Click To Know About Reserve Bank of India

 

Reserve Bank of India

•The Reserve    Bank    of     India     was     established in 1935 under the provisions of the Reserve Bank of India Act, 1934. It was located earlier in Calcutta but later moved to Bombay.

•Though    originally     privately     owned,     RBI     was nationalized in 1949

Organization and Management:

•The Reserve Bank is headed by a Central Board of Directors.

•The board is appointed by the Government of India for a period of four years, under the Reserve Bank of India Act.

•The board comprises of a Governor and not more than four Deputy Governors.

•The current Governor of RBI is Mr. Shaktikanta Das.

•Ten directors amongst whom two are government officials and others are distinguished personalities in their respective fields are nominated by Government.

•There are four more directors who are from four local boards respectively.

Roles and Functions of RBI Monetary Authority:

•It formulates, implements and monitors the monetary policy.

•It is entrusted with maintaining price stability, and keeping inflation in check

•It ensures adequate flow of credit to productive sectors.

 

Regulation and monitoring of the financial system:

•It sets the standards of banking operations according to which the country’s banking and financial system functions

•It maintains public confidence in the financial system

•It protects the interests of the depositors

•It provides cost-effective banking services to the general public

Regulation and monitoring of the payment systems:

•It authorizes and directs the setting up of payment systems

•It lays down parameters for functioning of the payment system

•It prescribes the policies  for transition from paper-based payment systems to electronic modes of payments.

•It establishes the regulatory framework of newer payment methods.

•It works for enhancement of customer convenience in payment systems.

•It stresses on improving the security and efficiency in modes of payment.

Regulation of Foreign Exchange:

•RBI regulates foreign exchange under the FEMA- Foreign Exchange Management Act, 1999

•It facilitates all foreign trade and payment

•It advances the development of foreign exchange market.

Issuer of currency:

•RBI issues and exchanges currency as well as destroys currency & coins not fit for circulation to avoid public inconvenience.

•It ensures that the public has an adequate quantity of supplies of currency notes and in good quality to avoid artificial bottlenecks for the economy.

 

Promotional role:

•RBI is entrusted with a wide range of promotional functions in furtherance of national objectives.

•It has set up institutions like NABARD, IDBI, SIDBI, NHB, etc.

Banker to the Government:

•It performs banking function for the central and the state governments of the country.

Banker to banks:

•RBI is  entrusted with maintaining the banking accounts of all scheduled banks

•It acts as the banker of last resort.

Being an expert on financial and economic matters it acts as anagent of Government of India in the IMF.

 

Offices and Training Centers

•RBI has 20 regional offices and 11 Sub-offices. In total it has its offices at 31 locations.

•It has five training establishments. Amongst these five, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank.

•National Institute for Bank Management; Indira Gandhi Institute for Development Research (IGIDR); Institute for Development and Research in Banking Technology (IDRBT) are autonomous entities.

 

Monitoring of Monetary Policy

•The RBI formulates, operationalizes and monitors the monetary policy

•The Monetary Policy Committee (MPC) is responsible for fixing the benchmark policy interest rate (repo rate)

The main objectives of monitoring monetary policy are:

•Maintaining price stability as well as ensuring the growth of the economy as a whole.

•Inflation control (containing inflation at 4%, with a standard deviation of 2%)

•Ensuring the proper flow of bank credit

•Controlling the Interest rate levels in the interests of the economy.

 

Bank rate

•The rate at which central bank provides loan to commercial banks

 This is the most significant tool with the RBI to control the money supply in long term lending.

•At present it is 4.25%.

•When RBI increases the bank rate the loan becomes more expensive for the commercial banks with the result that they also in turn raise their rate of lending.

•The cumulative effect of the above measure is that the common borrowers find it tougher to take loans which ultimately brings about a fall in the volume of the lending activity.

•The reverse happens in case of a decrease in the bank rate

which in turn causes a rise in the lending activity.

•So it is an effective tool to pump or such money from the

economy as a whole.

 

Cash Reserve Ratio (CRR)

•It refers to the minimum amount of funds in the form of cash deposits that a commercial bank has to maintain with the Reserve Bank of India.

•An increase in this ratio will deprive commercial banks of much of their cash funds which they could have used for lending purposes.

•The consequence of the above measure would be a decrease of money supply in the economy as a whole.

•On the contrary, a fall in CRR will lead to an increase in the money supply as commercial banks would have surplus cash funds for lending purposes.

•Currently, it is 3%.

 

Statuary Liquidity Ratio (SLR)

•It refers to the minimum amount of assets in the form of non-cash deposits that a commercial bank has to maintain with itself.

•When SLR is increased by RBI the lending power of the commercial banks goes down.

•Consequently the overall money supply decreases as liquidity is sucked out of the economy as a whole.

•When SLR is decreased by RBI the lending power of the commercial banks goes up.

•In this case the money supply in the economy increases and the liquidity is pumped into the economy as a whole.

•Currently, SLR is 18%.

 

Liquidity Adjustment Facility

•Liquidity Adjustment Facility helps banks to adjust their daily liquidity mismatches.

Repo Rate

•Repo (Repurchase) rate is the rate at which the RBI lends short-term money against securities to various scheduled commercial banks.

•When the repo rate increases short term borrowing from RBI becomes more expensive.

•Repo rate is always higher than the reverse repo rate.

•At present it is 4.00%

 

Reverse Repo Rate

•It is the exact opposite of repo.

•In a reverse repo transaction, banks lend money to RBI against government securities and earn interest on it.

•So, Reverse repo rate is the rate at which RBI borrows money from banks.

•The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.

•The rate of interest is kept low so as to discourage banks from resorting to this measure.

•At present it is 3.35%