a period of four years
 Constitution:
Official Directors
Full-time : Governor and not more than
four Deputy Governors
Non-Official Directors
Nominated by Government: ten
Directors from various fields and one
government Official
Others: four Directors - one each from
four local boards
Functions: General superintendence
and direction of the Bank's affairs
 Main Functions of RBI
Monetary Stability
Financial stability
Stable payment system
Financial infrastructure for
market
Credit allocation
Regulate volume of money
 Issuer of currency:
Issues and exchanges or destroys currency
and coins not fit for circulation.
The 1861 Paper Currency Act provided
Government of India the monopoly of
issuing notes thus curbing the note issuance
authority of Private and Presidency Banks.
The RBI started note production in 2, 5, 10,
1000 rupees note whilst the Government
continued to issue 1 rupee notes.
As of 2015, notes of Rs 10, Rs 100, Rs 500
and Rs 1,000 are printed by the Reserve
Bank.
 Govt Banker:
It provides to the govts all banking
services such as acceptance
deposits, withdrawal of funds by
cheques, making payments as well
as receipts and collection of
payments on behalf of Govt, transfer
of funds, and management of public
debt.
 Ways and Means
Advance:
Temporary advances made in order
to bridge the temporary gap between
receipts and payments. The
maximum maturity period is 3
months.
 Over Draft

State Govt
In excess of Ways and means
advances
 Bankers bank
Banker to the Government: performs
merchant banking function for the
central and the state governments;
also acts as their banker.
Banker to banks: maintains banking
accounts of all scheduled banks
 Supervising Authority

Licensing banks
Credit reserves
Investigations
Inspections
Appointements
 Manager of Foreign
Exchange

Objective: to facilitate external trade

and payment and promote orderly
development and maintenance of
foreign exchange market in India.

Foreign Exchange Management Act, 1999.

(FEMA)
 Promoter of financial
system:
Money market
Agriculture sector
Industrial finance
Credit Delivery
Formulating prudential norms
 Regulator of Money and
Credit
Monetary Policy
Refers to the use of techniques of
monetary control at the disposal of the
central bank for achieving certain
objectives.

What is Disinflation without deflation?

 Disinflation
A slowing in the rate of price inflation.
Disinflation is used to describe instances when
the inflation rate has reduced marginally over
the short term. Although it is used to describe
periods of slowing inflation, disinflation should
not be confused with deflation.
For example, consider the CPI inflation rate in India
for June, July, August, September and October. If
the inflation rate is, 8.2%, 7.5%, 6.4%, 6.1% and
5.9% respectively, we can observe that the rate of
inflation is decreasing.
 Deflation
is a decrease in general price levels
throughout an economy. If there is a
higher supply of goods and services
but there is not enough money supply
to combat this, deflation can occur.
 Monetary Policy
Macroeconomic policy
Management of money supply and
interest rate
Demand side economic policy used by
the government of a country to
achieve macroeconomic objectives like
inflation, consumption, growth and
liquidity.
 Techniques of Monetary
Control
Repo and reverse repo (LAF)
Open market Operation
Bank rate
CRR
SLR
MSF
credit control policy, moral persuasion
 Repo and reverse repo

Repo rate is the rate at which RBI lends

money to commercial banks.
Reverse repo rate is therateat which RBI
borrows money from the commercial
banks.
The increase in theRepo ratewill increase
thecost of borrowing and lending of the
banks which will discourage the public to
borrow money and will encourage them to
deposit.
Fractional reserve banking:
CRR and SLR

CRR refers to the cash which banks

have to maintain with the RBI as a
certain percentage of their demand
and time liabilities.

Presently 4%
 SLR:

The SLR is the ratio of cash in hand; balances

in current account with SBI, its subsidiaries,
other nationalized banks and the RBI; gold,
approved securities etc of a bank.
Objectives:
To restrict expansion of bank credit
To augment banks investment in govt
securities
To ensure solvency of banks.
Presently 21.5%
 The bank rate
Section 49 of the RBI Act 1934, defines
Bank rate as the standard rate at which
bank is prepared to buy or discount bills of
exchange or other eligible commercial
paper.
This rate has been aligned to the MSF rate
and, therefore, changes automatically as
and when the MSF rate changes alongside
policy repo rate changes.
 Marginal Standing
Facility (MSF)
A facility under which scheduled
commercial banks can borrow
additional amount of overnight money
from the Reserve Bank by dipping into
their SLR portfolio up to a limit
(currently two per cent of their net
demand and time liabilities deposits)
at a penal rate of interest, currently
50 basis points above the repo rate.
 OMO
Goals and objectives:
To control the amount of and changes in
bank credit and monetary supply through
controlling the reserve base of banks
To make bank rate policy more effective
To maintain stability in Govt securities
market
To support Govt borrowing programme
To smoothen the seasonal flow of funds in
the bank credit market.
 Refinance facilities
Sector-specific refinance facilities aim
at achieving sector specific objectives
through provision of liquidity at a cost
linked to the policy repo rate.
The Reserve Bank has, however, been
progressively de-emphasising sector
specific policies as they interfere with
the transmission mechanism.
Direct credit allocation and
credit
rationing
Priority sector advances should constitute
40% of aggregate bank advances
Advances to the agri sector should be the
40% of the priority sector advances
Direct advances to weaker sections in
agri sector should be at least 50% of total
direct lending to agriculture advances to
rural artisans, village craftsman, and
cottage industries should be 12.5% of the
total advances to small scale industries
 Moral Suasion
A moral suasion is a persuasion tactic
used by an authority (i.e. Federal Reserve
Board) to influence and pressure, but not
force, banks into adhering to policy.
Tactics used are closed-door meetings
with bank directors, increased severity of
inspections, appeals to community spirit,
or vague threats.
 Discountinued

Credit Authorization Scheme

(CAS)
Fixation of Inventory and credit
norms: