Reserve bank of india

The Reserve Bank of India is India's central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934.

1. Reserve Bank of India AND ITS FUNCTIONS

2. EVOLUTION Established on 1 st April 1935 during British Raj Reserve Bank of India act of 1935 Initially established in Calcutta Later, permanently moved to Shahid Bhagath Singh Marg, Mumbai, Maharashtra in 1937 Commenced with Rs.5 Crore of capital Osborne Smith was the First Governor of RBI Sir Chintaman D.Deshmukh was the Governor of RBI after Independence On1st, January1949, RBI was Nationalized.

3. STRUCTURE OF RBI Governed by 20 Central Board of Directors 1 Governor- Appointed by GOI for the term of 5years 4 Deputy Governors appointed for the term of 4 years 15 Directors 4 Regional Local boards located in Mumbai, Kolkata, Chennai, New Delhi Local boards consists of 5 members each for the term of 4 years appointed by the GOI

4. OBJECTIVES OF RBI Securing monetary stability and credit system Regulate the issuing of Bank notes Stabilizing internal and external value of Rupee Developing organized Money Market Proper arrangement of Agricultural, Industrial finance Proper Management of public debts To establish Monetary relations with other countries Centralization of cash reserves of commercial banks Maintain balance between the Demand and Supply of Currency

5. FUNCTIONS OF RBI Bank of Note Issue Banker, Agent and Advisor to the Government Banker’s Bank Lender of Last Resort Clearing Agent Developmental Role Custodian of Foreign Exchange Reserves Controller of Credit

6. 1. Bank of Note Issue Uniformity in Monetary system Better control over Money supply in the country Increases public confidence Monetary Management Control over credit creation Earns profits by issuing paper currency Monopoly in issue of note

7. 2. Banker, Agent and Advisor to the Government Maintains accounts of the Central as well as State Government Provides Short-term and Long-term loans & advances Collect Cheques and drafts deposited in the Government account Provides Foreign Exchange Reserves Collects taxes and other payments Issues New loans & advances on behalf of the CG/SG Represents Government in the International stages such as IMF, World Bank

8. 3. Banker’s Bank Custodian of cash reserves Acts as friend, philosopher, supervisor and guide to commercial banks Provides basis for a larger and more elastic credit structure Promotes National welfare Provides financial accommodation to cooperative banking for financing special sectors like agriculture Appoints key posts of Commercial Banks to ensure proper Governance and Sound Banking practices Resorts to moral suasion

9. 4. Lender of Last Resort Meets the genuine financial requirements Builds up and strengthens the financial infrastructure Increases elasticity and liquidity of whole credit structure Enables commercial banks to carry on their activities even with limited cash reserves Provides financial assistance

10. 5. Clearing Agent Commercial banks can easily settle their claims with each other Economizes the use of cash Reduces withdrawals of cash Discloses of liquidity position of Commercial Banks

11. 6. Developmental Role Helps to develop Money and Capital markets Undertakes measures to promote Economic Development/Growth Maintains price and exchange rate stability Promotes various institutions such as IDBI, NABARD, SIDBI, ECGC 7. Custodian of Foreign Exchange Reserves Overcome Balance of Payment difficulties Formulates, Monitors and Implements Exchange Rate Policy

12. 8. Control of Credit Regulate the flow of credit Adopts Credit Control instruments such as Bank Rate, Open Market Operations, CRR, SLR from time to time 9. Other Functions Collects various types of Statistics Conducts surveys, seminars Publishes reports Training facilities to working staff

13. MONETARY POLICY The monetary authority of a country controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth. OBJECTIVES Price Stability Controlled Expansion Of Bank Credit Promotion of Fixed Investment Restriction of Inventories and stocks Healthy Balance of Payment Promote Efficiency Reducing the Rigidity Stable exchange rate Financial stability Economic growth

14. Elements of Monetary Policy

15. QUALITATIVE MEASURES Bank Rate Rate of interest charged by the RBI for providing funds or loans to the banking system. It involves commercial and co-operative banks, IDBI, IFC, EXIM Bank, and other approved financial institutes. Funds are provided either through lending directly or discounting or buying money market instruments like commercial bills and treasury bills. Increase in Bank Rate increases the cost of borrowing by commercial banks which results into the reduction in credit volume to the banks and hence declines the supply of money. Increase in the bank rate is the symbol of tightening of RBI monetary policy.

16. Open Market Operations Buying or selling of Government securities from or to the public and banks. Influences the reserve position of the banks, yield on Government securities and cost of bank credit. The RBI sells Government securities to control the flow of credit and buys Government securities to increase credit flow. Maintains stability in Government securities market and makes bank rate policy effective. The RBI is resorting more to open market operations in the more recent years.

17. Cash Reserve Ratio Certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the liquidity in the system and vice versa. Banks hold large proportion of their deposits in the form of deposits with the RBI which reduces the size of their deposits and they will lend less. This will in turn decrease the money supply.

18. Statutory Liquidity Ratio Banks are required to maintain liquid assets in the form of gold, cash and approved securities Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances A higher liquidity ratio diverts the bank funds from loans and advances to investment in Government and approved securities.

19. QUANTITATIVE MEASURES Credit Ceiling Loans to the commercial banks will be given up to a certain limit Commercial bank tightens advancing of loans to the public by allocating loans to limited sectors such as agriculture sector advances, priority sector lending Credit Authorization Scheme Credit Authorizes the banks to advance loans to desired sectors Moral Suasion A request by the RBI to the commercial banks to take action and measures in so and so trend of the economy RBI may request commercial banks not to give loans for unproductive purpose and inflationary activities Reverse Repo Rate The rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation.

20. Key Indicators Indicator Current rate Inflation 6.00% Bank Rate 7.75% CRR 4.00% SLR 21.50% Repo Rate 6.75% Reverse Repo Rate 5.75% Marginal Standing facility rate 7.75%

21. FISCAL POLICY Raising of government revenue and incurring of government expenditure. The policy of the government with regard to taxation, public expenditure and public borrowings. The importance of fiscal policy is high in underdeveloped countries. Objectives To maintain and achieve full employment. To stabilize the price level and Inflation level To stabilize the growth rate of the economy. To Balanced Regional Development To maintain equilibrium in the balance of payments. To promote the economic development of underdeveloped countries. Development by effective Mobilization of Resources Efficient allocation of Financial Resources Reduction in inequalities of Income and Wealth Capital Formation Foreign Exchange Earnings

22. Stances Of Fiscal Policy Neutral stance- Government Expenditure = Taxes Expansion stance- Government Expenditure > Tax Receipts Contraction stance- Government Expenditure <Tax Receipts

23. Funds For Government Expenditure Taxation Borrowing Consumption fiscal reserves Sale of fixed assets Instruments of fiscal policy Budgetary surplus and deficit Government expenditure Taxation- direct and indirect Public debt Indicators Of Fiscal Policy

24.  Fiscal Policy for Economic Growth Variations in Government expenditure and taxation affects National Income, employment, output and prices An increase in Public Expenditure during depression adds to the aggregate demand for goods and services and leads to a large increase in income via the multiplier process Reduction of public expenditure during inflation reduces aggregate demand, national income, employment, output and prices An increase in taxes tends to reduce disposable income and thereby reduces consumption and investment expenditures Reduction in taxes has the effect of raising disposable income thereby increasing consumption and investment expenditure of the people The Government can control deflationary and inflationary pressures in the economy by a judicious combination of expenditure and taxation The Government follows compensatory fiscal policy

25. Presented by Harshitha.S