RBI INTRODUCTION
RBI INTRODUCTION
The Reserve Bank of India (RBI) is the central bank of India, which began operations on
Apr. 1, 1935, under the Reserve Bank of India Act.
The Reserve Bank of India uses monetary policy to create financial stability in India,
and it is charged with regulating the country’s currency and credit systems.
The Reserve Bank of India (RBI) is the central bank of India,
The RBI was originally set up as a private entity in 1935, but it was nationalized in 1949.
The main purpose of the RBI is to conduct consolidated supervision of the financial
sector in India, which is made up of commercial banks, financial institutions, and non-
banking finance firms.
OBJECTIVE
RBI is entirely operated and owned by the Government of India, and the Preamble
of RBI, describes the basic objectives of the Reserve Bank which are as follows:
To regulate the issue of Banknotes
Securing monetary stability in India
To operate the currency and credit system of India to its advantage
Note-issuing authority
Bankers’ bank
Banker to government
ESTABLISHMENT OF RBI
Establishment of the RBI
The Reserve Bank of India (RBI) was first established in 1935 according to the Reserve Bank of India
Act of 1934. Situated in Mumbai, the RBI is wholly owned and operated by the Indian Government.
The operations of the RBI are governed by the Central Board of Directors which comprises of 21
members appointed by the Government of India by the Act.
The Central Board of Directors consists of the Official Directors and the Non-Official Directors.
The Official Directors would include the Governors appointed for four years with an addition of 4
Deputy Governors.
The Non-Official Directors comprise of 10 Directors elected from multiple fields along with 2
Government Officials.
CHAIN OF COMMAND
Chain of Command
The following is the chain of command among the Central Board of Directors of the RBI according to their ranks.
Governor
Deputy Governor
Executive Directors
Principal Chief General Manager
Chief General Managers
General Managers
Deputy General Managers
Assistant General Managers
Managers
Assistant Managers
Support Staff
FUNCTIONS OF THE RBI
Functions of the RBI
The following are the functions of the Reserve Bank of India under various authorities.
Supervisory and Regulatory Authority
To set specific parameters for the banks in the country. This would include financial operations within which the
banking and financial systems are to function.
To protect the interests of every investor and offer economic and cost-efficient banking services to the public.
Monetary Authority
To formulate and implement the monetary policies of the country.
To maintain stability in the prices across all the sectors along with the objective of growth.
Currency Authority
To issue, exchange or destroy currency that is not fit for circulation.
To provide adequate currency notes and coins of the standard quality to the public.
FUNCTION
Foreign Exchange Management
To oversee the Foreign Exchange Management Act, 1999.
To facilitate the external trade and development of the foreign exchange market in the country.
Other Functions
To promote and perform promotional functions to support national banking and other financial objectives.
To offer banking solutions to the Central and State Governments.
To act as a banker for the Central and State Governments.
To be the Chief Banker to every bank across the country and maintain all the banking accounts of every
scheduled bank.
CREDIT CONTROL
RBI uses a Credit control monetary policy strategy to ensure that the country’s
economic development is accompanied by stability. It means that banks will not only
contain inflationary trends in the economy but will also stimulate economic growth,
resulting in increased real national income stability in the long run. Because of its
functions, including issuing notes and keeping track of cash reserves, the RBI does not
regulate credit because it would cause social and economic instability in the country.
RBI- The Reserve Bank of India is India’s central bank and regulatory organisation in
charge of overseeing the country’s financial sector. It is owned by the Government of
India’s Ministry of Finance. It is in charge of issuing and distributing the Indian rupee.
CREDIT CONTROL POLICY
Credit Control Policy
Credit control is a monetary policy tool used by the Reserve Bank of India to control the demand and
supply of money, or liquidity, in the economy. The Reserve Bank of India (RBI) supervises the credit
granted by commercial banks.
Credit Control Objectives
The following are the broad aims of India’s credit control policy:
To maintain an acceptable amount of liquidity in order to achieve a high rate of economic growth while
maximising resource use without causing severe inflationary pressure.
To achieve stability in the country’s currency rate and money market.
To meet financial obligations during a downturn in the economy as well as in regular times.
Controlling the business cycle and meeting the needs of the company.
Credit control is most important function of Reserve Bank of
India. Credit control in the economy is required for the smooth
functioning of the economy. By using credit control methods RBI
tries to maintain monetary stability. There are two types of
methods:
Quantitative control to regulates the volume of total credit.
Qualitative Control to regulates the flow of credit
Quantitative Measures
• Bank Rate Policy
• Open Market Operations
• Cash Reserve Ratio
• Statutory Liquidity Ratio
Qualitative Measures
• Margin requirements
• Consumer Credit Regulation
• RBI Guidelines
• Rationing of credit
• Moral Suasion
• Direct Action
CREDIT CONTROL OF RBI
The implementation of RBI's Quantitative and Qualitative (Called as Monetary Policy) instruments
plays an important role in the development of the country. If the required money supply for the
economy is not available in the market, it leads to a decline in investment in the economy. On the
other hand, if the money supply in the economy is more than what is required, then the poor section
of the economy will suffer because the price of essential commodities will rise.
In the Indian Economy, RBI is the sole authority that decides the money supply in the economy.
And to control this, RBI implements the monetary policy's Quantitative and Qualitative instruments
to achieve economic goals. The main instruments of these policies are CRR, SLR, Bank Rate, Repo
Rate, Reverse Repo Rate, Open Market Operations, etc.
Let's understand the Quantitative and Qualitative instruments of RBI's monetary policy individually.
QUANTITATIVE METHODS
Quantitative Methods
The quantitative instruments are also known as general tools used by the RBI (Reserve Bank of India). As the name
suggests, these instruments are related to the quantity and volume of the money. These instruments are designed to control
the total volume/money of the bank credit in the economy. These instruments are indirect in their nature and are used to
influence the quantity of credit in the economy.
Bank Rate Policy
The bank rate is the minimum rate at which the central bank lends money and rediscounts first-class bills of exchange and
securities held by commercial banks. When RBI gets a hint that inflation is rising, it increases the bank interest rates so that
commercial banks borrow less money and the inflation stays under control.
Commercial banks also increase their lending rate to the public and business enterprises so that people borrow less money,
which will eventually help to control inflation.
On the other hand, when RBI reduces bank rates, that means borrowing for commercial banks will become cheap and
easier. This allows the commercial banks to lend money to borrowers on a lower
Legal Reserve Ratios
The commercial banks have to keep a certain amount of reserve assets in the form of reserve cash. Some portion of
these cash reserves is their total assets in the form of cash.
To maintain liquidity and to control credit in the economy, the RBI also keeps a certain amount of cash reserves.
These reserve ratios are known as SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio).
CRR refers to a certain percentage of commercial bank's net demand and time liability that commercial banks have to
maintain with the RBI at all times. In India, the CRR remains between 3-15 per cent by the law.
SLR refers to a certain percentage of reserves to be maintained in the form of gold and foreign securities. In India,
SLR remains 25-40% by the law.
Any changes in SLR and CRR bring out the change in the position of commercial banks.
TECHNIQUES
Open Market Operations (OMO)
The sale and purchase of security in the long run/short run by the RBI in the money market is known as open
market operations. This is a popular instrument of the RBI's monetary policy.
To influence the term and structure of the interest rate and to stabilize the market for government securities, etc.,
the RBI uses OMO, and this operation is also used to wipe out the shortage of money in the money market.
If RBI sells securities in the money market, private and commercial banks and even individuals buy it. This
leads to a reduction in the existing money supply as money gets transferred from commercial banks to the RBI.
On the other hand, when RBI buys securities from the commercial banks, the commercial banks that sell receive
the amount they had invested in RBI before.
There are certain factors that affect OMOwhich include underdeveloped securities market, excess reserves with
the commercial banks, indebtedness of the commercial banks, etc.
Repo Rate
A Repo rate is a rate at which commercial banks borrow money by selling their securities to the RBI
to maintain liquidity. Commercial banks sell their securities in case of a shortage of funds or due to
some statutory measures. It is one of the main instruments of the RBI to keep inflation under control.
Reverse Repo Rate
Sometimes, the RBI borrows money from commercial banks when there is excess liquidity in the
market. In that case, commercial banks get benefits by receiving the interest on their holdings with
the RBI.
At the time of higher inflation in the country, RBI increases the reverse repo rate that encourages
banks to park more funds with the RBI, which will help it earn higher returns on excess funds.
Qualitative Methods
Qualitative instruments are also known as selective instruments of the
RBI's monetary policy. These instruments are used for discriminating
between various uses of credit; for example, they can be used for
favouring export over import or essential over non-essential credit
supply. This method has an influence on both borrowers and lenders.
Following are some selective tools of credit control used by the RBI:
Rationing of Credit
RBI fixes a credit amount to be granted for commercial banks. Credit is given by limiting the
amount available for each commercial bank. For certain purposes, the upper credit limit can be
fixed, and banks have to stick to that limit. This helps in lowering the bank's credit exposure to
unwanted sectors. This instrument also controls the bill rediscounting.
Regulation of Consumer Credit
In this instrument, consumers' credit supply is regulated through the instalment of sale and
hire purchase of consumer goods. Here, features like instalment amount, down payment, loan
duration, etc., are all fixed in advance, which helps to check the credit and inflation in the
country.
Change in Marginal Requirement
Margin is referred to the certain proportion of the loan amount that is not offered
or financed by the bank. Change in marginal can lead to change in the loan size. This
instrument is used to encourage the credit supply for the necessary sectors and avoid
it for the unnecessary sectors. That can be done by increasing the marginal of
unnecessary sectors and reducing the marginal of other needy sectors.
Suppose, RBI feels that more credit supply should be allotted to the agricultural
sector, then RBI will reduce the margin, and even 80-90% of the loan can be
allotted.
Moral Suasion
Moral suasion refers to the suggestions to commercial banks from the RBI that
helps in restraining credits in the inflationary period. RBI implies pressure on the
Indian banking system without taking any strict action for compliance with rules.
Through monetary policy, commercial banks get informed of the expectations of
RBI. The RBI can issue directives, guidelines, suggestions for commercial banks
regarding reducing credit supply for speculative purposes under the moral
suasion.
CONCLUSION
Monetary policy's quantitative and qualitative methods aim to accelerate growth and
stability by controlling the credit supply in the economy. Both the quantitative and
qualitative instruments have their own merits and demerits, but both of the
instruments are important for the economic stability and price stability in the
economy. Both these methods are effective and efficient to control inflation and
deflation due to the movement of the money supply in the economy.
Over the decades, it has been proven that the credit supply in the economy can be
controlled better with the coordination of both the general (Quantitative) and selective
(Qualitative) methods rather than implementing them individually in the economy.
