POLICY Ry oe 4 ,: ne | RBI AND ITS MONETARY |INTRODUCTION > It is the Central Bank of India Established in “1st April 1935” under the “RESERVE BANK OF INDIA ACT”. its head quarter is in Mumbai (Maharashtra). Its present governor is “ Shaktikanta Das”.‘History of RBI » 1935-1950 The bank was founded in 1935 to respond to economic troubles eet the First World War. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country, The Central Office of the Reserve Bank was initially establishe: J kata, Bengal, but was permanently moved to Mumbai in » 1960-1969 As a result of bank crashes, the reserve bank was ed to establish and monitor a deposit insurance system. It should | restore the trust in the national bank systern and was initialized on’7 December 1961.~ 1969-1985 Between 1969 and 1980, the Indian government nationalized 6 more commercial banks; following 14 major commercial banks being nationalized in 1969 . The branch was forced to establish two new offices in the country for every newly established office in a town. The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. » 1985-1991 A lot of committees analyzed the Indian economy between 1985 and 1991. Their results had an effect on the RBI.» 1991-2000 The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio, published in 1993 to establish a private banking sector. This turning point Should reinforce the market and was often calléd liberal. The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets. ince 2000 The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004-2005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."FUNCTIONS OF RBI « Issue of currency ¢ Development role ¢ Banker to government ¢ Banker to bank ¢ Role of RBI in inflation control ¢ Formulate monetary policy « Manager of foreign reserve e Clearing house functions e Regulations of banking systemIssue of Currency > To ensure adequate quantity of supplies of currency notes and coins of good quality. » Issues new currency and destroys currency and coins not fit for circulation. } It has to keep in forms of gold and foreign securities as per statutory rules against notes & coins issued. p Developmental Role » To develop the quality of banking system in Indias » Performs a wide range of promotional functions to suppo national objectives. ¥To establish financial institutions of national importance, for e.g: NABARD,IDBI etc.Banker to the Government:Banker to banks: > Maintains banking accounts of all scheduled banks. >RBI also regulates the opening /installation of ATM Fresh currency notes for ATMs are supplied by RBI. > RBI regulates the opening of branches by banks. >It ensures that all the N.B.F.S follow the Know Your Customer guidelines. | - BANK>The Reserve Bank of India also regulates the trade of gold. Currently 17 Indian banks are involved in the trade of gold in India. >RBI has invited applications from more banks for direct import of gold to curb illegal trade in gold and increase competition in the market. » Collection and publication of data. » \t issues guidelines and directives for the commercial banks.AVIC UF ABS TT Ta lIOn control ~ Inflation arises when the demand increases and there is a shortage of supply There are two policies in the hands of the RBI. ~ Monetary Policy: It includes the interest rates. When the bank increases the interest rates than there is reduction in the borrowers and people try to save more as the rate of interest has increased. » Fiscal Policy: It is related to direct taxes and government spending. When direct taxes increased and government spending increased than the disposable Income of the people reduces and hence the demand reduces.Formulate monetary policyQuantitative Measures > Quantitative Measures “BANK RATE” also called “Discount Rate”. > It also includes “Repo Rate”. “Open Market Operations” buying and selling of government securities. Variable Reserve Ratio” it includes C.R.R and S.L.R Qualitative Measures 1, Direct Action 2. Moral persuasion 3. Legislation 4, PubliciBANK RATE ® It’s the interest rate that is charged by a country’s central bank on loans and advances to control money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and stabilize the country’s exchange rates. *A fluctuation in bank rates Triggers a Ripple-Effect as it impacts every sector of a country’s economy. *A change in bank rates affects customers as it influences Prime Interest Rates for personal loans. The present bank rate is 9%REPO RATE » Whenever the banks have any shortage of funds they can borrow it from the central bank. Repo rate is the rate at which our banks borrow currency from the central bank. ® Areduction in the repo rate will help banks to get Money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. In order to increse the liquidity in the market, the central bank does it. >The present repo rate is 8%Reverse Repo Rate REVERSE REPO RATE ® It’s the rate at which the banks park surplus funds with reserve bank. While the Repo rate is the rate at which the banks borrow from the central bank. >It is mostly done, when there is surplus liquidity in the market by the central bank. »The present reverse repo rate is 7%CRR (Cash Reserve Ratio) * Cash Reserve Ratio (CRR) is the amount of Cash(liquid cash like gold)that the banks have to keep with RBI. *This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. *The present CRR rate is 4%. CRR \SLR ( Statutory Liquidity Ratio) ‘It is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. “SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. -The present SLR rate is 23%.Current bank rates eee ee ee we Bank Rate Repo Rate Reverse Repo Rate a Cash Reserve Ratio (CRR) 4.5% Statutory Liquidity Ratio (SLR) 18.0% Marginal Standing Facility Rate(MSF) 6.75% Base Rate. 8.65% to 9.40%. Saving Deposit Rate. 2.70% to 3.00%. Term Deposit Rate. 6.00% to 7.25%QUALITATIVE MEASURES 1. Direct Action: The central bank may take direct action against commercial banks that violate the rules, orders or advice of the central bank. This punishment is very severe of a commercial bank. 2. Moral persuasion: It is another method by which central bank may get credit supply expanded or contracted. By moral pressure it may prohibit or dissuade commercial banks to deal in speculative business.e 3. Legislation: The central bank may also adopt necessary legislation for expanding or contracting credit money in the market. © 4. Publicity: The central bank may resort to massive advertising campaign in the news papers, magazines and journals depicting the poor economic conditions of the country suggesting commercial banks and other financial institutions to control credit either by expansion or by contraction.Manager of Foreign Exchange ¥To facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. >lt acts as a custodian and Manages the Foreign Exchange Management Act,(FEMA) 1999. > RBI buys and sells foreign currency to maintain the exchange rate of Indian Rupee v/s foreign currencies like the US Dollar, Euro, Pound and Japanese yen.Clearing House Functions « The RBI operates clearing houses to settle banking transactions. The RBI manages 14 major clearing houses of the country situated in different major cities. The State Bank of India and its associates look after clearing houses function in other parts of the country as an-agent- of RBI.Regulation of Banking System The prime duty of the reserve Bank is to regulate the banking system of our country in such a way that the people of the country can trust in the banking Up to perform its duty. The Reserve Bank has following powers in this regard: -Licensing: According to the section 22 of the Banking Regulation Act, every bank has to obtain license from the Reserve Bank. The Reserve Bank issues such license only to those banks which fulfill condition of the bank.* Management: Section 10 of the Banking Regulation Act embowered the Reserve Bank to change manager or director of any bank if it considers it necessary or desirable. © Branch Expansion: Section 23 requires every bank to take prior permission from Reserve Bank to open new places of business in India. © Power of inspection of Bank: Under Section 35, the Reserve Bank may inspect any bank and its books and accounts either at its own initiative or at the instance of the Central Government.