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Reserve Bank of India

AProject Report

submittedin partial fulfillment

for the award of the Degree ofBachelors of Technology

Submitted By:Monika Mehta

I.T. IV year

April, 2010

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Reserve Bank of India

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Preface

Reserve Bank of India, the Central Bank of the country, is at the center of the Indian Financial and Monetary system. RBI is among the oldest among the developing countries. It was inaugurated on April 1, 1935 as a private shareholders institution under the Reserve Bank of India Act 1934.

It was nationalized in January 1949, under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the central government, in consultation with the Governor of the Bank, to issue such directions to RBI as might be considered necessary in the public interest. RBI is governed by a Central Board of Directors with 20 members consisting of the Governor and the Deputy Governors. The Governor and the deputy Governors of the Bank are Government of India appointees.

The preamble to the Reserve Bank of India Act lays down the purpose of establishing RBI as “to regulate issue of Bank notes, to keep the 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”.

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Table of Contents

Preface.......................................................................................................................................................3Table of Contents......................................................................................................................................4

1. RBI: Reserve Bank of India....................................................................................................62. Role of RBI in Indian Financial System................................................................................7

2.1 Issue of Notes:................................................................................................................................72.2 Banker, Agent and advisor to the Government:.............................................................................82.3 Banker’s Bank:.............................................................................................................................112.4 Custodian of Foreign Exchange Reserves:..................................................................................112.5 Regulation of Banking System:...................................................................................................122.6 Clearing House Functions............................................................................................................142.7 Credit Control..............................................................................................................................142.8 Other Functions............................................................................................................................15

3. RBI Financial Fraud monitoring:........................................................................................174. Role of RBI in Inflation Control...........................................................................................20RBI takes measures to control inflation in 2005.......................................................................22RBI takes measures to control inflation in 2007.......................................................................23RBI takes measures to control inflation in 2008.......................................................................24

Appendix A: Glossary.....................................................................................................25Appendix B: References..................................................................................................26

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List of figures:

Figure 1. The RBI headquarters in Mumbai.......................................................................6Figure 2. Currency Garland................................................................................................8Figure 3. Reserve Bank of India.........................................................................................9Figure 4. RBI Banker's Bank............................................................................................11Figure 5. Custodian of Foreign Exchange Reserves.........................................................12Figure 6. Clearing House Functions.................................................................................14Figure 7. Credit Control....................................................................................................15Figure 8. Financial Fraud..................................................................................................18Figure 9. Financial Fraud Monitoring...............................................................................19Figure 10. INR Value against USD..................................................................................21Figure 11. India - Inflation rate (consumer prices) (%)....................................................23

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1. RBI: Reserve Bank of India

The Reserve Bank of India (RBI, Hindi: भा�रती�य रिरज़र्व बैं�क) is the central bank of India and

controls the monetary policy of the rupee as well as 287.37 billion US-Dollar (2009) currency reserves. The institution was established on 1 April 1935 during the British-Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 [1] and plays an important part in the development strategy of the government.

It was inaugurated as a private shareholders institution under the Reserve Bank of India Act 1934. It was nationalized in January 1949, under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the central government, in consultation with the Governor of the Bank, to issue such directions to RBI as might be considered necessary in the public interest.

Figure 1. The RBI headquarters in Mumbai

(Source: http://en.wikipedia.org/wiki/Reserve_Bank_of_India)

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RBI is governed by a Central Board of Directors with 20 members consisting of the Governor and the Deputy Governors. The Governor and the deputy Governors of the Bank are Government of India appointees. The preamble to the Reserve Bank of India Act lays down the purpose of establishing RBI as “to regulate issue of Bank notes, to keep the 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”.

RBI took a leading role in designing and implementing policies for agricultural and industrial development and for laying the foundations for financial markets. Some of today’s premier development and market institutions such as the National Bank for Agriculture and Rural Development (NABARD), the Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI) had their beginnings as specialized departments and divisions within the RBI. When RBI started in 1935, there were just three departments, namely the Banking Department, the Issue Department and the Agricultural Credit Department. Today, RBI has 26 departments in the Central Office, have 26 regional and field offices across the country, four subsidiaries (BRB Note Mudran Press Ltd., DICGC, NABARD and NHB,) and a staff of over 20,000 employees.

Today, RBI is the monetary authority, and regulator and supervisor for banks and non-banking financial companies. RBI is the issuer of currency and the debt manager for the central and state governments. Besides, RBI manages the country’s foreign exchange reserves, manage the capital account of the Balance of payments, and design and operate payment systems. RBI also operates a grievance redressal scheme for bank customers through the Banking Ombudsmen and formulates policies for treating customers fairly.

2. Role of RBI in Indian Financial System

The reserve Bank of India is the central bank of India. Therefore, it performs all those functions which are essentially being performed by the central bank of a country. The important functions of the reserve Bank of India are as follows:

2.1 Issue of Notes:

The reserve Bank of India enjoys monopoly in the issue of currency notes as central Bank of the country. All the currency notes except one rupee note are issued by RBI. One rupee note and all coins of small magnitude are issued by the Government of India and are circulated through the Reserve Bank of India. The RBI Act permits RBI to issue notes in the denominations of rupees 2,5,10,20,50,100,500,1000,5000,10,000. Although the RBI had issued all these denominations, but at present notes of all denominations except 5,000 and 10,000 are being issued in circulation.

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Figure 2. Currency Garland

(Source: http://indiwo.in.com/media/images)

The RBI has established a separate department for this purpose known as issuing department. The basis of note issue is minimum Reserve system. The RBI has been issuing currency notes on the principle of banking system, in which cent per gold/precious metals reserves are not required. In this system RBI have to maintain a minimum reserve of Rs. 200 crore as security against note issue. In which a minimum reserve of Rs. 115 crore has been maintain in gold and remaining Rs. 85 crore reserve in foreign securities. The value of gold reserve held by the issue department has not been less than Rs. 85 crore at the time of an emergency.

2.2 Banker, Agent and advisor to the Government:

The reserve bank of India acts as the banker, agent and advisor to the Government of India.

RBI as banker:

It accepts payments for the account of the union and state governments and also makes payments on behalf of the Government. On behalf of the Government, RBI carries remittances, managing foreign exchange reserves and public debts and other banking operation. It also makes way and means advances to the central and state Government repayable within three months. The reserve bank of India carries out agency functions of the Government as the commercial banks carries out on behalf of their customers.

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RBI as Agent:

The state Bank of India works as an agent of the RBI where its offices do not exist. The RBI does not charge any fee for its operation from the Central and state Governments. It also does not pay any interest on the deposits of the central and state Government

accounts. The reserve Bank, as the agent of the Government, issues Government securities to the public and collects money on behalf of the Government.

Figure 3. Reserve Bank of India

(Source: http://www.bizaims.com/files)

It also manages public debts to the central and state Governments. The RBI pays interest on the securities and redeemed at the time of maturity and also maintains accounts of this effect. The RBI also issues treasury bills of Government for three months.

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RBI as advisor:

The RBI is also authorized to make to the central and state Government, ways and means advances which are repayable in three months. It not only advises Govt. on all monetary and banking issues but also on a wide range of economic issues including those in the field of planning and resource mobilization.

It also manages foreign exchange reserves to meet the important requirement. Thus, RBI acts as the custodian public debts. It also advises Govt. in the matters of agriculture credit, cooperation, banking and credit and investment of funds.

WAMA:

The issue, management and administration of the public debt of the Government is a major function of the RBI for which it charges a commission. The objective of the debt management policy is to raise resources from the market at the minimum cost, while containing the refinance risk and maintaining consistency with the monetary policy objectives, to bridge temporary mismatches in the cash flows (i.e. temporary gaps between receipts and payments), the RBI provides Ways and Means Advances (WAMAs). The maximum maturity period of these advances is three months.

The WAMAs to the state Governments are of three types:

Normal advances, that is advances without any collateral security;

Secured advances, which are secured against the pledge of central Governments securities and

Special advances granted by the RBI at its discretion.

In addition to WAMAs, the state government make heavy use of overdrafts from the RBI, in excess of the credit limits (WAMAs) granted by the RBI. Overdrafts are, in a way, unauthorized WAMAs drawn by the state governments, on the RBI.

In fact, the management of these overdrafts is on of the major responsibilities of the RBI these days. The interest charged by the RBI on the WAMAs is related to a graduated scale of interest based on its duration. Overdrafts upto 7 days are charged at the bank rate and an interest of 3 per cent above the bank rate is charged from the 8th day onwards.

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2.3 Banker’s Bank:

As an apex bank the RBI acts as banker of the banks and lender of the last resort. Under the RBI Act, the bank has been vested with extensive powers of supervision and control over all scheduled commercial and cooperative banks. Once the name of a bank is incorporated in the second schedule of the RBI Act, it becomes entitled to refinance facility from the RBI. Under the act, every schedule bank is required to keep with the RBI a cash balance of 5% of its total demand and time liabilities as cash reserve ratio. Now, CRR has reduced from 5% to 4.75 with effect from 16 November, 2002.

Figure 4. RBI Banker's Bank

(Source: http://fadeawaynever.com/index)

The cash reserve ratio may be between 3 to 15% as decided by the Reserve Bank. This provision is also applicable on non-scheduled banks. This provision of cash reserve enables the Reserve Bank to control credit which is created by commercial banks. In case of need of funds, commercial banks can borrow funds from Reserve Bank on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting their bills of exchange. Therefore, commercial banks always look upon the Reserve Bank at the Time of financial crisis

2.4 Custodian of Foreign Exchange Reserves:

One of the important functions performed by the Reserve Bank is that of external value of the rupee. Apart from adopting appropriate monetary polices for the economic stability in the country and thereby exchange stability in the long-term, the Reserve Bank has to ensure that the normal short-term fluctuations in trade do not affect the exchange rate.

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Figure 5. Custodian of Foreign Exchange Reserves

(Source: http://www.zahipedia.com/wp-content/uploads/2009/11)

This is secures by the centralization of the entire foreign exchange reserves of the country with the Reserve Bank of India. In order to maintain stability in exchange rates, the Reserve Bank enter into foreign exchange transactions. It also administers foreign currency for the central Government, state Govt. and Indian embassies in foreign countries. There is a separate department for this purpose in RBI known as “Exchange control currencies and tries to maintain balance between the demand and supply of foreign exchange. The Reserve Bank is also authorized to buy and sell foreign exchange from and to scheduled banks.

2.5 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:

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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 should be strong. The RBI is also empowered to cancel the license granted to a bank works against the interests of the depositors.

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 or ro change the location of an existing place of business in India or abroad.

Power of inspection of Bank:

Under Section 35, the Reserve Bank may inspect any bank and its books and its books and accounts either at its own initiative or at the instance of the Central Government. If, on the basis of the inspection report submitted by the Reserve Bank Central Government is of the opinion that the affairs of the bank are being conducted to the detriment of the interests of depositors, it may direct to the Reserve Bank to apply for the winding up of such bank.

Power to issue Directions:

Section 35(A) of IBR Act confers powers to RBI to issue direction or to prevent the affairs of the being conducted in manner detriment to the interests of the depositors or in a manner prejudicial to the interests of the bank or to secure proper management of the bank.

Section 36 confers powers on the RBI to caution or prohibit banks against entering into any particular transaction and generally give advice to any bank. It may pass orders requiring the bank to carry out the specified instructions. In order to develop a strong banking structure in the country the RBI promotes amalgamation or merger of weak banks so that they can develop as a strong bank.

Section 38 of the Act empowered RBI to request to High Court to windup the bank which has no hopes of improvement.

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2.6 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.

Figure 6. Clearing House Functions

(Source: http://www.thehindubusinessline.com/2005/08/11)

2.7 Credit Control

Credit 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. The reserve Bank 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.

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Figure 7. Credit Control

(Source: http://corporateaxisltd.com/ESW/Images)

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.

2.8 Other Functions

The RBI performs following other functions:

Agriculture Credit:

All matters relating to agriculture credit are looked after by RBI before the establishment of NABARD in 1982. Now all functions relating to agriculture and rural development are performed by NABARD.

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Industrial Finance:

The RBI has contributed in the share capital of industrial finance institutions such as Industrial Finance Corporation of India, Industrial Development Bank of India, State Finance Corporations etc. Thus RBI indirectly contributes in the field of industrial finance.

Publication of Data:

The RBI publishes statistics regarding money, price, finance etc, in its periodicals. This provides valuable information for Govt., business and industries. This information is helpful to take decisions. The important publications of RBI are the Reserve Bank of India Annual Report, currency and finance, trends and progress of Banking etc. At present, there are more than 100 publications of RBI.

Banking Education and Training:

The RBI has been organizing various educations and training programs for bank employees and officers. ‘Banker Training College’ Mumbai has been setup by RBI for the training of Bank officers. Other important training institutes such as “College of Agriculture Banking (Pune), Reserve Bank staff Training College (Chennai) etc. had been setup by the RBI. RBI had also setup regional training centers at Mumbai, Kolkata, Chennai and Delhi.

Remitting Facility:

Reserve Bank provides remitting facilities to the central Government, state Government and semi-Government institutions free of cost. It also provides this facility to cooperative banks free of cost.

Conversion of currency:

The RBI converts spoiled currency in to fresh currency. It also provides facilities to convert currency notes into small denominating coins.

To accept Deposits:

The RBI accept deposits from Central and state Government’s institution and individual persons without paying interest.

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Transactions with international institutions:

All international economic transactions are being made through RBI. RBI opens its accounts in the central bank of member countries of IMF. It also deals with IMF, World Bank and other international financial institutions.

Transactions in precious metals:

In order to fulfill its obligations, RBI buys and sells precious metals, gold coins etc. RBI can borrow funds by mortgaging these precious metals.

Expansion of banking facilities:

RBI has played an important role in expansion of banking facilities in the rural areas of the country. At the end of June, 2001, there are 65,931 bank branches are situated in country, out of which more than half of the branches are situated in rural areas. At the end of 2000, on an average there were only one bank branches at a population of 5,000 in the country.

Supply of Development Finance:

The RBI provides development finance for the different parts of the economy. It leads economic development of the country as a whole.

3. RBI Financial Fraud monitoring:

The system of internal control and follow-up in respect of cases of large frauds of Rs.1 crore and above reported to the RBI is reviewed periodically. The emphasis on house keeping aspects has helped in detecting large frauds and instituting fraud prevention measures.

Banks are cautioned about the details of individuals/companies/firms/ proprietary concerns involved in perpetration of frauds, furnishing details of their directors/partners /guarantors/associates. In addition, modus operandi of new types of frauds is also circulated 15 among banks and financial institutions, to put them on guard. RBI also conducts special scrutiny in respect of large value frauds at the branch/controlling office level to find out lapses contributing to the frauds.

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All cases of frauds involving large amounts are analyzed to identify the contributory factors and taken up with the banks concerned for remedial measures. The aspects relating to recovery, staff accountability and improvement in internal controls are also pursued with the banks which are advised in the process to report the fraud cases to Police/CBI, if not already done. Detailed instructions have been issued by Reserve Bank of India towards streamlining fraud prevention and control/monitoring system.

Figure 8. Financial Fraud

(Source: http://www.bestblogsite.org/images/blogs)

With a view to expediting the investigation of fraud cases, RBI reports cases involving Rs. 1 crore and above as also those revealing inter-state ramifications irrespective of the amounts to CBI. The banks are advised to examine staff accountability aspect in all cases. Obtaining photographs of accountholders while opening accounts is one of the measures introduced to control frauds.

In-depth examination of large value frauds reported by commercial banks was conducted by a Study Group under the Chairmanship of CMD of a public sector bank. The group indicated common types of frauds by giving the modus operandi thereof and recommended several measures for early detection and prevention of frauds including recommendations for improvement in internal control, house-keeping, vigilance, management, etc.

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Apart from implementing the recommendations the banks were advised to adopt certain measures to avoid delay in reporting. It has also been decided that if large value frauds were due to non-observance of prescribed internal control system, certain restrictions are to be placed on opening of new branches by these banks. The banks have been advised to scrupulously follow the time limit laid down by Chief Vigilance Commissioner (CVC) and the position of adherence to CVC guidelines reviewed by their board on a quarterly basis. If these guidelines are not strictly followed, the concerned banks should furnish a report to the CVC.

Figure 9. Financial Fraud Monitoring

(Source: http://www.whistlebloweragainstfraud.com/images/nav_pages)

An Advisory Board on bank frauds was set up by the Governor, RBI with effect from March 1, 1997 under the Chairmanship of Shri S.S. Tarapore, former Member of BFS and Deputy Governor of RBI and five members drawn from areas such as law, administration, police, professional accounting and commercial banking. The Board has since been converted as Central Advisory Board on Bank Frauds and functions as part of the Central Bureau of Investigation (CBI) of Government of India.

The Board advises on the cases referred by the CBI either directly or through the Ministry of Finance for investigation/ registration of cases against bank officers of the rank of General Manager and above. The Department of Banking Supervision is providing the secretarial assistance and RBI meets the cost of the functioning of the Board.

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4. Role of RBI in Inflation Control

Inflation arises when the demand increases and there is a shortage of supply. So by anyways if government is able to reduce the money in the hands of the people it will be able to reduce the demand as the purchasing power of the people will reduce. 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.

1949-1975:

Since 1949, India ran into trade deficits that increased in magnitude in the 1960s. The Government of India had a budget deficit problem and therefore could not borrow money from abroad or from the private sector, which itself had a negative savings rate.

As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation.

In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee, was finally cut off and India was told it had to liberalize its restrictions on trade before foreign aid would again materialize. The response was the politically unpopular step of devaluation accompanied by liberalization.

The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defense spending in 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This, accompanied by the drought of 1965/1966, led to a severe devaluation of the rupee. Current GDP per capita grew 33% in the Sixties reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the Eighties and

20% in the Nineties.

Some other excuses that were generally offered were - War with China in 1962 and with Pakistan in 1965 and 1971; a flood of refugees from East Pakistan in 1971; droughts in 1965, 1966, 1971, and 1972; currency devaluation in 1966; and the first world oil crisis, in 1973-1974, all jolted the economy.

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1991 Economic crisis:

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government budget deficits. This led the government to devalue the rupee.

At the end of 1999, the Indian Rupee was devalued considerably.

Figure 10. INR Value against USD

(Source: http://upload.wikimedia.org/wikipedia/commons/thumb/9/90)

Revaluation

In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 USD = INR 44–48. In recent times, the Indian Rupee had begun to gain value and by 2007 traded around 39 Rs to 1 US dollar, on sustained foreign investment flows into the country. This posed problems for major exporters and BPO firms located in the country. The trend has reversed lately with the 2008 financial crisis.

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The changes in the relative value of the rupee has reflected that of most currencies, eg the British Pound, which had gained value against the dollar and then has lost value again with the recession of 2008.

RBI takes measures to control inflation in 2005

Indian bonds were little changed after a government report showed inflation accelerated for a seventh week in eight. The rate of wholesale price inflation was 4.75% in the week ended Oct 29. Economists expected the figure to be at 4.5%. The inflation rate was 4.49% the previous week. The yield on the 7.37% bond due 2014 was 6.98% which was not changed much in spite of the report.

India's inflation rate accelerated to 4.75% in the week ended Oct 29 from 4.49% in the previous week as the cost of fruit and vegetables rose. The wholesale price index rose 0.3% to 198.3 from 197.7 in the previous week.

The Reserve Bank of India (RBI) on Oct 25 announced a quarter- point increase in the key reverse repurchase rate at which it borrows overnight to 5.25%, the third in a year, to keep inflation within its forecast of between 5% and 5.5% by March 31. It predicted that persistent high oil prices will force the government to raise fuel costs, pushing inflation higher. For the week ended Sept. 3, the government raised the inflation rate to 3.64% from 3.16%. The government sometimes adjusts two-month-old inflation figures because of a lag in prices.

Governor YV Reddy has stated that India's inflation rate is within the expectations of the central bank which expects the rate to be between 5% and 5.5% by year-end.

The central bank lent money to banks at its daily repurchase auction, when it buys securities from lenders for a short period, temporarily injecting funds. The bank added Rs 2440 crore to the banking system. A mismatch between demand and supply of money with banks came about because the estimation of liquidity wasn't advanced enough. Frictional liquidity issue arises because in a system, in a fragmented market, the liquidity assessment by various players is not advanced yet.

The central bank will expedite the introduction of a second repurchase auction during the day for better liquidity management, he said.

On the other hand, finance minister P Chidambaram has announced that India's banks will need to raise Rs 60,000 crore ($13 billion) of capital in the next five years to meet expanding demand for credit and fuel economic growth. The nation's banks should boost lending to finance at least 50% of gross domestic product, from 35%.

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To achieve that goal, banks would need an additional Rs 60,000 crore of capital, the minister said in a speech.

Figure 11. India - Inflation rate (consumer prices) (%)

(Source: http://www.indexmundi.com/g/g.aspx?c=in&v=71)

RBI takes measures to control inflation in 2007

The Reserve Bank of India (RBI) does not bring any changes in its key signaling rates in its annual policy statement for 2007. The apex bank seems to pave the way for more foreign exchange outflows and restricts the inflow to cut inflation.

It has set a challenging inflation target of 5 per cent for the current year and expects to woo further monetary tightening with the continuing breach. The RBI has also increased the amount of cash banks are required to keep with it by 150 basis point to 6.75 percent of deposits. Also, it has given a push to repo rate as well which is now 7.75 percent.

There will be no further tightening, says the RBI. The RBI has taken two broad measures to keep a close scrutiny on net foreign exchange inflows.

First, it is making hard efforts to discourage foreign currency inflows by tightening the norms for Non Resident Indians (NRIs) investments. Second, it has encouraged greater outflows by companies and individuals. Putting the same efforts to control inflation, the RBI has reduced the interest rates that banks can pay on NRI deposits by 50 basis points.

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The ceiling on overseas investments by companies has been increased to 200 per cent of their net worth from 200 per cent and by mutual funds to $4 billion from $3 billion.

The RBI has also reduced its medium-term inflation goal to 4.0-4.5 per cent from 5 percent. The inflation is believed to be ruling above 6 per cent since December 2006, which has actually persuaded the central bank to ponder over tightening the monetary measures during the period.

As such, the finance ministry has all praises for the RBI for taking significant steps and right decisions to control inflation without hurting economic growth rate.

RBI takes measures to control inflation in 2008

Inflation has soared to 8.75 per cent for the week ended May 31. It is set to cross the 9 per cent mark when the official data is released on June 20, which reflect the impact of hike in fuel prices, according to analysts.

As part of inflation control measures, the Reserve Bank of India had last week increased the repo rate to 8 per cent, prompting the banks to consider a rise in lending rates for consumers and industries.

The continuous rise in inflation has forced the banks to increase interest rates which analyst feel could further add to the cost factor. However, the monetary measures are aimed at cooling the high demand which is pushing up prices.Most of the banks have the prime lending rates pegged at around 13 %. Besides raising the short-term lending rate (repo rate), RBI had also sucked over Rs 27,000 crore out of the economy by increasing the Cash Reserve Ratio by 0.75 per cent in three phases.

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Appendix A: Glossary

Term Definition

CBI Central Bureau of Investigation

CMD Centre for Management Development

CVC Chief Vigilance Commissioner

IMF International Monetary Fund

Inflation A general and progressive increase in prices

NABARD National Bank for Agriculture and Rural Development

RBI Reserve Bank of India

WAMA Ways and Means Advances

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Appendix B: References

http://www.rbi.org.in

http://en.wikipedia.org/wiki/Economic_history_of_India#Republic_of_India

http://answers.yahoo.com/question/index?qid=20090226221345AAN11hD

http://searchandhra.com/politics/rbi-steps-in-to-control-inflation

http://www.nrirealtynews.com/stories/apr07/check-inflation-control-measures-rbi.php

http://www.indexmundi.com/g/g.aspx?c=in&v=71

http://en.wikipedia.org/wiki/History_of_the_rupee

http://www.livemint.com/2008/06/10221118/Inflation-a-short-history.html

https://www.cia.gov

http://images.google.co.in/images