RBI and its roles

8/2/2019 RBI and its roles

1/21

PresentationByANKUR VERMA40707006G-1


2/21

RBIs History Need for RBI

Functions of RBI

Non-Monitory functions of RBI

Monitory functions of RBI

Tools of Monitory Policy

Quantitative tools

Qualitative tools Selective and Direct credit controls

Current Monitory Policy

Purchase Power Parity (PPP)2/20


3/21

The central bank of the country--Reserve Bank of India (RBI).

Established in April 1935 with a share capital of Rs. 5 crores on the basis of therecommendations of the Hilton Young Commission.

The share capital was divided into shares of Rs. 100 each fully paid up whichwas entirely owned by private shareholders in the beginning.

The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalized in the year 1949

No of members on central board is 20 (incl. governor and 4 deputy governors)

3/20


4/21

4/20

The Reserve Bank of India Act, 1934 wascommenced on April 1, 1935.

The Act, 1934 (II of 1934) provides the

statutory basis of the functioning of the Bank.The Bank was constituted for the need offollowing:

To regulate the issue of banknotes

To maintain reserves with a view to securingmonetary stability and

To operate the credit and currency system ofthe country to its advantage.


5/21

5/20

The Reserve Bank of India Act of 1934 contains all the importantfunctions of a central bank to the Reserve Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the soleright to issue bank notes of all denominations.

Banker to Government

The second important function of the reserve bank of India is to act asgovernment banker, agent and adviser. RBI carries out banking operations(e.g. to receive and make payments, carry cash reserves) for allgovernments except J&Kacts as advisor to govt on all monetary and

banking matters.Bankers' Bank and Lender of the Last Resort

The scheduled banks can borrow from the Reserve Bank of India on thebasis of eligible securities or get financial accommodation in times of needor stringency. Banks have been asked to keep cash reserves equal to 3percent of their aggregate deposit liabilities.


6/21

Controller of CreditThe Reserve Bank of India is the controller of credit i.e. it has thepower to influence the volume of credit created by banks in India. Itcan do so through changing the Bank rate or through open market

operations.

Controller of money market

The Reserve Bank of India is armed with many more powers tocontrol the Indian money market

Custodian of foreign exchange reserves

Besides maintaining the rate of exchange of the rupee, theReserve Bank has to act as the custodian of India's reserve of

international currencies.6/20


7/21

1. Monopoly of currency notes issue2. Banker to the Government(both the central and state)

3. Agent and advisor to the Government

4. Bankers Bank

5. Acts as the clearing house of the country

6. Lender of the last resort (B R P)

7. Custodian of the foreign exchange reserves

8. Maintaining the external value of domestic currency

9. Controller of forex and credit (Credit Policy)

10. Ensures the internal value of the currency11. Publishes the Economic statistical data

12. Fight against economic crisis and ensures stability of

Economy.


8/21

1. Promotion of banking habit and expansion of banking systems.

2. Provides refinance for export promotion. (E P C G)

3. Expansion of the facilities for the provision of the agricultural

credit through NABARD.

4. Extension of the facilities for the small scale industries.

5. Helping the Co-operative sectors.

6. Prescribe the minimum statutory requirement. (SLR)

7. Innovating the new banking business transactions.


9/21

1. Granting license to Banks.

2. Inspecting and making enquiry or determining position in

respect of matters under various sections of RBI and Banking

regulations.

3. Periodical review of the work of the commercial banks.

4. Giving directives to commercial banks.

5. Control the non-banking finance corporations.

6. Ensuring the health of financial system through on-site and

off-site verification.


10/21

Role as Supervisor

RBI enjoys wide powers of supervision and control over commercialand co-operative banks, relating to

licensing and establishments,

branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction,

and liquidation. The RBI is authorized to carry out periodical inspections of the banks

and to call for returns and necessary information from them..

10/20


11/21

Promotional functions

The major function of Reserve Bank is to promote banking habit, extendbanking facilities to rural and semi-urban areas, and establish and promotenew specialized financing agencies.

Accordingly, the Reserve Bank has helped in the setting up of the

IFCI

SFC

Deposit Insurance Corporation in 1962

Unit Trust of India in 1964,

Industrial Development Bank of India in 1964

11/20


12/21

What is monetary policy?

A macroeconomic policy tool used to influence interestrates, inflation, and credit availability through changes in thesupply of money available in the economy. In India it is alsocalled the Reserve Bank of Indias Credit Policy as thestress is primarily on directing credit.

12/20


13/21

CONTROLLED EXPANSION(1951-72)

Speed up economic development in the country to raisenational income and standard of living.

To prevent heavy depreciation of the rupee.

Maintaining the momentum of economic growth. Toconsider measures in a calibrated manner to respond toevolving circumstances with a view to stabilizing

inflationary expectations.

13/20

RBIs ANTI-INFLATIONARY POLICY SINCE 1972

Economic aims given above were nearly the same but policyof CONTROLLED EXPANSION was changed to CREDITRESTRAINT.


14/21

14/20

There are two kinds of tools:

Quantitative tools

control the volume ofcredit and inflation, indirectly.

Qualitative toolsthey control the supply

of money in selective sectors of the economy.


15/21

Bank Rate

Bank Rate is the rate at which RBI allows finance to commercial banks.Bank Rate is a tool, which RBI uses for short-term purposes. Any revision inBank Rate by RBI is a signal to banks to revise deposit rates as well asPrime Lending Rate.

Role of bank rate is limited in India because

The structure of interest rates is administered by RBICommercial banks enjoy specific refinance facilities.

CRRAll scheduled commercial banks are required to maintain a fortnightlyminimum average daily cash reserve equivalent with RBI .The apex bank isempowered to vary this ratio between 3 and 15 per cent. RBI uses CRReither to impound the excess liquidity or to release funds needed for theeconomy from time to time.

15/20


16/21

SLR

Every bank is required to maintain at the close of business everyday, a minimum proportion of their Net Demand and Time Liabilities

as liquid assets in the form of cash, gold etc, in addition to cashreserve requirements. The ratio of liquid assets to demand and timeliabilities is known as Statutory Liquidity Ratio (SLR). Present SLRis 24%.

16/20

Repos and Reverse RepoRBI is empowered to enter a transaction in which two parties agree to selland repurchase the same security. Under such an agreement the seller sellsspecified securities with an agreement to repurchase the same at a mutuallydecided future date and a price. Similarly, the buyer purchases the securities

with an agreement to resell the same to the seller on an agreed date in futureat a predetermined price.


17/21

An instrument of monetary policy

It involves buying and selling of govt. securities by the

RBI to influence the volume of cash reserves with

commercial banks and thus influence their loans andadvances

To contract the flow of credit ,RBI starts selling govt

securities To increase the credit flow RBI starts purchasing the

govt securities.

17/20


18/21

The main objective is to check speculation and rising prices

The RBI issues directives to banks relating to

the purpose for which advances may or may not be made

The margins to be maintained in respect of secured advances

The maximum amount of advance to any borrower The maximum amt. of guarantee that can be given on behalf of any

firm

18/20


19/21

Specifies minimum margins for lending against specific securities

Ceiling on amt of credit for certain purposes to stem the flow of credit

to speculative and non productive sectors

Charges discriminatory rate of interest on certain types of advances

19/20


20/21

The role of RBI has been redefined through gradual

evolution and adaptation, along with some statutory

changes

While the policy tries to cope with these issues, a

combination of instruments is necessarily used in a

flexible manner to meet these complexities.

These challenges and dilemmas persist in the Indian

context, every effort is made by the RBI to meet the

broader objectives set forth, from time to time.20


21/21

Documents

RBI and its roles