RBI

SCHEDULE Non Schedule

Banks Banks

State Co-
Commercial
operative

Indian Banks Foreign Banks

PSU Banks Pvt Sector

Other
SBI & its Regional &
Nationalized
Subsidiaries Rural Banks
Banks
 RESERVE BANK OF INDIA
r It is an apex institution of the monetary and banking
structure of a country. A central bank has the authority to
regulate and control the banking business and monetary
system of a country.

r Its main function are:

Bank of issue
Financial advisor to the state( banker also)
Banker to bank
Custodian of foreign exchange reserves
Lender of the last resort
Bank of central clearance and transfer
Controller of credit
 WAYS OF MONEY MANAGEMENT BY RBI

r Two important tools of macroeconomic policy .

r They are :
r Monetary Policy

r Fiscal Policy

r 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.
 MONEY MANAGEMENT USING MONETARY
POLICIES
r This policy statement, traditionally announced twice a year,
through which the Reserve Bank of India seeks to ensure
price stability for the economy.
r Regulates the supply of money and the cost and availability
of credit in the economy.
r Deals with both the lending and borrowing rates of interest
for commercial banks.
r Policy aims to maintain price stability, full employment and
economic growth.
r The Reserve Bank of India is responsible for formulating and
implementing Monetary Policy by increase or decrease the
supply of currency as well as interest rate, carry out open
market operations, control credit and vary the reserve
requirements.
 SOME MONETARY POLICY TERMS

r Bank Rate
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.
r Cash Reserve Ratio
All commercial banks are required to keep a certain
amount of its deposits in cash with RBI. This percentage is
called the cash reserve ratio. The current CRR requirement is 6
per cent.
r Money Supply (M3)
Refers to the total volume of money circulating in the
economy, & comprises currency with the public and demand
deposits (current account + savings account) with the public.
The RBI has adopted Three 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.
r Statutory Liquidity Ratio(SLR)
Banks in India are required to maintain 25 per cent of
their demand and time liabilities in government securities and
certain approved securities.
These are collectively known as SLR securities. The
buying and selling of these securities laid the foundations of
the 1992 Harshad Mehta scam.

r Repo
A repurchase agreement or ready forward deal is a
secured short-term (usually 15 days) loan by one bank to
another against government securities.
Legally, the borrower sells the securities to the lending
bank for cash, with the stipulation that at the end of the
borrowing term, it will buy back the securities at a slightly
higher price, the difference in price representing the interest.
r Open Market Operations
An important instrument of credit control, the Reserve
Bank of India purchases and sells securities in open market
operations.

r Reverse Repo
Rate at which Reserve Bank of India (RBI) borrows
money from banks. Banks are always happy to lend money to
RBI since their money are in safe hands with a good interest.
An increase in Reverse repo rate can cause the banks to
transfer more funds to RBI due to this attractive interest
rates. It can cause the money to be drawn out of the banking
system.
Due to this fine tuning of RBI using its tools of CRR, Bank
Rate, Repo Rate and Reverse Repo rate our banks adjust
their lending or investment rates for common man.
 MONEY MANAGEMENT USING FISCAL
POLICIES
r Fiscal policy is a broader tool with the government.

r The Fiscal Policy can be used to overcome recession and

control inflation.

r Defined as a deliberate change in government revenue and

expenditure to influence the level of national output and
prices.

r For instance, at the time of recession the government can

increase expenditures or cut taxes in order to generate
demand.
r On the other hand, the government can reduce its
expenditures or raise taxes during inflationary times.

r Fiscal policy aims at changing aggregate demand by

suitable changes in government spending and taxes.

r The annual Union Budget showcases the government's

Fiscal Policy.

r We can say in case of RBI

Monetary Policy + Governmental Aspect = Fiscal Policy