ROLE OF RBI IN SOCIAL AND ECONOMIC

DEVELOPMET

Bachelor of Commerce (Banking & Insurance)

Semester (V)
(2019-2020)

Submitted By
ANANT JAIN,14

Project Guide
PROF. VINAY JADAV

Mithibai College of Arts, Chauhan Institute of Science &

Amruthben Jivanlal College of Commerce and
Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna

Nagar, Vile Parle (W), Mumbai, Maharashtra 400056

1
 “ROLE OF RBI IN SOCIAL AND ECONOMIC
DEVELOPMENT”

Bachelor of Commerce (Banking & Insurance)

Semester (V)

Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of
Bachelor of Commerce (Banking & Insurance)

By:
ANANT JAIN
Roll No.: 14

Mithibai College of Arts, Chauhan Institute of Science &

Amruthben Jivanlal College of Commerce and
Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna

Nagar, Vile Parle (W), Mumbai, Maharashtra 400056

2
 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so
numerous, and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.

I take this opportunity to thank Mithibai College for giving me chance

to do this project.

I would like to thank my Principal, Dr. Rajpal Shripat Hande for

providing the necessary facilities required for completion of this
project.

I take this opportunity to thank our Head of Department Mr. Mandar

Thakur, for his moral support and guidance.

I would also like to express my sincere gratitude towards my project

guide Asst. Prof. Mr. Vinay Jadav whose guidance and care made
the project successful

Lastly, I would like to thank every person who directly or indirectly

helped me in the completion of the project especially my Parents and
Peers who supported me throughout my project.

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 DECLARATION

I, Anant Jain the student of T.Y.B.B.I. Semester V (2019-2020)

hereby declare that I have completed the project on “Role of RBI in
Social and Economic Development.

The information submitted is true and original to the best of my

knowledge.

_____________________
Anant Jain
Roll No.: 14

Mithibai College of Arts, Chauhan Institute of Science & Amruthben

Jivanlal College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile

Parle (W), Mumbai, Maharashtra 400056

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 CERTIFICATE

This is to certify that Mr. Anant Jain, Roll No: 14 of Third Year
B.B.I., Semester V (2019-2020) has successfully completed the
project on
Role of RBI in Social & Economic Development
under the guidance of Asst. Prof. Mr. Vinay Jadhav.

Project Guide/ Internal Examiner Principal

(Asst. Prof. Mr. Vinay Jadav)

External Examiner

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 S.NO Title of Contents Pg. No
1. EXECUTIVE SUMMARY 7
2. REVIEW OF LITERATURE 8-16
2.1 INTRODUCTION 8
2.2 COMMITTEES, AUTHORS, WRITERS & 8-15
COMMISSIONS
2.3 SUMMARY 16
3. NEED OF THE STUDY 17
4. OBJECTIVES 18
5. SCOPE OF THE STUDY 18
6. RESEARCH METHODOLOGY 19
7. INTRODUCTION 20-23
7.1 ABOUT RBI 20
7.2 EVOLUTION OF RBI 21
7.3 STRUCTURE 22-23
7.4 BRANCHES & SUPPORT BODIES 23
8. FUNCTIONS OF RBI 24-30
9. PROMOTIONAL ROLE OF RBI 30-33
10. POLICIES OF RBI 34-47
10.1 MONETARY POLICY 34-41
10.2 FISCAL POLICY 42-47
11. RBI - SOCIAL & ECONOMIC DEVELOPMENT 48-50
12. SCHEMES INITIATED BY RBI 50-62
13. CHANGING ROLE OF RBI 63-64

14. ECONOMIC REVIEW 65-66

15. CONCLUSION 67

16. WEBLIOGRAPHY & REFERENCES 68

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 CHAPTER 1 – EXECUTIVE SUMMARY

The study presents the role of RBI, the Reserve Bank of India in Social and Economic
Development of the country. The Reserve Bank of India commenced operations in 1935 and
was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve
Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The bank was constituted to maintain reserves with a view of economic stability, regulate the
issue of currency and to operate the credit system in the country to its full potential.

The study aims to critically evaluate the role of RBI in the Indian economy over the years, and
its contribution of various developmental aspects. The study also focusses on various functions
performed by Central Bank and policies adopted by the Central Bank to perform these
functions.

The role of RBI has undergone through a vast change over the period of time. Earlier, the role
of RBI was merely confined to credit control. However, with increasing economic activities
both at national as well as international level as well as rising economic fluctuations, RBI
assumes a much bigger role. Thus, it is important to thoroughly study the changing role of RBI
over the years, especially in terms of development and a study of the programs implemented
and reforms initiated.

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 CHAPTER 2 – REVIEW OF LITERATURE

2.1 Introduction

The review of literature helps to understand the importance, background and the present
situation related to the subject problem selected for research. Therefore, it is necessary to
review the latest and relevant literature related to the problem.

A number of studies have been conducted in India and abroad to study the various aspects of
role of the Reserve Bank of India in development of India. These studies have been reviewed
with a view to understand the objectives of the study, methodology and findings.

These studies have been placed below –

2.2 Committees, Authors, Writers & Commissions

1. Dr. Girish Painoli & Dr.G.S.Gaud (2013) analyzed the risk faced by the banking
industry and Role of RBI as a Guardian for the management of risk in “Bank Risk
Management and Role of Reserve Bank of India” The various risks that a bank is bound
to tackle is divided into two categories i.e. business risks and control risks. Risk
management in banking designates the entire set of risk management processes and
models allowing banks to implement risk-based policies and practices. They cover all
techniques and management tools required for measuring, monitoring and controlling
risks. The range of models and processes extends to all risks: credit risk, market risk,
interest rate risk, liquidity risk and operational risk, to mention only major areas. For
centuries bankers as well as their regulators have assessed and managed risk
instinctively, without the benefit of a formal and generally accepted framework or
common terms. The risk management arrangement followed at all banks is a blend of
centralized and decentralized form. Though risk department forms the heart of the
organization because if it fails the bank will gasp for breath. But this department is a
victim of ignorance in today’s scenario. After observations it was found that the banks

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 have lowest number of workforce assigned to this department. Within the department,
maximum stress is given to credit risk and other risks are still neglected. The bank does
not have sufficient skill set for driving risk management function RBI, keeping in view
international best practices has already taken certain initiatives in this regard and there
is a proposal to initiate shortly, the system of Consolidated Supervision too, along with
Risk Based Supervision. The impact on bank’s key ratios due to banking supervision
reveals good results and walking on the same range few issues can be stressed upon
like technology up gradation, corporate governance, market intelligence etc. In short
there is a need of a perfect role to be played by R.B.I. in managing the bank risk so that
risk of bank can be restricted from spreading towards other components of financial
mechanism at the same time promising policy making and implementation is needed
from central government.

2. Anand Sinha (2011) in his Valedictory Speech on “Indian Banking – Journey into the
Future” at Conference Bancon-2011 in Chennai says that The Financial Stability
Report (FSR) of the Reserve Bank of India for the half year ended June 2011 has
expressed concerns over growing reliance of banks on wholesale funding/ market
borrowing to fund assets. One reason for such reliance could be the low growth of
deposits not commensurate with the credit growth. Such reliance, however, could
prove disastrous as evidenced during the crisis as the wholesale funding sources can
dry up quickly. Banks, therefore, have to factor this in their liquidity management.
There, however, remains an issue under Basel III about the extent to which SLR
holdings can be taken into consideration for the purpose of calculating the liquidity
ratios. As the SLR holdings are required to be maintained on an ongoing basis, these
would technically not be reckoned for liquidity purposes. However, it may be
reasonable to reckon, under stress conditions, at least a part of the SLR holdings in
calculating the liquidity ratio, as the SLR holdings are primarily government bonds
against which the Reserve Bank provides liquidity. Further, the major challenge for
Indian banks in implementing the liquidity standards is to develop the capability to
collect the relevant data accurately and granularly and also to formulate and predict the
liquidity stress scenarios with reasonable accuracy and consistency.

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3. Dr. Karl Brunner in his book “The Role of Money and Monetary Policy” analyzes &
evaluates various issues raised by the counter-critique. He points outs that the main
economists who stress the role of money and monetary policy also utilizes the asset &
relative price approach to monetary analysis hence in this regard there is little
difference between them & the “New view”. The Development of Monetary analysis
in the past decade has intensified the debate concerning the role of money and
monetary policy. The New view in monetary economics provides a more useful
analytical framework. In the new view banks like other financial institutions are
considered as suppliers of financials claims for the public to hold and the public is
given a significant role in determining the total amount of bank liabilities. This general
argument guided the construction of an explicit model designed to emphasis the role
of the public and the banks behaviour in the determination of the money stock, bank
credit and interest rates. A program for applying economic analysis to financial
institutions is certainly acceptable and worth pursuing. This program suggests that the
public and banks interact in the determination of Bank credit, interest rates, & the
money stock in response to the behaviour of monetary authority.

4. Rajesh Chakrabarti in his paper “Banking in India – Reforms and Reorganization”

elaborated the process of reforms and reorganization in the banking sector and what is
the 30 effect of that process to the banking sector in India. Arguably the most far-
reaching impact of banking liberalization in India has involved the deregulation of the
interest rate. From a completely government-determined interest rate structure, Indian
banks have now gradually moved to an almost entirely market-driven interest rate
system. During this period interest rates have declined somewhat – the development
with arguably the largest direct impact on common people. Regardless of the actual
movement of the rates, what is truly significant is the fact that the rates are now
determined largely by competitive market forces rather than the government. This
means that lending rates are determined by forces of demand and supply for such funds
rather than by government policies. Nevertheless, the corporate loan market does not
appear to have fully equilibrated over time.

5. Bruno Carrasco and Hiranya Mukhopadhyay in his working paper “Reserve Bank
of India’s Policy Dilemmas: Reconciling Policy Goals in Times of Turbulence”
reviews some of the more critical policy dilemmas facing the Reserve Bank of India
10
(RBI) in its pursuit of inflation stabilization and balanced growth objectives. The
challenge in meeting these objectives further increased in the mid-2000s with the
advent of large capital flows into the country and with RBI’s role in preserving
financial stability. Much to the concern of 38 policymakers, this has led to potentially
large trade-offs among the various policies that are often used to meet these challenges.
In so far as price stability is concerned, RBI’s policies are aimed at ensuring that the
supply of broad money does not grow at a rate that is inconsistent with the level of
economic activity of the economy, given the prevailing inflation, inflation expectations
and growth outlook of the economy. There is, however, one question that remains
unanswered before we judge the effectiveness of RBI’s monetary policy stance. A
higher policy rate, as engineered by RBI to dampen inflation expectations may not cool
down the market in terms of credit disbursement under certain circumstances. Indeed
our results below suggest that if the credit market is in disequilibrium and the market
is primarily supply constrained, higher interest rate will lead to a counter intuitive
higher credit disbursement as a higher policy rate will not contain the credit demand.
Banks will take all necessary steps, including higher deposit rates, to mobilize
additional deposits to meet excess credit demand. The banks, or lenders, however, not
only take into consideration the lending rates, they are also constrained in their ability
to supply credit by their deposit base. While this is not a general principle, in many
countries such as India, loan able funds are to a large extent sourced from their deposit
base. Specifically, the growth of credit supplied by banks is critically dependent on the
growth in the volume of deposits which, net of the CRR and the statutory liquidity ratio
(SLR) requirements, determines the extent to which the banks can lend.
Macroeconomic and monetary management have become extremely complex in a
liberalized world due to a potential for conflicting policy objectives. The effectiveness
of policy changes critically depends on underlying economic and functional structures
of markets, e.g., credit market, foreign exchange market, money market etc. As
demonstrated above, there is no simple policy solution to consistently apply in different
circumstances with full knowledge about the underlying structure of the economy. As
shown, a policy action that may be effective under a particular circumstance, may not
be effective when the underlying economic structure changes. For example, in a
demand constrained regime with high inflation, weak capital flows and growth below
trend, a hike in the policy rate will address the first two concerns at the cost of output

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 growth. However, if the credit market becomes supply-constrained, ceteris paribus, a
hike in the policy rate is unwarranted.

6. Goyal and Joshi (2012) analyze in his paper “Indian Banking Industry: Challenges
and Opportunities” that the banking industry in India has a huge canvas of history,
which covers the traditional banking practices from the time of Britishers to the
reforms period, nationalization to privatization of banks and now increasing numbers
of foreign banks in India. Therefore, Banking in India has been through a long journey.
The use of technology has brought a revolution in the working style of the banks.
Nevertheless, the fundamental aspects of banking i.e. trust and the confidence of the
people on the institution remain the same. The majority of the banks are still successful
in keeping with the confidence of the shareholders as well as other stakeholders.

7. Dr. Y.V.Reddy (2002) in his speech about “Parameters of Monetary Policy in India”
attempted to focus on the conduct of monetary policy and highlighted some of the
immediate tasks. In case, there is interest in an overview of theory and analytics,
especially in the context of role of monetary policy in revitalizing growth in India. The
conduct of monetary policy in India would continue to involve the constant rebalancing
of objectives in terms of the relative importance assigned, the selection of instruments
and operating frameworks, and a search for an improved understanding of the working
of the economy and the channels through which monetary policy operates. Among the
unrealized medium-term objectives of reforms in monetary policy, the most important
is reduction in the prescribed CRR for banks to its statutory minimum of 3.0 per cent.
The movement to 3.0 per cent can be designed in three possible ways, viz., the
traditional way of pre-announcing a time-table for reduction in the CRR; reducing
CRR as and when opportunities arise as is being done in recent years; and as a one-
time reduction from the existing level to 3.0 per cent under a package of measures. The
Reserve Bank influences liquidity on a day-to-day basis through LAF and is using this
facility as an effective flexible instrument for smoothening interest rates. The
operations of non-bank participants including FIs, mutual funds and insurance
companies that were participating in the call/notice money market are in the process

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 of being gradually reduced according to pre-set norms. Such an ultimate goal of
making a pure inter-bank call money market is linked to the operationalisation of the
CCIL and attracting non-banks also into an active repo market. The effectiveness of
LAF thus will be strengthened with a pure inter- 16 bank call/notice money market in
place coupled with growth of repo market for non-bank participants.

8. Kulkarni and Yuan (2006) in his paper “Demand for Money in an Open Economy
Setting: A Case of India” made a summary of Keynesian and Monetarists explanations
of money demand determination. The main contrasting argument between these two
camps is the importance of interest rates in determining the demand for money. While
Keynesians are seen to be in firm belief that interest rate is quite crucial in determining
money demand (a la liquidity trap), the monetarists hold a view that the real GDP and
general price level (P) are the only significant determinants of it. We also carried out
a thorough survey of demand for money studies applied to many economies in general
and to India in particular. By using the modern times data in case of India, we find that
the influence of interest rate on demand for money is small in magnitude and
statistically insignificant in both cases, and that of real GDP is significant in the first
case and insignificant in the second case. Inflation rate shows strong negative effect on
money demand and statistically significant in both cases. Hence it appears that the
monetarist belief that the interest rate is not very crucial determinant of the demand for
money is supported. Since foreign reserve exhibits abnormal effect when it comes into
play, it is dropped throughout the co integration tests and the following vector error
correction model. Another point is that the positive (but insignificant) effect of
exchange rate 18 on money demand is seen to be the test of monetary policy makers’
ability to sterilize the domestic money demand. All in all the demand for money
function for India does not have changed behaviour because of her newly found love
for openness. The demand for money in India is still significantly determined by real
GDP and inflation rate alone, and exchange rate and foreign reserves do not make
drastic changes in it. Transactions demand for money is mainly determined by National
Income and the speculative demand for money is primarily determined by Interest rate.
Hence according to Keynes the main determined of demand for money are interest rate
and the national income. Reserve Bank of India (2010) in his discussion paper
“Deregulation of Savings bank Interest rates: A Discussion paper” try to put the pros
and cons of deregulation of savings deposits interest rates in India. Regulation of
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 interest rates imparts rigidity to the instrument/product as rates are either not changed
in response to changing market conditions or changed slowly. This adversely affects
the attractiveness of a product/instrument. In the case of savings bank deposits, its
interest rate has remained unchanged at 3.5 per cent since March 1, 2003 even as the
Reserve Bank’s policy rates and call rates moved significantly in either direction.
Regulation of savings deposits interest rate has not only reduced its relative
attractiveness but has also adversely affected the transmission of monetary policy. For
transmission of monetary policy to be effective, it is necessary that all rates move in
tandem with the policy rates. This suggests that regulation of the interest rate on
savings deposits has impeded the monetary transmission and that deregulation of
interest rate will help improve the transmission of monetary policy. In sum,
deregulation of savings deposit interest rates has both pros and cons. Savings deposit
interest rate cannot be regulated for all times to come when all other interest rates have
already been deregulated as it creates distortions in the system. International
experience suggests that in most of the countries, interest rates on savings bank
accounts are set by the commercial banks based on market interest rates.

9. Dr. Krishna Goyal & Vijay Joshi (2012) commented on challenges & opportunities
before the banking industry in his paper “Indian Banking Industry: Challenges &
Opportunities” Over the years, it has been observed that clouds of trepidation and
drops of growth are two important phenomena of market, which frequently changes in
different sets of conditions. The pre and post liberalization era has witnessed various
environmental changes which directly affects the aforesaid phenomena. It is evident
that post liberalization era has spread new colours of growth in India, but
simultaneously it has also posed some challenges. Banks are expected to be more
responsive and accountable to the investors. Banks have to disclose in their balance
sheets a plethora of information on the maturity profiles of assets and liabilities,
lending to sensitive sectors, movements in NPAs, capital, provisions, shareholdings of
the government, value of investment in India and abroad, operating and profitability
indicators, the total investments made in the equity share, units of mutual funds, bonds,
debentures, aggregate advances against shares and so on.

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10. Shahul Hameedu (2014) in his study titled, “Financial Inclusion - Issues in
Measurement and Analysis”, explains that financial inclusion is delivery of banking
services of an affordable cost to the vast sections of disadvantaged and low-income
groups. As banking services are in the nature of public good, it is essential that
availability of banking and payment services to the entire population without
discrimination is the prime objective of the public policy. The banking industry has
shown tremendous growth in volume and complexity during the last few decades.
Despite making significant improvements in all the areas relating to financial viability,
profitability and competitiveness, there are concerns that banks have not been able to
include vast segment of the population, especially the underprivileged sections of the
society, into the fold of basic banking services. Internationally efforts are being made
to study the causes of financial exclusion and designing strategies to ensure financial
inclusion of the poor and disadvantaged. The reasons may vary from country to country
and hence the strategy could also vary but all out efforts are being made as financial
inclusion can truly lift the financial condition and standards of life of the poor and the
disadvantaged.

11. Bhoomika Garg (2014) made a study titled, “Financial Inclusion and Rural
Development”, Nationalization of banks in 1969 and subsequent developments led to
the expansion of commercial banks, Regional Rural Banks and Co-operative credit
institutions geographically all over India. Banks policy aimed at “social” and
“development bonding” by providing credit to agriculture and other priority sectors. It
may be noted that despite of vast expansion, a large number of groups remain excluded
from the “opportunities and services” provided by the financial sector. Such excluded
groups include small and marginal farmers, women, unorganized sector workers
including artisans, self-employed and pensioners. Against this background, the
objective of this note is to bring out issues and challenges for reducing financial
execution.

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2.3 Summary

There is a total of 11 reviews which include review from National & International papers,
books, RBI’s reports and others. The review highlights different measures taken by banks and
RBI for the people of India, however the same should reach to the people equally without any
discrimination. Also, the banking policy aims at “social” and “development bonding” by
providing credit to agriculture and other priority sectors. The use of technology has brought a
revolution in the working style of the banks and its functioning, and helped achieving
objectives in less time. These reviews also highlight some of the more critical policy dilemmas
facing the Reserve Bank of India (RBI) in its pursuit of inflation stabilization and balanced
growth objectives.

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 CHAPTER 3 – NEED OF THE STUDY

The Reserve Bank of India plays a very important role as it plays multi-facet functions in the
economy such as issuing currency, maintaining foreign exchange, overseeing various policies
implemented in terms of changes in bank rate, repo rate, CRR, SLR etc. Thus, the monetary
and credit system of the economy lies in hands of RBI and it is important to understand the
same.

India has recorded top GDP rates across the world in the last 2 decades. It is also considered
one of the most powerful emerging market countries. World Bank projected India’s GDP
would expand by 7.5% in 2020. This makes the role of RBI increasingly important as the GDP
moves higher.

Similar with all economies, the central bank assumes a key role in overseeing and observing
the monitory policies affecting both commercial and personal finance as well as the banking
system. As GDP moves higher on the world rankings the RBI's activities will turn out to be
progressively significant.

Perceiving the significance of RBI's policies and functions, it is essential to likewise gauge the
adequacy and effectiveness of RBI in usage of its policies and functions in financial and social
improvement of the nation and furthermore to basically assess existing strategies and dissect if
there is need of new approaches and structure.

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 CHAPTER 4 – OBJECTIVES

1. To analyse the role and functions of RBI.

2. To understand the role of RBI in Social and Economic Development.
3. To understand different policies of RBI.
4. To understand monetary and credit system of the country.

CHAPTER 5 – SCOPE OF THE STUDY

The research is limited to the study of “Role of RBI in Social and Economic Development of
India.” The study includes structure of RBI, the functions and role assumed by RBI to achieve
its objectives and the means through which it performs those functions (policies of RBI). The
study also covers different programmes initiated by RBI for betterment of the banking system
in India. Towards the end, the study takes us through the changing role of RBI with respect to
changes in banking system and other variables in the economy. In a nutshell, the study analyses
the role and contribution of RBI to the banking system and economy.

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 CHAPTER 6 – RESEARCH METHODOLOGY

There are two types of data collection methods that can be considered for collecting data for
research purpose. These data collection includes the following:

• Primary data
• Secondary data

The only data used in this project is secondary data.

Secondary Data: The secondary data for the research was collected from research articles,
books and internet websites, annual reports etc whose details are given in the references of the
project. Secondary data was the main source of data in formulation of overview of “Role of
RBI in Social and Economic Development”.

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 CHAPTER 7 – INTRODUCTION

7.1 About RBI

The Reserve Bank of India (RBI) was built up in the year 1935 as per the provisions of Reserve
Bank of India Act, 1934. The Reserve Bank of India is the national Bank of India endowed
with the multidimensional job. It performs significant financial capacities right from issue of
money note to upkeep of fiscal security in the nation. At first the Reserve Bank of India was a
private investor's organization which was later nationalized in 1949, following India’s freedom.
Its issues are administered by the Central Board of Directors delegated by the Government of
India. Since its commencement the Reserve Bank of India had assumed a significant job in the
financial improvement and fiscal solidness in the nation.

The Reserve Bank of India (RBI) is India's focal financial organization, which controls the
issuance and supply of the Indian rupee. It started with its duties on 1 April 1935 as per the
Reserve Bank of India Act, 1934.The first share capital was separated into portions of 100 each
completely paid, which were at first possessed totally by private shareholders.

The RBI has a significant impact in the Development Strategy of the Government of India. It
is a part bank of the Asian Clearing Union. The general superintendence and bearing of the
RBI is endowed with the 21-part focal directorate: the governor, four agent governors, two
account service delegates ten government-assigned chiefs to speak to significant components
of India's economy, and four executives to speak to nearby sheets headquartered at Mumbai,
Kolkata, Chennai and the capital New Delhi. Every one of these nearby sheets comprises of
five individuals who speak to local premiums, the premiums of co-employable and indigenous
banks.

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RBI was a free pinnacle money related specialist which directs banks and gives significant
budgetary administrations like putting away of outside trade saves, control of expansion,
financial approach report.

The bank is likewise dynamic in advancing money related incorporation approach and is a main
individual from the Alliance for Financial Inclusion (AFI). The bank is frequently alluded to
by the name 'Mint Street’ and is also knows as the banker's bank.

7.2 Evolution of RBI

The Royal Commission on Indian Currency and Finance which was delegated on August 25,
1925 recommended the foundation of the Central Bank in India, later the Indian Central
Banking Enquiry Committee, 1931 focused on the foundation of the Central Bank in India. The
Reserve of Bank was set up on April 1, 1935 under the Reserve Bank of India Act, 1934.The
fundamental object of Reserve of India is, "to manage the issue of Bank notes and the keeping
of stores with the end goal of verifying fiscal strength in India and by and large to work the
cash any credit arrangement of the nation furthering its potential benefit.’’ The Reserve Bank
of India was set up as a private investor's bank. The Central office of Reserve Bank of India
was at first situated in Calcutta which was later moved to Bombay. The Reserve Bank of India
issued first of its cash notes in January 1938 in denominations of Rs.5 and Rs.10 and later
around the same time section of Rs.100, Rs.1000 and Rs.10000 were issued Post Independence.
The Reserve Bank of India was nationalized in the year 1949 through the Reserve Bank
(Transfer of Public Ownership) Act, 1948 and all offers were moved to Central Government.
The Reserve bank of India is established for the administration of cash and for conveying the
matter of banking as per arrangements of the Act. It is a corporate body with perpetual
succession, seal and can be sued or sue in its name. The general supervision and course of the
issues of the Reserve Bank is endowed with Central Board of Directors.

7.3 Structure

The central board of directors is the main committee of the central bank. The Government of
India chooses the executives for a four-year term. The board comprises of a governor, and not

21
in excess of four representative governors; four chiefs to speak to the territorial boards; two —
typically the Economic Affairs Secretary and the Financial Services Secretary from the
Ministry of Finance and ten different executives from different fields. The Reserve Bank under
Raghuram Rajan's governorship needed to make a post of a head working official (COO), in
the position of appointee representative and needed to re-assign work among them (four
delegate governor and COO)

The bank is going by the governor, as of now Shaktikanta Das. There are four representative
governors BP Kanungo, N. S. Vishwanathan, Viral Acharya and Mahesh Kumar Jain.

Two of the four delegate governors are customarily from RBI positions and are chosen from
the bank's official executives. One is designated from among the chairpersons of open part
banks and the other is a financial analyst. An Indian Administrative Service official can
likewise be designated as representative legislative leader of RBI and later as the legislative
head of RBI similarly as with the instance of Y. Venugopal Reddy and Duvvuri Subbarao.
Different people shaping piece of the focal governing body of the RBI are Dr. Nachiket Mor,
Y. C. Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Uma Shankar, boss general supervisor (CGM) responsible for the Reserve Bank of India's
money related consideration and advancement office has taken over as official executive (ED)
in the focal bank

Sudha Balakrishnan, a previous VP at National Securities Depository Limited, accepted charge

as the primary (CFO) of the Reserve Bank on 15 May 2018; she was given the position of an
official director.

The Central Board comprises of Governor, representative Governor, Ten Director named by
the Central Government and two Government authority selected by the Central Government.
The agent Governor and Director are qualified to go to meeting of the Central Board however
are not qualified for vote. The Governor and agent Governor hold office for term of five years

22
and are entitled for a re - arrangement. The Directors are selected for a term of four and hold
office during the joy of the president. The gathering of the Central Board is assembled at any
rate multiple times in a year. Organization of Local Board a neighbourhood board is framed in
every four zones comprising of five individuals which are selected by the Central Government.
There is Chairperson of the Board who is chosen among the part. The individuals from the
Board have a hold office for a term of four years and qualified for reappointment. The Local
Board guidance on issues alluded to it by the Central Board and performs obligations
designated to it by the Central Board.

7.4 Branches & Support Bodies

The RBI has four regional depictions: North in New Delhi, South in Chennai, East in Kolkata
and West in Mumbai. The depictions are surrounded by five people, named by the central
government and with the direction of the central top administrative staff fill in as a talk for
commonplace banks and to oversee doled out tasks from the Central Board.

It has two preparing colleges for its officials, viz. Spare Bank Staff College, Chennai and
College of Agricultural Banking, Pune. There are three independent associations continued
running by RBI to be explicit National Institute of Bank Management (NIBM), Indira Gandhi
Institute of Development Research (IGIDR), Institute for Development and Research in
Banking Technology (IDRBT).[44] There are furthermore four zonal instructional centre
points at Mumbai, Chennai, Kolkata, and New Delhi.

The Board of Financial Supervision (BFS), surrounded in November 1994, fills in as a CCBD
warning gathering to control the budgetary associations. It has four people, chose for quite a
while, and takes measures to quality the activity of statutory analysts in the money related
division, external checking, and internal controlling structures. The Tarapore leading group of
trustees was set up by the Reserve Bank of India under the chairmanship of past RBI specialist
representative S. S. Tarapore to "lay the guide" to capital record convertibility. The five-section
load up recommended a three-year time length for complete convertibility by 1999–2000.

On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of India,
said RBI will open an office in the north-eastern region of Arunachal Pradesh.

23
 CHAPTER 8 – FUNCTIONS OF RBI

India is one of the quickest developing economies, with a population over 1.2 Billion, has
turned into the center for worldwide speculation. There are different components that impact
and control Indian economy, one such being, The RBI, perhaps the most established foundation
behind the accomplishment of Indian economy. The RBI is the foundation of Indian economy
and as a result of it, development in Exports, FOREX, Capital Markets and different divisions
of the economy are generally occurring. It assumes a significant job in reinforcing, creating
and expanding the nation's monetary and money related structure. It is the pinnacle bank in the
Indian Banking System.

8.1 Functions performed by RBI –

i. Monetary Authority:

The RBI undertakes the responsibility of controlling credit created by commercial banks. It
controls the supply of money in the economy to stabilize exchange rate, maintain healthy
balance of payment, attain financial stability, control inflation, strengthen banking system. It
takes care of all these economic variables by bringing its policies into action, that is, the
quantitative and qualitative techniques to control and regulate the credit flow in the economy.

ii. The Issuer of Currency:

Section 22 of the Reserve Bank of India Act gives RBI the sole right in India for printing of
currency notes and has the sole right to issue currency in different denominations. (except one
rupee note). It also takes action to control the circulation of fake currency. RBI has adopted the
Minimum Reserve System for printing currency notes where it maintains gold and foreign
exchange reserves of Rs. 200 Crores. As per the system, not less than 40% of the total note
issue is required to be covered by gold.

24
iii. The Issuer of Banking License:

As per Sec 22 of Banking Regulation Act, every bank has to obtain a Banking license from
RBI to conduct banking business in India.

iv. Banker’s to the Government:

The RBI acts as the Banker, Agent and Advisor to the government. It acts as banker both to the
central and the state governments. It takes care of all banking functions of State and Central
government. It provides short-term credit. It manages all new issues of government loans,
servicing the government debt outstanding and nurturing the market for government’s
securities. It advises the government on banking and financial subjects.

v. Banker’s Bank:

Banks can be classified ad schedule and non-schedule banks. Schedule banks are the ones
included in the second schedule to the RBI Act. The inclusion of bank in the second schedule
does not allow and guarantee soundness of the bank and hence every schedule is supposed to
maintain with the RBI minimum 3% of its total demand and time liabilities. The Reserve Bank
of India performs same functions for the commercial banks (its schedule) as other banks
perform for their customers. RBI is the bank of all banks in India as it provides the loan to
banks/bankers, accept the deposit of banks, and rediscount the bills of banks.

vi. Lender of Last Resort:

There are times when commercial banks as well as the government is in need of credit of their
respective functioning. The banks can borrow from the RBI by keeping eligible securities as
collateral at the time of need or crisis.

vii. Banker and Debt Manager of Government:

RBI performs the following with respect to Government –

✓ Receives and makes payments on behalf of the government.

✓ Loans and advances to Government.

25
 ✓ Carries out government relates banking operations and exchange remittances.

✓ Provides short-term loans and foreign exchange resources to the Government.

✓ Maintains accounts of various departments of the government.

✓ Collects taxes on behalf of the government.

viii. Money Supply and Controller of Credit:

The RBI takes responsibility to control demand and supply of money in Economy by Open
Market Operations, Credit Ceiling, etc. When the economy has sufficient money supply and
there are chances of inflationary situations, it squeezes the money supply through its monetary
policy and vice-versa.

ix. Act as Clearing House:

The RBI acts as the clearing house for all scheduled banks, thereby enabling banks to settle
their transactions economically and easily. For settlement of banking transactions, RBI
manages 14 clearing houses. It facilitates the exchange of instruments and processing of
payment instructions.

x. Manager of Foreign Exchange:

It is important to maintain enough foreign exchange in order to maintain the foreign exchange
rate. It acts as a custodian of FOREX. It buys and sells FOREX with the aim of maintaining
the rate and not just to make profit. It administers and enforces the provision of Foreign
Exchange Management Act (FEMA), 1999.

xi. Regulator and Supervisor of Payment and Settlement systems:

The Payment and Settlement systems Act of 2007 (PSS Act) gives RBI oversight authority for
the payment and settlement systems in the country. RBI focuses on the development and
functioning of safe, secure and efficient payment and settlement mechanisms.

26
xii. Developmental Role:

This role includes the development of the quality of banking system in India and ensuring that
credit is available to the productive sectors of the economy. It provides a wide range of
promotional functions to support national objectives. It also includes establishing institutions
designed to build the country’s financial infrastructure. It also helps in expanding access to
affordable financial services and promoting financial education and literacy.

xiii. Publisher of monetary data and other data:

RBI collects with respect to economic, financial and banking sectors of the economy. RBI
maintains and provides all essential banking and other economic data, formulating and
critically evaluating the economic policies in India. RBI conducts surveys, collects, collates
and publishes data regularly for studying problems in areas of money supply, capital markey,
trade etc.

RBI also publishes reports of the operation of various banks and report on progress of banking
in India. It also computes the country’s balance of payments statistics.

xiv. Exchange Manager and Controller:

RBI represents India as a member of the International Monetary Fund [IMF]. Most commercial
banks are authorized dealers of RBI.

xv. Banking Ombudsman Scheme:

RBI introduced the Banking Ombudsman Scheme in 1995. Under this scheme, the
complainants can file their complaints in any form, including online and can also appeal to the
RBI against the awards and the other decisions of the Banking Ombudsman.

xvi. Banking Codes and Standards Board of India:

To measure the performance of banks against Codes and standards based on established global
practices, the RBI set up the Banking Codes and Standards Board of India (BCSBI).

27
 8.2 Major development functions of the RBI

i. Development of the Financial System:

The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid economic
development of the nation. The RBI has encouraged establishment of main banking and non-
banking institutions to cater to the credit requirements of diverse sectors of the economy.

ii. Development of Agriculture:

In an agrarian economy like ours, the RBI has to provide special attention for the credit need
of agriculture and allied activities. It has successfully rendered service in this direction by
increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and
Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks (RRBs).

iii. Provision of Industrial Finance:

Rapid industrial growth is the key to faster economic development. In this regard, the adequate
and timely availability of credit to small, medium and large industry is very significant. In this
regard the RBI has always been instrumental in setting up special financial institutions such as
ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

iv. Provisions of Training:

The RBI has always tried to provide essential training to the staff of the banking industry. The
RBI has set up the bankers' training colleges at several places. National Institute of Bank
Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e
CAB are few to mention.

28
 v. Collection of Data:

Being the apex monetary authority of the country, the RBI collects process and disseminates
statistical data on several topics. It includes interest rate, inflation, savings and investments etc.
This data proves to be quite useful for researchers and policy makers.

vi. Publication of the Reports:

The Reserve Bank has its separate publication division. This division collects and publishes
data on several sectors of the economy. The reports and bulletins are regularly published by
the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of
Commercial Banks India., etc. This information is made available to the public also at cheaper
rates.

vii. Promotion of Export through Refinance:

The RBI always tries to encourage the facilities for providing finance for foreign trade
especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the
Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their
lending for export purpose.

viii. Promotion of Banking Habits:

As an apex organization, the RBI always tries to promote the banking habits in the country. It
institutionalizes savings and takes measures for an expansion of the banking network. It has set
up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964,
NABARD- 1982, NHB-1988, etc. These organizations develop and promote banking habits
among the people. During economic reforms it has taken many initiatives for encouraging and
promoting banking in India.

29
8.3 Prohibitory Functions of Reserve Bank of India-

i. It cannot provide any direct financial assistance to any industry, trade or business.

ii. It cannot purchase its own share.

iii. It cannot purchase shares of any commercial and industrial undertaking.

i. It cannot purchase any immovable property.

ii. It cannot give loans on the security of shares and property

30
 CHAPTER 9 – PROMOTIONAL ROLE OF RBI

Promotional
Role

Differential
Commercial Industrial Export Credit
Rate of
Banking Finance Finance Gaurantees
Interest

i. Promotion of Commercial Banking –

For promotion of Commercial Banking, RBI aims to-

9 To strengthen the business banking structure in the nation through mandatory liquidation
of powerless banks or their amalgamation into more grounded banks and through progress
in the operational principles of banks by ordinary review and general observation,
10 To expand banking offices all through the nation, particularly in communities and country
territories in order to improve the geological inclusion of banks, and
11 To expand the utilitarian inclusion of banks in order to improve the sectoral circulation of
bank credit for the need areas, for example, agribusiness, little scale ventures, and so on
and make a greater amount of it accessible to little borrowers. The RBI has additionally
orchestrated the instruction and preparing of various classes of banking staff.

ii. Promotion of Industrial Finance –

✓ The provision of long-term development finance and

✓ Bank credit for small-scale industries.

31
In both the circles on the dynamic guidance and investment of the RBI uncommon measures
have been effectively taken. For giving long-and medium-term account just as guaranteeing of
new issues, particular money related organizations as mechanical improvement banks, for
example, the IDBI, IFCI, ICICI, SIDBI, SFCs and SIDCs have been set up in the open area
and the ICICI in the private division.

For the small-scale industries, finance is made available by SIDBI, SFCs, and SIDCs and more
importantly by commercial banks which are the most important source of credit to them. The
recognition of small-scale industries as a ‘priority sector’ has made all the difference.

iii. Promotion of Export Finance –

Different steps have been taken to give credit at internationally competitive rates of interest.
For instance, a plan was made employable in October 1993 for rediscounting fare charges
abroad at rates connected to global financing costs. Under another plan of November 1993,
exporters are given pre-shipment credit in major outside monetary forms for financing imports.

The government also set up in an Export-Import Bank in 1981, which has taken over the
functions of the international financing wing of the IDBI and which acts as the apex institution
relating to financing of foreign trade.

iv. Promotion of Credit Guarantees –

To encourage institutional lending to small scale businesses, the Government of India, in

conference with the RBI, presented a Credit Guarantee Scheme in July I960 for the certification
of advances allowed by banks and other credit organizations to these enterprises. The
undertaking of overseeing the Scheme was depended to the RBI as the specialist of the Central
Government.

The extension and arrangements of the Scheme have been changed every once in a while. It
reaches out to a wide range of credit offices permitted to little scale mechanical units. The
certification offices are accessible at a little charge to endorsed credit establishments, including
business and co-usable banks, provincial rustic banks, and state money related partnerships. In

32
addition, the RBI and the IDBI offer particular renegotiate offices to booked business banks in
regard of momentary loaning to little scale ventures secured by the certification conspire.

v. Promotion of Differential Rate of Interest Scheme-

The scheme was introduced in 1972 was implemented by all-Indian Scheduled Commercial
Banks. The object of this scheme is to provide bank finance at a concessional rate of interest
of 4 per cent p.a. to the weaker sections of the community for engaging in productive and
gainful activities so that they could improve their economic conditions.

33
 CHAPTER 10 – POLICIES OF RBI

RBI

Monetary Policy Fiscal Policy

10.1 Monetary Policy –

10.1.1 What is Monetary Policy?

Monetary policy suggests those measures intended to guarantee a proficient activity of the
monetary framework or set of explicit targets through its impact on the supply, cost and
accessibility of money. Monetary policy is defined differently by different authors. Some
definitions are –

iii. Prof. Crowther - “Monetary Policy consists of the steps taken or efforts made to reduce
to a minimum the disadvantages that flow from the existence and operation of the
monetary system. It is a policy to regulate the flow of monetary resources in the
economy to attain certain specific objectives.”

iv. D.C. Aston – “Monetary policy involves the influence on the level and composition of
aggregate demand by the manipulation of interest rates and the availability of credit.”

v. Mr. C.K. Johri - “It would comprise those decisions of the government and Reserve
Bank of India which affect the volume and composition of money supply in the size
and distribution of credit (including Co-operative Banks Credit) the level and structure
of interest rates and the effect of these variables upon the factors determining output
and prices.”

34
10.1.2 Objectives of Monetary Policy –

i. Neutrality of Money –

In any economy, money related change is the main driver of economic fluctuation. The
monetary change causes contortion and disturbances in the functioning of the nation.

With the policy of neutralism being followed, there will be no fluctuations, no inflation and no
collapse in the economy. Under this framework, money is kept stable by the authority (RBI).
Thus, the main aim of RBI is not to deviate from such neutrality of money. It implies that
amount of money held should be stable and steady. It should not be used to impact or
discourage utilization and generation of money in the economy.

ii. Stability in Exchange Rates –

Exchange Stability is considered an important objective across all banking systems and
standards. If there arises any instability in exchange rates it would lead to either inflow or
outflow resulting in unfavourable balance of payments. In this way, stability is important,
especially in case of International Trade. The fundamental object of monetary policy is to keep
up stability in the equilibrium. The monetary policy attempts to take out those adverse forces
which tend to bring instability in exchange rates.

iii. Price Stability –

Price Stability is one of the most important and genuine objectives of Monetary Policy. Stable
price is that one card in hand that helps to gather public confidence since fluctuations are totally
eliminated.

It advances economic activities and ensures equitable distribution of wealth and income. As an
outcome, there is wave of prosperity and welfare. Price stability also ensures economic
progress as there is no incentive left with the business community to increase production of
qualitative goods. Apart from the following, it also discourages exports and encourages
imports.

35
 iv. Full Employment –

During world depression, the issue of unemployment expanded and thus, full employment was
assumed as the primary objective of monetary policy. Of late, full employment also includes
price stability and exchange stability. The main aim of monetary policy of a country is to bring
about equilibrium between saving and investment at full employment level.

Full employment means absence of involuntary unemployment and henceforth, it implies not
only employment of all types of labourers but also includes the employment of all economic
resources.

As monetary policy is the government policy currency and credit oriented, in this way,
government measures of currency and credit can easily overcome the problem of trade
fluctuations in the economy.

The advanced countries like U.S.A. and U.K. work at full employment level as their main
objective is to maintain full employment and avoid fluctuations in the level of employment and
production. While in developing and underdeveloped countries, the objective is to achieve full
employment. In such economies, monetary policy can be designed to meet with the problem
of under employment and disguised unemployment and by creating new opportunities for
employment. The most suitable and favourable monetary policy should be followed to promote
full-employment through increased investment, which in turn having multiplier and
acceleration effects.

v. Economic Growth –

Economic growth is regarded as the phenomena whereby the real per capita income of a
country increases over a period of time. Economic Growth implies an increase in the total
physical or real output, production of goods for the satisfaction of human wants.

Along these lines, the monetary policy promotes continuous economic growth by maintaining
equilibrium between the total demand for money and total production capacity and further
creates favourable conditions for saving and investment.

36
 vi. Equilibrium in Balance of Payments –

Equilibrium in the balance of payments is another objective of monetary policy. This objective
holds importance due to the problem of international liquidity on account of the growth of
world trade at a faster speed.

Increase deficit in the balance of payments reduces the ability of an economy to achieve other
objectives. As a result, many less developed countries have to curtail their imports which
adversely effects development activities. Therefore, monetary authority makes efforts that
equilibrium should be maintained in the balance of payments.

37
 10.1.3 Instruments of Monetary Policy –

Bank Rate

Open Market
Operations
Quantitative

CRR

SLR
Instruments
Margin
Requirements

Moral Suasion

Qualitative

Direct Action

Control through
Directives

The instruments of monetary policy can be classified as Qualitative and Quantitative

Instruments.

I. Quantitative Instruments –

The Quantitative Instruments are also known as the General Tools of monetary policy. These
tools are related to the Quantity or Volume of the money. These tools are designed to regulate
or control the total volume of bank credit in the economy. These tools are indirect in nature
and are employed for influencing the quantity of credit in the country. The general tool of credit
control comprises of following instruments.

38
 a. Bank Rate –

The Bank Rate or the Bank Rate Policy is a very important technique which is used in the
monetary policy for influencing the volume or the quantity of the credit. Bank rate refers to
rate at which the central bank (RBI) rediscounts bills and provides advances to commercial
banks against approved securities. The Bank Rate directly affects the actual availability of
credit. Any change in the bank rate leads to a resultant change in the availability and cost of
credit available to commercial banks. An increase in the bank rate by RBI leads to reduction in
the volume of commercial banks borrowings from the RBI. It prevents commercials banks from
seeking further credit as it becomes costly. On the other hand, reduction in the bank rate by
RBI makes borrowing for commercial banks easy and cheap. This boosts the credit creation.
Hence, changes in the bank rate is associated with changes in the lending rate and market rate
of interest.

b. Open Market Operations (OMO) –

Open Market Operation refers to the purchase and/or sale of short-term and long-term
securities by the RBI in the open market. This is a very effective instrument of the monetary
policy. The OMO is used to wipe out shortage of money in the market. In order to reduce
existing money supply, RBI sells securities in an open market, so that commercial banks and
private individuals buy it. In this way money gets transferred from commercial banks to the
RBI, thereby reducing money supply. On the contrary, RBI opts to buy securities from
commercial banks in the open market, commercial banks sell it and get back the money they
had invested in them, thereby increasing money supply in the economy. This way when the
RBI regulates the OMO transactions, and money supply gets affected. During inflation period,
RBI sells securities in order to reduce the purchasing power and during the recession or
depression phase RBI buys securities and makes more money available in the economy. Under
OMO there is continuous buying and selling of securities taking place leading to changes in
the availability of credit in an economy.

39
 c. Cash Reserve Ratio (CRR) –

The CRR refers to some percentage of commercial bank's net demand and time liabilities which
commercial banks have to maintain with the central bank. In India the CRR ranges between
3% - 15%. Any change in the Cash Reserve Ratio brings out a change in commercial banks
reserves positions. Thus, by varying the CRR, commercial banks’ lending capacity can be
affected. During inflation, RBI increases CRR to reduce the purchasing power and credit
creation. But during recession or depression, RBI lowers CRR making more cash reserves
available for credit expansion.

d. Statutory Liquidity Ratio (SLR) –

SLR refers to some percent of reserves to be maintained in the form of gold or foreign
securities. In India the SLR remains in between 25%-40% of bank reserves. Any change in the
Statutory Liquidity Ratio brings out a change in commercial banks reserves positions. Thus,
by varying the SLR, commercial banks’ lending capacity can be affected. During inflation, RBI
increases SLR to reduce the purchasing power and credit creation. But during recession or
depression, RBI lowers SLR making more cash reserves available for credit expansion.

II. Qualitative Instruments –

The Qualitative Instruments are also known as the Selective Tools of monetary policy. These
tools are not directed towards the quality of credit or the use of the credit. They are used for
discriminating between different uses of credit. This method can have influence over the lender
and borrower of the credit. The Selective Tools of credit control comprises of following
instruments.

a. Fixed Margin Requirements –

Margin is that part of a loan which a borrower has to raise in order to get finance for his purpose
from the bank. A change in a margin implies a change in the amount of loan. This method is
used to encourage credit supply for the needy and productive sector and discourage it for other

40
non-necessary and unproductive sectors. This can be done by increasing margin for the
unproductive sectors and by reducing it for other productive sectors.

b. Moral Suasion –

Moral Suasion refers to pressure exerted by the RBI on commercial banks for the compliance
of rules. It is a kind suggestion to banks. Under moral suasion central banks issue directives,
guidelines and suggestions for commercial banks regarding reducing credit supply for
speculative purposes and encouraging credit for productive purposes.

c. Direct Action –

Under this method the RBI can impose an action against a bank. If commercial banks are not
adhering to the RBI's directives, the RBI has authority to refuse to rediscount their bills and
securities. RBI can also penalize such banks by changing some rates. It can also put a ban on a
particular bank if it does not follow its directives and works against the objectives of the
monetary policy.

d. Control through Directives –

Central bank issues frequent directives to commercial banks which guide commercial banks in
framing their lending policy. Through a directive the central bank can influence supply of credit
to certain limit for a specific purpose. The RBI issues directives to commercial banks for not
lending loans to speculative sectors and also issues directives to lend for needy and productive
sectors.

41
10.2 Fiscal Policy –

10.2.1 What is Fiscal Policy?

Fiscal policy is the means by which government adjusts its spending levels and tax rates to
monitor and influence a nation's economy. It is the estimate of taxation and expenditure and its
impact on the Indian economy.

Fiscal Policy is of two types – Expansionary and Contractionary.

The most widely-used is expansionary. Under this, the government either spends more, cuts
taxes, or both. The idea is to put more money into consumers' hands, so they spend more. The
main aim is to increase money supply in the economy.

Under the contractionary fiscal policy, taxes are increased, and spending is cut in order to
reduce money supply. It is used to slow down economic growth.

10.2.2 Objectives of Fiscal Policy –

i. Full Employment –

The first and foremost objective of fiscal policy in any economy is to achieve and maintain full
employment. Even if full employment is not achieved, the main aim is to avoid unemployment
and to achieve a state of near full employment. This calls for expenditure on social and
economic overheads. These expenditures help to create more employment opportunities and
increase the efficiency of the economy.

In the rural areas, the RBI attempts to encourage domestic industries by providing them cheap
finance and loans at low interest rates.

ii. Price Stability –

Various parts of the society such as consumers, laborers and employees, producers, traders,
etc. are affected by in-fluctuation in prices. Such fluctuations increase opportunities for earning
undue profits, however, employment and output are badly affected by a decrease in prices.
42
The fiscal policy aims to bring stability in prices by shielding the impact of increase/decrease
in prices. The impact of the price increase can be reduced by providing subsidy or decreasing
taxes and in the case of the decrease in prices, the government can provide the subsidy to
buyers.

iii. Economic Development –

Balanced economic development is very important in every economy and can be done
through fiscal policy. The government undertakes various developmental projects in the field
of irrigation, transport, power and water supply facilities in India.

The aim of government is not only development, but development of both developing as well
as underdeveloped areas. It aims to capture the productive areas and invests its funds leading
to economic development. By setting up various projects in underdeveloped areas the
government facilitates balanced development in the country.

iv. Equitable Distribution of Income & Wealth –

In order to reduce inequalities, the government invests in those productive channels which
incur benefit to low income groups and help in raising their productivity. A well-planned fiscal
programme can take up public expenditure which can help in the development of human capital
which in turn possesses positive effects on income distribution. Through fiscal policy, regional
disparities can also be removed by providing incentives to backward regions.

v. Economic Stability –

The fiscal policy ensures economic stability in the country by controlling external and internal
forces.

Export and import duties are imposed during the period of boom to minimize the impact of
international cyclical fluctuations on the economy.

To curb the use of additional purchasing power, heavy import duty on consumer goods and
luxury import restrictions are imposed.

43
During recession, government undertakes public works programmes through deficit financing,
thereby controlling the supply of money in the economy.

vi. Encouraging Investment –

The aim of fiscal policy is to accelerate the rate of investment in the public as well as in private
sectors of the economy. Fiscal policy encourage investment in public sector which increases
the volume of investment in private sector. Through this, fiscal policy achieves rapid economic
development and encourages investment in those desirable and productive channels.

It also aims at curtailing conspicuous consumption and investment in unproductive channels,

thus ensuring better investment opportunities in the country.

10.2.3 Instruments of Fiscal Policy –

Budgetary Policy
Public Expenditure
Instruments of Fiscal Policy
Public Debt
Taxation Policy

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I. Budgetary Policy-

In any nation, the budget is an important and useful instrument to access the fluctuations in an
economy. In India, the government formulates three types of budgets –

a. Annual Balanced Budget –

The concept of a fully balanced budget was propounded in the early 1930’s. This was based on
the ideology that there should be balance in income and expenditure of the government. A
balanced budget is an automatic system which can correct fluctuations and will maintain a
stable period in the economy (neither depression nor boom).

This type of budget also ensures full employment without inflation.

b. Cyclical Balanced Budget –

Such a budget implies surplus in prosperous period and employing this surplus in public debt.
During recession, deficit budgets are prepared in such a manner that the budget surplus is
balanced with deficits.

Under such a budget, excess of public expenditure is financed through public borrowings.
Hence, cyclical budget stabilizes the level of business activity. Also, it becomes easy for
government to adjust its funds as per the needs of different sections.

This policy can be implied in any period- boom, recession, depression, inflation.

c. Fully Managed Compensatory Budget –

This aims at achieving full employment without inflation by making adjustments in taxes,
expenditures and revenue. With the help of this budget, the problem of growth of public debt
and interest payment can be avoided. However, the country will be burdened with debt over a
long period.

45
 II. Taxation Policy –

Taxes and duties determine the size of disposable income in the hands of overall population
and subsequently, the quantum of inflationary and deflationary gaps. During depression, taxes
have to be altered in such a way that it encourages investment and during inflation, it must be
designed to curb consumption and investment.

During inflation, new duties and taxes can be demanded to discourage increased purchasing
power. This helps in reducing excess demand in the market and hence curbing inflationary
characters in the economy.

The government of India levies two types of taxes – Direct & Indirect Taxes.

Direct tax is a tax levied directly on a taxpayer, which is paid to the Government and cannot
be passed on to someone else. Some direct taxes imposed in India are –

✓ Income Tax – Income tax is the tax imposed on income of individuals, organisations
are businesses, who file taxes at end of every financial year.

Others include Wealth Tax and Inheritance Tax which have been abolished.

Indirect taxes are the taxes levied by the Government on goods and services and not on the
income, profit or revenue of an individual and the burden of tax can be shifted from one
taxpayer to another.

Indirect taxes include Custom Duty, GST, Service Tax, Excise Duty etc.

III. Public Expenditure –

Public expenditure is the tool in hands of government which can be used to stimulate
production, income and employment. Government expenditure forms a highly significant part
of the total expenditure in the economy. A reduction or expansion in total expenditure by
government causes significant variations in the total income, consumption and investment.

Government undertakes expenditure on developmental and planned activities such as transport,

infrastructure, irrigation, roads, schools, hospitals etc.

46
 During inflation, the government reduces its expenditure in order to control inflation. With
reduced expenditures, public revenue increases and leads to a surplus budget.

During depression, government expenditure is incurred to revive the economy and increase
employment and income.

IV. Public Debt –

Public borrowing and Debt repayment is a means to fight inflation and deflation. Government
borrowing can be in the form of borrowing from non-banking financial intermediaries,
borrowing from commercial banks, from the central bank or printing of new money.

Borrowing from the public is done in the form of selling bonds and securities which curbs
consumption and private investment. Borrowing from the banks is an effective method during
depression since it will reduce bank’s reserves and discourage lending.

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 CHAPTER 11 – RBI - SOCIAL AND ECONOMIC
DEVELOPMENT

The central bank is regarded as the supreme monetary authority in India and accordingly
performs various useful functions for ensuring smooth functioning of the economy. The role
of RBI in Economic Development of the country refers to the development of quality banking
system in India and ensuring provision of credit to productive sectors of the economy.

The following functions are performed by RBI for Economic Development -

i. Development of Banking System-

The Reserve Bank of India ensures development of Banking System by granting necessary
licence to banks, periodical review of banks and giving important directives to banks. It also
ensures health of financial system through off-site and on-site verifications.

ii. Development of Financial Institutions:

RBI role’s includes establishing institutions designed to build the country’s financial
infrastructure as well as regulate them. Export-Import Bank of India (Exim Bank), National
Bank for Agricultural and Rural Development (NABARD), Small Industries Development
Bank of India (SIDBI), National Housing Bank (NHB), are some of them.

iii. Development of Backward Areas:

RBI plays an important role in the development and growth of the backward classes in the
country by implementing various policies and providing credit to the public. RBI has
proactively promoted initiative of establishing banking as well as many financial schemes and
infrastructure in the ignored regions.

48
RBI aims to provide access to affordable financial services and promoting financial education
and literacy and including banking habits among the rural mass.

iv. Economic Stability:

RBI is responsible for the safety and stability of the economy and combats issues like inflation,
recession, currency devaluation through its various monetary policies.

It uses tools like CRR, SLR, Bank Rate, Repo Rate, Reverse Repo Rate etc to combat such
issues.

v. Economic Growth:

RBI has adopted the policy of ’Growth with Stability’, which means sufficient credit will be
available for growing needs of different sectors of the economy and at the same time other
issues such as inflation, deflation, currency devaluation etc will be controlled.

vi. Proper Interest Rate Structure:

RBI also ensures that within a country prevails a proper interest rate structure that would help
in the growth and development of the country.

The cost of borrowing is determined by where RBI sets its interest rates and ultimately
customer behaviour determines the overall demand in the economy. Through both direct
channels on money supply as well as indirect channels through interest rate, RBI determines
the interest rate for commercial banks.

RBI has been active in its role towards social development of the country. It has undertaken
promotions for several institutions for both social and economic development.

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The following has been covered by RBI with respect to Social Development –

✓ For agricultural development RBI created a department - Agricultural Credit

Department and later Agricultural Re Finance Development Corporation which later
became NABARD.

✓ The Small Industries Development Bank of India (SIDBI) and IDBI were established
to promote industrial development in India.

✓ National Housing Bank was set up by RBI to promote housing loans.

✓ RBI established MICR mechanised clearing houses to speed up clearing.

✓ RBI also established IBRDT at Hyderabad to improve and research in Banking

Technology.

✓ Established RTGS and other fast fund transfer systems.

✓ Introduced priority sector lending to small borrowers.

✓ Introduced the concept of regulation of co-operative banks.

✓ Reserve Bank established its own note printing press.

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 CHAPTER 12 – SCHEMES INITIATED BY RBI

The Reserve Bank of India has come with a variety of schemes over the years, for the
development of the banking sector as well as betterment of society. Some of the major schemes
initiated by RBI are –

1. Banking Ombudsman Scheme –

The Reserve Bank of India announced the Banking Ombudsman Scheme with the view to
incorporate customer complaints on certain new areas, such as, credit card complaints,
deficiencies in providing the promised services even by banks, levying service charges without
prior notice to the customer and no- adherence to the fair practices code as adopted by
individual banks.

With effect from 1st January 2006, this scheme is applicable to all commercial banks, regional
rural banks and scheduled primary cooperative banks. Under the revised Banking Ombudsman
Scheme, the mechanism is designed to file the complainants in any form, including online. This
scheme provides a base to customers to seek redressal of their complaints against banks,
relating to credit cards, service charges, promises given by the sales agents of banks, delays in
delivery of bank services, non-payment or any inordinate delay in payments or collection of
cheques towards bills or remittances by banks, non-acceptance of small denomination notes
and coins or charging of commission for acceptance of small denomination notes and coins by
banks. This scheme was first in 1995 to provide handy and inexpensive forum to bank
customers for resolution of their complaints relating to deficiency in banking services. The
Scheme was revised in 2002 mainly to cover Regional Rural Banks. The Banking Ombudsmen
currently have their offices in 15 centres.

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 2. Interest Subvention Scheme for Short Term Crop Loans –

The Interest Subvention Scheme for farmers aims at providing short term credit to farmers at
subsidised interest rate. The policy came into force with effect from the Kharif policy 2006-
07. The scheme is being implemented for the year 2018-19 and 2019-20.The interest
subvention will be offered to Public Sector Banks (PSBs), Private Sector Banks, Cooperative
Banks and Regional Rural Banks (RRBs) on use of own funds and to NABARD for refinance
to RRBs and Cooperative Banks.

This Scheme is being implemented by NABARD and RBI.

The following is considered while implementing the scheme -

✓ The Central Government provides short term crop loans to all farmers up to one year
for loans up to Rs. 3 lakhs borrowed by them.
✓ Under this scheme, the farmers can avail concessional crop loans till Rs.3 lakh at 7 per
cent rate of interest.
✓ This interest subvention of 2% will be calculated on the crop loan amount from the date
of its drawing up to the due date of the loan.
✓ The scheme also provides for an additional subvention of 3 per cent for prompt
repayment within a period of one year from the date of advance.
✓ In case farmers do not repay the short-term crop loan in time they would be eligible for
interest subvention of 2% as against 5% available above.
✓ Interest Subvention would be available only on credit requirement for cultivation of
crops and post-harvest loan components under ST limit of KCC.
✓ The scheme does not cover household / consumption requirement / maintenance
expenses of farm assets, term loan etc.
✓ To ensure hassle-free benefit to farmers under Interest Subvention scheme, the lending
institutions have made Aadhar linkage mandatory for availing short term crop loans
during 2018-19 and 2019-20.

3. Senior Citizen Saving Scheme (SCSS) –

The Senior Citizens Savings Scheme (SCSS) offers regular income, safety and tax saving,
making it a popular and important service for those over 60 years of age.

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Post retirement, people look for investment avenues to park their retirement corpus in. They
are hesitant to put their hard-earned money in equities, as it carries capital loss risk, or products
which come with a long lock-in period and don't offer any income till maturity.

Retirees are looking for products that are are looking for products that are less risky and can
also minimise their earnings. This is where SCSS comes in. The scheme offers capital
protection, along with quarterly interest payment as a source of income. SCSS is backed by the
government and, therefore, offers guarantee.

A senior citizen can invest in this scheme by opening either an individual or a joint account
with a post office or a commercial bank. The scheme offers an interest rate of 8.7 per cent per
annum. However, the interest payable on an investment is locked on the date of the investment
and does not change. The tenure of the scheme is five years, which can be extended for three
more years. However, premature withdrawals are allowed, but only after one year and with
premature withdrawal charges. Under this scheme, nomination facility is also available for
account holders and depositor also has an option of transferring his/her account to another post
office or bank.

4. MSME Loans –

The Micro- Small and Medium Enterprises (MSMEs) are small sized entities, where ceiling of
investment on plant and machinery is Rs. 0 – Rs. 25 lakhs, Rs. 25 lakhs to Rs. 5 crore and Rs.
5 crores to Rs. 10 crores in micro, small and medium enterprises respectively. They contribute
significantly to output, employment export etc. in the economy. MSME’S provide employment
to a large number of unskilled and semi-skilled people, contribute to exports, raise
manufacturing sector production and extend support to bigger industries by supplying raw
material, basic goods, finished parts and components, etc.

RBI has allowed the restructuring of MSME that have become stressed and has decided a
permit of one time restructuring of existing loans to MSME’s, subject to following conditions-

✓ The aggregate exposure, of banks to the borrower should not exceed ₹250 million as
on January 1, 2019.

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 ✓ The borrower’s account is in default but is a ‘standard asset’ as on January 1, 2019
and continues to be classified as a ‘standard asset’ until date of implementation of the
restructuring.
✓ The borrowing entity should be GST-registered on the date of implementation of the
restructuring. However, this condition will not apply to MSMEs that are exempted
from GST-registration.
✓ A provision of 5% to the provisions already held, shall be made in respect of accounts
restructured under these instructions.
✓ Post-restructuring, classification of these accounts shall be as per the IRAC norms.
✓ Banks and NBFCs are required to make appropriate disclosures in their financial
statements, under ‘Notes on Accounts’, relating to the MSME accounts restructured.

OTHER DEVELOPMENTAL SCHEMES BY RBI

Pradhan
Stand Up
Mantri
India
Jan Dhan
Scheme
Yojna

Pradhan
Mantri
Atal
Jeevan
Pension
Jyoti
Yojna
Bima
Yojna

Pradhan
Swarnajaya
Mantri
nti Gram
Vaya
Swarozgar
Vandana
Yojana
Yojna

Pradhan
Mantri Pradhan
Suraksha Mantri
Bima Mudhra
Yojna Yojna

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 1. Pradhan Mantri Jan Dhan Yojana (PMJDY):

The Prime Minister of India announced Pradhan Mantri Jan Dhan Yojana as the National
Mission on Financial Inclusion, which is covered by the RBI, to ensure comprehensive
financial inclusion of all the households in the country by providing them with universal access
to banking facilities, access to credit, insurance and pension facility.

Under this, a person who does not have a savings account can open an account without the
requirement of any minimum balance. PMJDY offers unbanked persons easy access to
banking services and awareness about financial products through financial literacy
programmes. In addition, those covered under the scheme receive a RuPay debit card, with
inbuilt accident insurance cover of Rs. 1 lakh.

PMJDY is considered as a bold, innovative and ambitious mission for Indians and the Indian
economy. Census 2011 estimated that out of 24.67 crore households in the country, 14.48 crore
(58.7%) had access to banking services.

In the first phase of the scheme, households were targeted through the opening of a bank
account within a year of the launch of the scheme. The actual achievement, by 26th January
2015, was 12.55 crore. As on 29.3.2017, the number of accounts has grown to 28.17 crores. s

The deposit base of PMJDY accounts has expanded over time. As on 29th March 2017, the
deposit balance in PMJDY accounts was Rs. 62,972 crores. The average deposit per account
has more than doubled from Rs. 1,064 in March 2015 to Rs. 2,235 in March 2017.

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 2. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY):

The PMJJBY scheme is available to the people belonging age group of 18 to 50 years having
a bank account who give their consent to join /enable auto-debit. The life cover of Rs. 2 lakhs is
for the one year period stretching from 1st June to 31st May and is renewable. Risk coverage
under this scheme is for Rs. 2 lakhs in case of death of the insured, due to any reason. The
premium is Rs. 330 per annum which is to be auto-debited in one instalment from the
subscriber’s bank account as per the option given by him on or before 31st May of each annual
coverage period under the scheme.

The scheme is being offered by the Life Insurance Corporation (LIC) and all other life insurers
who are willing to offer the product on similar terms with necessary approvals and tie up with
banks for this purpose.

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 3. Pradhan Mantri Suraksha Bima Yojana (PMSBY):

The Scheme is available to people in the age group 18 to 70 years with a bank account who
give their consent to join/ enable auto-debit on or before 31st May for the coverage period 1st
June to 31st May on an annual renewal basis. The premium of Rs.12 per annum is to be
deducted from the account holder’s bank account through ‘auto-debit’ facility in one
instalment. Aadhar would be the primary KYC for the bank account. The risk coverage under
the scheme for accidental death and full disability is up to Rs. 2 lakhs and Rs. 1 lakh for partial
disability. The scheme is being offered by Public Sector General Insurance Companies or any
other General Insurance Company who are willing to offer the product on similar terms with
necessary approvals and tie up with banks for this purpose.

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 4. Atal Pension Yojana (APY):

In case of premature death of the subscriber,

Government gives an option to the spouse of the
subscriber to continue contributing to APY account of
the subscriber, for the remaining vesting period, till the
original subscriber would have attained the age of 60
years. The spouse of the subscriber shall be entitled to
receive the same pension amount as that of the
subscriber until the death of the spouse. After the death
of both the subscriber and the spouse, the nominee of
the subscriber shall be entitled to receive the pension
wealth.

Atal Pension Yojana was launched on 9th May 2015 by the Prime Minister. This scheme is
open to all saving bank/post office saving bank account holders in the age group of 18 to 40
years and the contributions differ, based on pension amount chosen. Subscribers would receive
the guaranteed minimum monthly pension at the age of 60 years. Under this scheme, the
monthly pension would be available to the subscriber, and after him to his spouse and after
their death, the pension corpus, as accumulated at age 60 of the subscriber, would be returned
to the nominee of the subscriber. The minimum pension would be guaranteed by the
Government.

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 5. Pradhan Mantri Mudra Yojana:

The PMMY scheme was launched on 8th April 2015. Under this scheme a loan of up to Rs.
50,000, Rs. 50000 – Rs 5 lakhs and Rs. 5 lakhs – Rs. 10 lakhs are given under the name of
‘Shishu’, ‘Kishor’ & ‘Tarun’ respectively. The loans taken do not require collaterals. These
measures are aimed at increasing the confidence of young, educated or skilled workers who
would now be able to aspire to become first generation entrepreneurs; existing small
businesses, too, will be able to expand theirs activates.

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 6. Stand Up India Scheme:

The government of India launched the Stand-Up India scheme on 5th April 2016. The Scheme
was designed to provide the facility of bank loans between Rs.10 lakh and Rs.1 crore to at least
one Scheduled Caste/ Scheduled Tribe borrower and at least one-woman borrower per bank
branch for setting up business. This business may be in manufacturing, services or the trading
sector. The scheme which is being implemented through all Scheduled Commercial Banks is
to benefit at least 2.5 lakh borrowers. The scheme is operational and the loan is being extended
through Scheduled Commercial Banks across the country.

The aim is to promote entrepreneurship amongst women, SC & ST category since they face
significant hurdles due to lack of advice/mentorship as well as inadequate and delayed credit.
The scheme intends to leverage the institutional credit structure to reach out to these
underserved sectors. It caters to both ready and trainee borrowers.

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 7. Pradhan Mantri Vaya Vandana Yojana:

The Pradhan Mantri Vaya Vandana Yojana scheme was started by the government of India
with a view to protect elderly persons aged 60 years and above against a future fall in their
income due to uncertainties in market and to also provide social security during old age. This
scheme was started realising the success and popularity of Varishtha Pension Bima Yojana
2003 (VPBY-2003), Varishtha Pension Bima Yojana 2014 (VPBY-2014) schemes. The
scheme stands to provide assured pension of 8% and is implemented through the Life Insurance
Corporation (LIC) of India. As per the scheme, on payment of an initial lump sum amount
ranging from a minimum purchase price of Rs. 1,50,000/- for a minimum pension of Rs 1,000/-
per month to a maximum purchase price of Rs. 7, 50,000/- for the maximum pension of Rs.
5,000/- per month, subscribers will get an assured pension based on a guaranteed rate of return
of 8% per annum, which will be payable monthly.

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 8. Swarnajayanti Gram Swarozgar Yojana:

The SGSY Scheme is operative from 1st April, 1999 in rural areas of India. This scheme
covers all aspects of self-employment such as organisation of the poor into Self Help Groups,
training, credit, technology, infrastructure and marketing. The scheme is funded by the Centre
and the States in the ratio of 75:25 and is widely implemented by Commercial Banks,
Regional Rural Banks and Co-operative Banks. Other financial institutions, Panchayat Raj
Institutions, District Rural Development Agencies (DRDAs), Non-Government Organisations
(NGOs), Technical institutions in the district, are directly involved in the process of planning,
implementation and monitoring of the scheme.

The Scheme aims at establishing a large number of micro enterprises in the rural areas,
especially getting the people Below Poverty Line above. The objective of SGSY is to bring
the assisted poor families (Swarozgaris) above the poverty line by ensuring appreciable
sustained income over period of time. This objective is to be achieved by organising the rural
poor into Self Help Groups (SHGs) and others. The rural poor such as those with land,
landless labour, educated unemployed, rural artisans and disabled are covered under the
scheme. The assisted poor families known as Swarozgaris can be either individuals or groups
and would be selected from BPL families by a three member team consisting of Block
Development Officer (BDO), Banker and Sarpanch.

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 CHAPTER 13 – CHANGING ROLE OF RBI

The role of RBI has experienced a thorough change over the timeframe. Initially, the role of
RBI was restricted to credit creation in the economy. RBI’s role was to maintain credit in the
economy keeping in mind national as well as international conditions. When inflation occurs,
RBI assumes its role and alters the CRR, SLR, Bank Rate etc. When economy faced less
liquidity, RBI reduces the rates to improve the liquidity in the economy.

With respect to commercial banks, the RBI has to take care of three things - liquidity,
profitability as well as the safety of the fund collected from the depositors. When the banks are
accepting deposit from the corporate and the household, banks have to pay certain interest and
when it is lending the fund to the borrower, the banks are entitled to receive the interest .The
lending rate of the bank is quite high with respect to its borrowing rate, the differential of which
is known as Net Interest Margin, which is the profit for banks. The banks are required to create
certain assets by providing the credit and advances. If they are unable to realize the assets,
banks are unable to meet their liability such as interest payment on deposit. Therefore, business
of the banking sector itself contains chance. Hence, banks have to maintain certain amount of
capital as a safety cushion. As a consequence, risk management is a major area of concern for
banks. Another recognizable element of the bank is that if any organization goes for liquidation,
it creates a knee snapping impact on its shareholders, suppliers, creditors, employees as well
as the customers but once a bank is suffering from solvency risk , it adversely affects
shareholders, suppliers, creditors, employees as well as multiple depositors of the bank who
have deposited their hard earned money in the bank with utmost good faith.

One of the real dangers that the Indian banking system is facing is the accumulation of the Non-
Performing Assets due to the faulty credit appraisal mechanism followed by the banks. In the
recent past the global banking practices have faced a number of malpractices such as window
dressing, over and undervaluation of mortgage and collateral, overpricing the default risk and
under-pricing the credit risk.

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To secure the depositor’s interest, the RBI keeps up a nearby supervision to every one of the
members of money market to guarantee that they are fitting in with the universal benchmark.
To ensure the investors premium, corporate administration instrument of the bank is highly
stable which are intently viewed by the apex body of the capital market. The banking sector is
a unique sector where two regulatory apex bodies are discharging the role of the watchdog so
that irregularities and scam cannot take place and maximum justice can be provided to the all
stakeholders of the bank.

Over the years, the role of RBI has become vast yet specific. RBI has now taken up Corporate
Governance, Risk Management in Banking and Ethical obligations of the banks as well as
successful implantation of International Basel Norms on capital adequacy framework by
issuance of relevant norms and guidelines.

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 CHAPTER 14 – ECONOMIC REVIEW

In April 2019 the RBI settled on the money related strategy choice to bring down its getting
rate to 6%. The rate cut was the second for 2019 and is relied upon to help sway the obtaining
rate over the credit advertise all the more significantly. Before April, credit rates in the nation
have remained moderately high, in spite of the national bank's situating, which has been
restricting acquiring over the economy. The national bank should likewise think about a
somewhat unpredictable swelling rate that is anticipated at 2.4% in 2019, 2.9% to 3% in the
principal half of 2020, and 3.5% to 3.8% in the second 50% of 2020.

The various functions performed by RBI have a direct bearing on the Social and Economic
Development of the country. Aspects such as currency, bank rates, foreign exchange, loans,
banking services, interest rates, taxation etc are covered by the RBI and Central Bank is the
apex body to regulate these aspects. Disturbances in issue of currency, foreign exchange,
taxation etc have a huge implication on the economic growth and development and hence it
becomes important to ascertain the role of RBI in these matters, as they directly affect social
and economic development.

The RBI additionally has power over specific choices with respect to the nation's cash. In 2016,
it influenced a demonetization of the money which expelled Rs. 500 and Rs. 1000 notes from
flow, predominantly with an end goal to stop criminal operations. Post examination of this
choice demonstrates a few successes and misfortunes. The demonetization of the predefined
monetary forms caused money deficiencies and disorder while likewise requiring extra spend
from the RBI for printing more cash. Perhaps the greatest preferred position, be that as it may,
was the expansion in expense accumulation which came about because of more prominent
purchaser detailing straightforwardness.

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As one of the fastest growing countries in the world, India and the RBI have several unique
challenges ahead that will require nimble navigation from the RBI. Shaktikanta Das will be
charged with guiding the monetary policy direction over the next three years for the country as
it continues to take the spotlight for GDP growth. The country also has a diverse range of goods
and services along with a rising inflation rate. With the Indian economy steadily accounting
for a greater share of the global economy, it is expected that the RBI will gain greater attention
from world leaders while also growing in stature as one of the world’s most-watched central
banks.

66
 CHAPTER 15 – CONCLUSION

To conclude, the role of RBI has been redefined through gradual evolution and adaptation,
along with changes in functions and policies. The Reserve Bank of India is the apex banking
institution in India. It is an autonomous body promoted by the government of India. The RBI
plays a very important in every credit related matters of the country. It is the primary regulator
for all banking as well as non-banking institutions in India. The RBI runs the whole economy
by producing coins and currency essential for the same.

However, RBI is not a pure monetary authority, rather it is responsible for various other
functions as a Central Bank. The objectives of RBI have remained the same with regular
changes in the framework with respect to evolving circumstances.

The RBI has been one of the most successful banks coming to the economy’s rescue whenever
a crisis emerges. The RBI brings its policies into action to control all economic fluctuations.

All the policies, functions and schemes are put into action by the RBI to facilitate Social and
Economic development of India. Through all the weapons, RBI seeks to monitor performance
of all sectors of the economy, control fluctuations in all economic variables such as inflation,
taxation, income, interest rates etc and participate to regulate the economy.

All the functions of RBI are significant to the Indian economy, be it monitory functions, non-
monetary functions, supervisory functions or promotional. RBI has been given a wide range of
powers as per the Banking Regulation Act. With all rights and powers, RBI has today helped
Indian economy achieve the standard GDP, thereby contributing to Social and Economic
Development. The RBI is also subjected to supervision and inspection, which has made its
working clear, fair and improvised.

The importance of RBI can be realised from the fact that it has immensely contributed to
agricultural as well as industrial development of the country. RBI has initiated a wide range of
schemes for the poor, the farmers, and all those below poverty line. (BPL)

It has also promoted rural youth to take up industrial activities in villages, thereby promoting
regional development.

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 CHAPTER 16 – WEBLIOGRAPHY AND REFERENCES

www.rbi.org

https://www.financialexpress.com/economy/financial-stability-now-a-key-metric-for-
monetary-policy-rbi/1610567/

http://www.economicsdiscussion.net/fiscal-policy/fiscal-policy-objectives-and-instruments-
trade-cycle-control/14669

https://www.investopedia.com/articles/investing/112614/increasing-importance-reserve-
bank-india.asp

http://www.economicsdiscussion.net/fiscal-policy/top-8-objectives-of-fiscal-policy/4694

https://kalyan-city.blogspot.com/2010/09/instruments-of-monetary-policy.html

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