A PROJECT REPORT ONMONETARY FUNCTIONS OF RBI

SUBMITTED BYALOUKIK S. SHETEROLL NO: 50M.COM (BANKING & FINANCE)SEMESTER I(2013-2014)

SUBMITTED TOUNIVERSITY OF MUMBAIACADEMIC YEAR(2013-2014)S.K.SOMAIYA COLLEGE OF ARTS, COMMERCE & SCIENCEVIDYANAGAR, VIDYAVIHARMUMBAI-400077.

DECLARATION BY THE STUDENT

I, SHETE ALOUKIK SUNIL. Student of M.com part-I Roll Number 50 hereby declare that the project for the paper Economics of Global Trade & Finance titled,MONETARY FUNCTIONS OF RBI submitted by me for semester-I during the academic year 2013-14, is based on actual work carried out by me under the guidance and supervision of .I further state that this work is original and not submitted anywhere else for any examination. (ALOUKIK SHETE) Signature of Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on MONETARY FUNCTIONS OF RBI submitted by SHETE ALOUKIK SUNIL student of M.com part-I.

This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner External Examiner Principal

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ACKNOWLEDGEMENT

First of all, I would like to take this opportunity to thank the Mumbai University for having projects as a part of the M.com- Part- 1 curriculum.

I want express my sincere gratitude to PROF. DR.C.V. HARI NARAYANAN for assigning the responsibility to prepare MONETARY FUNCTIONS OF RBI.

I would also like to say that subject was learning, interesting, and exhaustive. I would like to thank my parents, friends and teachers who have helped and encouraged me throughout the working of the project.

(ALOUKIK S.SHETE)

_______________ RESERVE BANK OF INDIA _______________www.rbi.org.in

OBJECTIVE OF THE STUDY

To know the various functions of RBI. To know how RBI has tackled and overcome the problems of Indian economy in its difficult period. To know the effects of RBIs decisions on Indian Banking Sector . To know why RBI regarded as exceptionally best institution in India.

CONTENTS

S NOTOPICPAGE NO

1.Abbreviations1

2.Preamble2

3.Introduction3

4.Objectives of RBI4

5.Denomination of Coins and Currency5

6.Recent Changes in RBI's Monetary policy9

7.Monetary Functions13

8.RBI Mid-Quarter Monetary Policy : Highlights30

9.Conclusion33

10.Bibliography34

1

LIST OF ABBREVIATIONS

RBIReserve Bank of India

DICGCDeposit Insurance and Credit Guarantee Corporation

NHBNational Housing Bank

BRBNMPLBharatiya Reserve Bank Note Mudran Private Limited

NABARDNational Bank for Agriculture and Rural Development

SBIState Bank of India

OMOOpen Market Operation

CRRCash Reserve Ratio

SLRStatutory Liquidity Ratio

IMFInternational Monetary Fund

IFCIIndustrial Finance Corporation of India

SFCsState Finance Corporations

UTIUnit Trust of India

IDBIIndustrial Development Bank of India

SACPSpecial Agricultural Credit Plan

MSSMarket Stabilisation Scheme

PREAMBLE

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as :"...to regulate the issue of BankNotes and keeping of reserves with aview to securing monetary stability in India and generally to operatethe currency and credit system of the country to its advantage."

INTRODUCTION

TheReserve Bank of India(RBI) is India'scentral bankinginstitution, which controls themonetary policyof theIndian rupee. It was established on 1 April 1935 during theBritish Rajin accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of 100 each fully paid which was entirely owned by private shareholders in the beginning.Following India's independence in 1947, the RBI was nationalised in the year 1949.The RBI plays an important part in the development strategy of the Government of India. It is a member bank of theAsian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of DirectorstheGovernor, four Deputy Governors, oneFinance Ministryrepresentative, ten Government-nominated Directors to represent important elements from India's economy, and four Directors to represent Local Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these Local Boards consists of five members who represent regional interests, as well as the interests of co-operative and indigenous banks.

OBJECTIVES OF ESTABLISHMENT OF RBI

The main objectives of establishment of RBI as the Central Bank of India were as follows :

1. to manage the monetary and credit system of the country2. to stabilize internal and external value of rupee3. for balance and systematic development of banking in the country4. for the development of organized money market in the country.5. for proper arrangement of agricultural finance.6. for proper arrangement of industrial finance.7. for proper arrangement of public debts.8. To establish monetary relations with other countries of the world and international financial institutions.9. For centralization of cash reserves of commercial banks.10. To maintain balance between the demand and supply of currency.

According to the Reserve Bank of India Act, the aim of RBI is, to regulate the issue of bank notes and keeping of reserve with a view to secure system of the country to its advantage.

DENOMINATIONS OF COINS ANDNOTES IN CIRCULATION

Coin DenominationCoins in India are available in denominations of 10 paisa, 20 paisa, 25 paisa, 50 paisa, one rupee, two rupees, five rupees and ten rupees. Coins up to 50 paisa are called small coins and coins of Rupee one and above are called Rupee coins. As per the provisions of Coinage Act, 1906, coins can be issued up to the denomination of Rs.1000.Coins in circulation: 50 paise, 1, 2, 5 and 10 Rupee

Currency Unit and DenominationThe Indian Currency is called the Indian Rupee (abbreviated as Re. in singular and Rs. in plural), and its sub-denomination the Paisa (plural Paise). At present, notes in India are issued in the denomination of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1,000. The printing of Re.1 and Rs.2 denominations has been discontinued.However, notes in these denominations issued earlier are still valid and in circulation. The Reserve Bank is also authorised to issue notes in the denominations of five thousand rupees and ten thousand rupees or any other denomination, but not exceeding ten thousand rupees, that tCentral Government may specify. Thus, in terms of current provisions of RBI Act 1934, notes in denominations higher than ten thousand rupees cannot be issued.Notes in circulation: Rs. 5, 10, 20, 50,100, 500 and 1000

Bank notes are legal tender at any place in India for payment without limit. As per Indian Coinage Act- Rupee coin (1 and above) can be used to pay for any sum. Paise 50 coin can be used to pay /settle any sum not exceeding Ten Rupees.Special Type of NotesA special Star series of notes in three denominations of rupees ten, twenty and fifty have been issued since August 2006 to replace defectively printed notes at the printing presses. The Star series banknotes are exactly like the existing Mahatma Gandhi Series banknotes, but have an additional character In the number panel in the space between the prefix and the number. The packets containing these banknotes will not, therefore, have sequential serial numbers, but contain 100 banknotes, as usual. This facility has been further extended to Rs. 100 notes with effect from June 2009. The bands on such packets indicate the presence of such notes.Exchange of NotesBasically there are two categories of notes which are exchanged between banks and the Reserve Bank soiled notes and mutilated notes. While soiled notes are notes which have become dirty and limp due to excessive use or a two-piece note, mutilated note means a note of which a portion is missing or which is composed of more than two pieces. While soiled notes can be tendered and exchanged at all bank branches, mutilated notes are exchanged at designated bank branches and such notes can be exchanged for value through an adjudication process which is governed by Reserve Bank of India (Note Refund) Rules, 2009. Under current

provisions, either full or no value for notes of denomination up to Rs.20 is paid, while notes of Rs.50 and above would get full, half, or no value, depending on the area of the single largest undivided portion of the note. Special adjudication procedures exist at the Reserve Bank Issue offices for notes which have turned extremely brittle or badly burnt, charred or inseparably stuck together and, therefore, cannot withstand normal handling.

RECENT CHANGES IN RBIS MONETARY POLICY

RBIs monetary management has undergone some major changes since 1991. Before 1991, the RBIs monetary policy was closely linked with the financing of fiscal deficit. Now, the focus is more on promoting economic growth and maintaining price stability.1) Multiple indicator approach:In 1980s and up to 1990s, the RBI used the monetary targeting approach to its monetary policy. Monetary targeting refers to a monetary policy strategy aimed at maintaining price stability by focusing on the changes in growth of money supply (M3). It was believed that a continuous rise in money supply caused inflation. After reforms in 1991, this approach became difficult to follow. Financial liberalization brought more innovative financial products. Earlier, RBI could monitor money supply as banks were the only financial intermediaries. As non- banking sources of finance grew, monitoring money supply and controlling inflation became difficult. Hence,RBI adopted theMultiple Indicators Approach in which it looks at a variety of economic indicators and monitors their impact on inflation and economic growth.This approach was formally adopted in April 1998. As a part of this approach, variables such as money, credit, output, trade, capital flows and fiscal position, as well as rates of return in different markets, inflation rate and exchange rate, are analyzed.

2) Expectation as a channel of monetary transmission:Monetary policy transmission refers to the channel through which a change in monetary policy affects the economy. Traditionally, four key channels of monetary policy transmission are identified, interest rate, creditavailability, asset prices and exchange rate channels. The interest rate channel is the most dominant has an immediate impact on interest rate and through it on prices, demand, consumption and growth.In the recent period, a fifth channel, expectations, has also emerged.Future expectations about asset prices, general price and income level influence the four traditional channels and is therefore, taken into consideration by RBI in evaluating monetary policy transmission.3) Introduction of liquidity adjustment facility (LAF):LAF is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. LAF was introduced by RBI during June 2000, in phases. The funds under LAF are used by the banks to meet theirday-to-daymismatches in liquidity. Under the scheme, reverse repo auctions (for absorption of liquidity) and repo auctions (for injection of liquidity) are conducted. LAF has emerged as the most important factor in RBIs short term monetary management.

4) Selective methods being phased out:With greater market orientation of monetary policy and rapid progress taking place in the financial markets, the selective methods of credit control are being slowly phased out. The quantitative methods are becoming more and more significant.5) Delinking monetary policy from budget deficit:In 1994, an agreement has been reached between the central government and the RBI to phase out the use of ad hoc treasury bills. These bills were being used by the government to borrow form to finance fiscal deficit. With the phasing out the bills, RBI would no longer lend to the government to meet fiscal deficit.6)Deregulation of administered interest rate system:The lending rates of banks used to be determined by the RBI earlier. Since 1990s this system has been changed and the lending rates are no longer regulated by the RBI but are determined by commercial banks on the basis of market forces.7) Reduction in reserve requirements:CRR and SLR have been progressively lowered during thepost-reformperiod. This has done as a part of financial sector reforms on the recommendations of the Narasimham committee report. As a result, more bank funds have been released for lending purpose. This promoted growth of the economy and improved profitability of banks.8) Provision of micro finance:The RBI has introduced the scheme of micro finance for the rural poor by linking the banking system with Self Help Groups.RBI, along with NABARD, has been promoting various other microfinance institutions.

9) External sector:The monetary policy is now oriented towards the process of globalization of Indias financial markets. It has become sensitive to changes in the rest of the world as India is increasingly attracting large amount of foreign capital. RBI uses sterilization and LAF to absorb the excess liquidity that comes in with huge inflow of foreign capital. This is done to provide stability in the financial markets.

MONETARY FUNCTIONS

Bank of IssueUnder Section 22 of the RBI Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the RBI as agent of the Government. The RBI has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 Cores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the RBI is required to maintain gold and foreign exchange reserves of Ra. 200 Crores, of which at least Rs. 115 Crores should be in gold. The system as it exists today is known as the minimum reserve system.

Banker to GovernmentThe second important function of the RBI is to act as Government banker, agent and adviser. The RBI is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. Banker to the Central GovernmentUnder the administrative arrangements, the Central Government is required to maintain a minimum cash balance with the Reserve Bank. Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays, as also at the end of March and July.Under a scheme introduced in 1976, every ministry and department of the Central Government has been allotted a specific public sector bank for handling its transactions. Hence, the Reserve Bank does not handle governments day-to-day transactions as before, except where it has been nominated as banker to a particular ministry or department.In 2004, a Market Stabilisation Scheme (MSS) was introduced for issuing of treasury bills and dated securities over and above the normal market borrowing programme of the Central Government for absorbing excess liquidity. The Reserve Bank maintains a separate MSS cash balance of the Government, which is not part of the Consolidated Fund of India.As banker to the Government, the Reserve Bank works out the overall fund position and sends daily advice showing the balances in its books, Ways and Means Advances granted to the government and investments made from the surplus fund. The daily advices are followed up with monthly statements.

Banker to the State GovernmentsAll the State Governments are required to maintain a minimum balance with the Reserve Bank, which varies from state to state depending on the relative size of the state budget and economic activity. To tide over temporary mismatches in the cash flow of receipts and payments, the Reserve Bank provides Ways and Means Advances to the State Governments. The WMA scheme for the State Governments has provision for Special and Normal WMA. The Special WMA is extended against the collateral of the government securities held by the State Government. After the exhaustion of the special WMA limit, the State Government is provided a normal WMA. The normal WMA limits are based on three-year average of actual revenue and capital expenditure of the state. The withdrawal above the WMA limit is considered an overdraft. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus balances of State Governments are invested in Government of India 14-day Intermediate Treasury bills in accordance with the instructions of the State Government.

Bankers' Bank The RBI acts as the bankers bank. According to the provisions of the Banking Companies Act, 1949, every scheduled bank was required to maintain with the RBI a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the RBI.As Banker to Banks, the Reserve Bank focuses on: Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations. Providing an efficient means of funds transfer for banks. Enabling banks to maintain their accounts with the Reserve Bank for statutory reserve requirements and maintenance of transaction balances. Acting as a lender of lasresort Page | 33

Lender of Last ResortAs a Banker to Banks, the Reserve Bank also acts as the lender of last resort. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of a bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.

Controller of CreditCredit control is a very important function of RBI as the Central Bank of India. For smooth functioning of the economy RBI control credit through quantitative and qualitative methods. Thus, the RBI exercise control over the credit granted by the commercial bank. Details of this have been discussed as a separate handing. The RBI is the most appropriate body to control the creation of credit in view if its functions as the bank of note issue and the custodian of cash reserves of the member banks. Unwarranted fluctuations in the volume of credit by causing wide fluctuations in the value of money cause great social & economic unrest in the country. Thus, RBI controls credit in such a manner, so as to bring Economic Development with stability. It means, Bank will accelerate economic growth on one side and on other side it will control inflationary trends in the economy. It leads to increase in real national income of the country and desirable stability in the economy.Objectives of credit control : To obtain stability in the internal price level. To attain stability in exchange rate. To stabilize money market of a country. To eliminate business cycles-inflation and depression-by controlling supply of credit. To maximize income, employment and output in a country To meet the financial requirements of an economy not only during normal times but also during emergency or war. To help the economic growth of a country within specified period of time. This objective has become particularly necessary for the less developed countries of present day world.

Methods and Instruments of Credit Control :There are many methods of credit control. These methods can be broadly divided into two categories:I. Quantitative or General Methods.II. Qualitative or Selective Methods.The Quantitative methods of credit control aim at influencing the quantity or total volume of credit in an economy during a particular period of time. The Qualitative methods of credit control aim at influencing the quality of use of credit with respect to a particular area or field of activity. Quantitative System of credit control includes following instruments :1) Bank Rate2) Open Market Operation (OMO)3) Cash Reserve Ratio (CRR)4) Statutory Liquidity Ratio (SLR)5) Repo and Reverse repo rateQualitative system consist of the following instruments :1) Margin Requirement2) Rationing of Credit3) Moral Persuasion4) Direct Action5) Control through Directives QUANTITATIVE SYSTEM :These methods are called traditional methods because they have been in use for decades. Through these methods, the credit creation is controlled by changing the cash reserves of commercial banks.The methods of Bank Rate Policy, open market operations and variation of Cash Reserve Ratios, etc., are designed to effect the lendable resources of commercial banks either directly affecting their reserve base or by making the cost of funds cheaper or dearer to them. The important methods of this nature are explained herein below:1) Bank RateBank Rate is the rate at which RBI lends money to other banks or financial institutions. The bank rate signals the central banks long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate, the interest that a bank pays for borrowing money increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.

(Chart showing effect of increase in Bank Rate)

2) Open Market Operation (OMO)OMO refers to buying and selling of government securities by central bank in open market in order to regulate and control volume of credit in economy. When RBI sells securities in OM, then the cash reserve of commercial banks will decrease because they will purchase these securities. Thus, credit creating base of commercial banks is reduced and credit contracts. Thus, When RBI wants to contract credit, it will start selling securities in market and When RBI wants to expand credit, it will start purchasing or buying back these securitie.

3) Cash Reserve Ratio (CRR)CRR i.e. cash reserve ratio, refers to a portion of deposits (as cash) which banks have to maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.

4) Statutory Liquidity Ratio (SLR)Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the banks leverage in pumping more money into the economy.The main object of SLR is, To assure solvency of Commercial banks by compelling them to hold low risk assets up to the stipulated extent. To create or support a market for government securities in the economy which do not have a developed capital market and To allocate resources to government for augmenting the resources of the Public Sector. Banks like Regional Rural Banks may hold entire SLR requirements in the form of cash with the sponsor banks

Difference between SLR and CRRBoth CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economySLR restricts the banks leverage in pumping more money into the economy. On the other hand, CRR, orcash reserve ratio, is the portion of deposits that the banks have to maintain with the Central Bank to reduce liquidity in banking system. Thus CRR controls liquidity in banking system while SLR regulates credit growth in the country.The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with central bank, whereas SLR is money deposited in govt. securities. CRR is used to control inflation.5) Repo RateRepo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.Types of repo and related productsThere are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years.Repo transactions occur in three forms: specified delivery, tri-party, and held in custody (wherein the "selling" party holds the security during the term of the repo). The third form (hold-in-custody) is quite rare, particularly in developing markets, primarily due to the risk that the seller will become insolvent prior to maturation of the repo and the buyer will be unable to recover the securities that were posted as collateral to secure the transaction. The first formspecified deliveryrequires the delivery of a pre specified bond at the onset, and at maturity of the contractual period. Tri-party essentially is a basket form of transaction, and allows for a wider range of instruments in the basket or pool. In a tri-party repo transaction a third party clearing agent or bank is interposed between the "seller" and the buyer. The third party maintains control of the securities that are the subject of the agreement and processes the payments from the "seller" to the "buyer."6) Reverse Repo RateThis is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking systemIf the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy.

QUALITATIVE SYSTEM :

1) Margin RequirementThe difference between the market value of securities and the loan value i.e. the amount borrowed against these securities known as Margin.e.g.:- a person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%.In case the flow of credit has to be increased, the marginal requirement will be lowered.RBIhas been using this method since 1956.2) Rationing of creditUnder this method there is a maximum limit to loans and advances that can be made, which thecommercial bankscannot exceed.RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Minimum of Capital: Total Assets (ratio between capital and total asset) can also be prescribed byReserve Bank of India.

3) Moral PersuasionUnder this, RBI issues periodical letters to bank to exercise sector to follow credit control norms. It is reminder to banking sector to follow credit control norms. In fact, it is a psychological measure of controlling credit by doing heart to heart talk with lending banker.4) Direct ActionUnder the banking regulation Act, the central bank has the authority to take strict action against any of thecommercial banksthat refuses to obey the directions given byReserve Bank of India. There can be a restriction on advancing of loans imposed byReserve Bank of Indiaon such banks. e.g. - RBI had put up certain restrictions on the working of the MetropolitanCo-operative Banks. Also the Bank of Karad had to come to an end in 1992The banks in default will be made to suffer by way of the following:I. Levying penal interest rates on the defaulting banks.II. Cancelling the licences of such banks ( extreme step)III. Refusing to grant refinance facilities to such banksIV. Putting lending restrictions on the banks.V. Not permitting opening of new branches for the banks.VI. Not allowing participation in money market, etc.5) Control through DirectivesThe Reserve Bank of India (Amendment) Act and the Banking Companies Act has empowered the RBI to issue directives to a particular bank or to the banks in general in regard to the following: The purpose for which advances may or may not be made, the maximum amount of advances that can be granted to any individual, firm or company; the margins to be maintained on secured loans, and the rate of interest to be charged, etc.For example,a) Banks are not allowed to provide finance for speculative purposes in stock market operations or to deal in real estate business.b) No banks can make advances to a single borrower company beyond 25 per cent of its paid-up capital and reserves.c) Reserve Bank prescribes margin on advances made by banks against the security of Commodities covered under selective credit control measures like sugar.d) Advances made under DRI scheme should be only at interest rate prescribed by RBI, i.e., 4 per cent per annum.The RBI has used this weapon for many times to bring down the prices of agricultural commodities. The directives are issued by the RBI as supplement to the traditional weapons of control like the bank rate policy, open market operations, etc. Custodian of Foreign ReservesThe RBI has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the RBI has the responsibility of maintaining fixed exchange rates with all other member countries of the International Monetary Fund (IMF).Besides maintaining the rate of exchange of the rupee, the RBI has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. Clearing House FunctionsThe 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 (SBI) and its associates look after clearing houses function in other parts of the country as an agent of RBI.

RBI MID-QUARTER MONETARY POLICY: HIGHLIGHTS

Reserve Bank of India Governor Raghuram Rajan surprised markets in his maiden policy review on Friday by raising interest rates to ward off rising inflation while scaling back some emergency measures put in place to support the rupee. Following are highlights from the monetary policy statement:POLICY MEASURES1. Lowers marginal standing facility rate by 75 bps to 9.50 per cent2. Raises repo rate (lending rate) by 25 bps to 7.50 per cent3. Reverse repo rises to 6.50 per cent.4. Cash reserve ratio (CRR) unchanged at 4.00 per cent5. Partially relaxes minimum daily cash balance requirement to 95 per cent of deposits from 99 per centPOLICY STANCE1. Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately2. To contemplate easing cash tightening measures in a calibrated manner3. Policy steps to mitigate exchange market pressures, create a conducive environment for revitalisation of sustainable growth4. Steps intended to address inflationary pressures so as to provide a stable nominal anchor for the economyFORECASTS1. Timing, direction of further actions on exceptional measures will be contingent upon exchange market stability, and can be two-way2. Further actions need not be announced only on policy dates3. Focus now on internal determinants of rupee, fiscal deficit and domestic inflation, after steps taken to contain current account gap4. Growth is trailing below potential and the output gap is widening5. Growth could pick up in the second half of the year6. Despite good monsoons leading to some moderation in CPI inflation, no room for complacency7. In the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year8. Further change in the minimum daily maintenance of the CRR not contemplated9. Objective to normalise conduct and operations of monetary policy so as to allow the repo rate to resume its role as operational policy rate.

Bank Rate : 9.50% Repo Rate : 7.50% Reverse Repo Rate : 6.50% Marginal Standing Facility Rate : 9.50%

CRR : 4% SLR : 23.0% RBI Reference Rate INR / 1 USD : 61.8110 INR / 1 Euro : 83.4200 INR / 100 Jap. YEN : 62.6600 INR / 1 Pound Sterling : 99.4972 INR / 1 Pound Sterling : 99.4972

Base Rate : 9.70% - 10.25% Savings Deposit Rate : 4.00% * Term Deposit Rate : 8.00% - 9.00% * relates to five major banks CONCLUSIONRBI is the apex banking institution in India. RBI is an autonomous body promoted by the government of India and is headquartered at Mumbai. It is non-profit making institution which has a public ownership and management.RBI has a very privileged position in the economy and it has a special relationship with commercial bank. The RBI plays a key role in the management of the treasury foreign exchange movements and is also the primary regulator for banking and non-banking financial institutions. The RBI operates a number of government mints that produce currency and coins. RBI also undertakes developmental and promotional functions such as rural credit, special agricultural credit plans, Micro, small and medium Enterprise development etc. The functions of the RBI also include the issue of currency notes, Banker to the Government, Bankers bank, Lender of Last Resort, Controller of Credit, Clearing House Functions.

BIBLIOGRAPHY

Books : RBI - Brochure explaining RBI's Role and Functions in brief Reserve Bank of India : Functions and Working

Website : www.rbi.org.in http://www.nrirealtynews.com/stories/apr07/check-inflation-control-measures-rbi.php http://en.wikipedia.org/wiki/History_of_the_rupee http://images.google.co.in/images http://en.wikipedia.org/wiki/Economic_history_of_India#Republic_of_Indiahttp://www.livemint.com/2008/06/10221118/Inflation-a-short-history.htm