Reserve Bank of India

23/02/2020 Reserve Bank of India - Wikipedia
Coordinates: 18.932679°N 72.836933°E
Reserve Bank of India

The Reserve Bank of India (RBI) is India's central bank,
Reserve Bank of India (RBI)
which controls the issue and supply of the Indian rupee. RBI
is the regulator of entire Banking in India. RBI plays an
important part in the Development Strategy of the
Government of India.
RBI regulates commercial banks and non-banking finance

companies working in India. It serves as the leader of the
banking system and the money market. It regulates money
supply and credit in the country. The RBI carries out India's Seal of the RBI
monetary policy and exercises supervision and control over
Headquarters Mumbai,
banks and non-banking finance companies in India. RBI was
Maharashtra, India
set up in 1935 under the Reserve Bank of India Act,1934.
Coordinates 18.932679°N
Until the Monetary Policy Committee was established in 72.836933°E
2016,[6] it also controlled monetary policy in India.[7] It Established 1 April 1935
commenced its operations on 1 April 1935 in accordance with
Governor Shaktikanta Das[1]
the Reserve Bank of India Act, 1934.[8] The original share
Central bank of India
capital was divided into shares of 100 each fully paid .[9]
Following India's independence on 15 August 1947, the RBI Currency Indian rupee (₹)
was nationalised on 1 January 1949.[10] Reserves ₹2,837,400 crore
(US$400 billion)[2][3]
It is a member bank of the Asian Clearing Union. The general
Bank rate 5.40%[4]
superintendence and direction of the RBI is entrusted with
the 21-member central board of directors: the governor; four Interest on 4.00% (market
deputy governors; two finance ministry representatives reserves determined)[5]
(usually the Economic Affairs Secretary and the Financial Website rbi.org.in (https://rbi.
Services Secretary); ten government-nominated directors to org.in)
represent important elements of India's economy; and four
directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the capital
New Delhi. Each of these local boards consists of five members who represent regional interests,
the interests of co-operative and indigenous banks.
The central bank is an independent apex monetary authority which regulates banks and provides
important financial services like storing of foreign exchange reserves, control of inflation,
monetary policy report till August 2016. A central bank is known by different names in different
countries. The functions of a central bank may vary from country to country and are autonomous
or body and perform or through another agency vital monetary functions in the country. A central
bank is a vital financial apex institution of an economy and the key objects of central banks may
differ from country to country still they perform activities and functions with the goal of
maintaining economic stability and growth of an economy.[11]
The bank is also active in promoting financial inclusion policy and is a leading member of the
Alliance for Financial Inclusion (AFI). The bank is often referred to by the name 'Mint Street'.[12]
RBI is also known as banker's bank.
https://en.wikipedia.org/wiki/Reserve_Bank_of_India 1/22
Contents
Preamble
History
1935–1949
1950–1960
1961–1968
1969–1984
1985–1990
1991–1999
Since 2000
Structure
Branches and support bodies
Functions
Financial supervision
Regulator and supervisor of the financial system
Regulator and supervisor of the payment and settlement systems
Banker and debt manager to government
Managing foreign exchange
Issue of currency
Banker's bank
Regulator of the Banking System
Detection of fake currency
Developmental role
Related functions
Custodian to foreign exchange
2016 demonetisation
Cash crunch and effects
Policy rates and reserve ratios
Repo rate
Reverse repo rate (RRR)
Statutory liquidity ratio (SLR)
Bank rate
Liquidity adjustment facility (LAF)
Cash reserve ratio (CRR)
Open market operation (OMO)
Marginal standing facility (MSF)
Qualitative tools
Margin requirements
Selective credit control
Moral suasion
Limitations of monetary policy
RTGS and NEFT transactions' charges removal
Regulation of variable pay of bank management
Publications
References
Further reading
External links
Preamble
The preamble of the Reserve Bank of India describes the basic functions of the reserve bank as:
"to regulate the issue of Bank notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of
the country to its advantage; to have a modern monetary policy framework to meet the
challenge of an increasingly complex economy, to maintain price stability while keeping
in mind the objective of growth."
History
The Reserve Bank of India was established following the
Reserve Bank of India Act of 1934.[13] Though privately owned
initially, it was nationalised in 1949 and since then fully owned
by Government of India (GoI).
1935–1949
A 2010 stamp dedicated to the 75th
The Reserve Bank of India was founded on 1 April 1935 to anniversary of the Reserve Bank of
respond to economic troubles after the First World War.[14] India
The Reserve Bank of India was conceptualised based on the
guidelines presented by the Central Legislative Assembly
which passed these guidelines as the RBI Act 1934.[15] RBI was
conceptualised as per the guidelines, working style and outlook
presented by Dr. B. R. Ambedkar in his book titled “The
Problem of the Rupee – Its origin and its solution” and
presented to the Hilton Young Commission.[16][17][18][19] The
bank was set up based on the recommendations of the 1926
Royal Commission on Indian Currency and Finance, also
known as the Hilton–Young Commission.[20] The original
choice for the seal of RBI was the East India Company Double
Mohur, with the sketch of the Lion and Palm Tree. However, it
was decided to replace the lion with the tiger, the national
animal of India. The Preamble of the RBI describes its basic
functions to regulate the issue of bank notes, keep reserves to Reserve Bank of India-10 Rupees
secure monetary stability in India, and generally to operate the (1938), first year of banknote issue.
currency and credit system in the best interests of the country.
The Central Office of the RBI was established in Calcutta (now
Kolkata) but was moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's (now
Myanmar) central bank until April 1947 (except during the years of Japanese occupation (1942–
45)), even though Burma seceded from the Indian Union in 1937. After the Partition of India in
August 1947, the bank served as the central bank for Pakistan until June 1948 when the State Bank
of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI has been fully
owned by the Government of India since its nationalisation in 1949.[21] RBI has monopoly of note
issue.
1950–1960
In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru, developed a
centrally planned economic policy that focused on the agricultural sector. The administration
nationalised commercial banks[22] and established, based on the Banking Companies Act, 1949
(later called the Banking Regulation Act), a central bank regulation as part of the RBI.
Furthermore, the central bank was ordered to support economic plan with loans.[23]
1961–1968
As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance
system. Meant to restore the trust in the national bank system, it was initialised on 7 December
1961. The Indian government founded funds to promote the economy, and used the slogan
"Developing Banking". The government of India restructured the national bank market and
nationalised a lot of institutes. As a result, the RBI had to play the central part in controlling and
supporting this public banking sector.
1969–1984
In 1969, the Indira Gandhi-headed government nationalised 14 major commercial banks. Upon
Indira Gandhi's return to power in 1980, a further six banks were nationalised.[20] The regulation
of the economy and especially the financial sector was reinforced by the Government of India in the
1970s and 1980s.[24] The central bank became the central player and increased its policies a lot for
various tasks like interests, reserve ratio and visible deposits.[25] These measures aimed at better
economic development and had a huge effect on the company policy of the institutes. The banks
lend money in selected sectors, like agricultural business and small trade companies.[26] The
Banking Commission was established on Wednesday, 29 January 1969, to analyse banking costs,
effects of legislations and banking procedures, including non banking financial intermediaries and
indigenous banking on Government of India economy; with Mr. R.G. Saraiya as the
chairman.[27][28][29]
The branch was forced to establish two new offices in the country for every newly established office
in a town.[30] The oil crises in 1973 resulted in increasing inflation, and the RBI restricted
monetary policy to reduce the effects.[31]
1985–1990
A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an
effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi
Institute of Development Research and the Security & Exchange Board of India investigated the
national economy as a whole, and the security and exchange board proposed better methods for
more effective markets and the protection of investor interests. The Indian financial market was a
leading example for so-called "financial repression" (Mckinnon and Shaw).[25] The Discount and
Finance House of India began its operations in the monetary market in April 1988; the National
Housing Bank, founded in July 1988, was forced to invest in the property market and a new
financial law improved the versatility of direct deposit by more security measures and
liberalisation.[32]
1991–1999
The national economy contracted in July 1991 as the Indian rupee was devalued.[33] The currency
lost 18% of its value relative to the US dollar, and the Narsimham Committee advised restructuring
the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New
guidelines were published in 1993 to establish a private banking sector. This turning point was
meant to reinforce the market and was often called neo-liberal.[24] The central bank deregulated
bank interests and some sectors of the financial market like the trust and property markets.[34]
This first phase was a success and the central government forced a diversity liberalisation to
diversify owner structures in 1998.[25]
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed
nationalised banks in July to interact with the capital market to reinforce their capital base. The
central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Private
Limited—on 3 February 1995 to produce banknotes.[35]
Since 2000
The Foreign Exchange Management Act, 1999 came into force in June 2000. It should improve
the item in 2004–2005 (National Electronic Fund Transfer).[36] The Security Printing & Minting
Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces
banknotes and coins.[37]
The national economy's growth rate came down to 5.8% in the last quarter of 2008–2009[38] and
the central bank promotes the economic development.[39]
In 2016, the Government of India amended the RBI Act to establish the Monetary Policy
Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the MPC
membership is evenly divided between members of the RBI (including the RBI governor) and
independent members appointed by the government. However, in the event of a tie, the vote of the
RBI governor is decisive.[7]
Structure
The central board of directors is the main committee of the
central bank. The Government of India appoints the directors
for a four-year term. The board consists of a governor, and not
more than four deputy governors; four directors to represent
the regional boards;[40] two — usually the Economic Affairs
Secretary and the Financial Services Secretary — from the
Ministry of Finance and ten other directors from various fields.
The Reserve Bank — under Raghuram Rajan's governorship —
wanted to create a post of a chief operating officer (COO), in
RBI runs a monetary museum in
the rank of deputy governor and wanted to re-allocate work Mumbai
between the five of them (four deputy governor and
COO).[41][42]
The bank is headed by the governor, currently Shaktikanta Das.[1] There are four deputy governors
B. P. Kanungo,[43] N. S. Vishwanathan, Mahesh Kumar Jain, and Michael Patra.[44][45][46]
Two of the four deputy governors are traditionally from RBI ranks and are selected from the bank's
executive directors. One is nominated from among the chairpersons of public sector banks and the
other is an economist. An Indian Administrative Service officer can also be appointed as deputy
governor of RBI and later as the governor of RBI as with the case of Y. Venugopal Reddy and
Duvvuri Subbarao. Other persons forming part of the central board of directors of the RBI are Dr.
Nachiket Mor, Y. C. Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly Duggal.
Uma Shankar, chief general manager (CGM) in charge of the Reserve Bank of India's financial
inclusion and development department has taken over as executive director (ED) in the central
bank.
Sudha Balakrishnan, a former vice-president at National Securities Depository Limited, assumed

charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May 2018; she was given
the rank of an executive director.[47]
Branches and support bodies

The RBI has four regional
representations: North in
New Delhi, South in
Chennai, East in Kolkata
and West in Mumbai. The
representations are formed
by five members, appointed
for four years by the central
The Regional Reserve Bank government and with the
building as seen from the Chennai advice of the central board
Suburban Railway lines of directors serve as a forum
for regional banks and to
deal with delegated tasks
from the Central Board.[49]
It has two training colleges for its officers, viz. Reserve Bank RBI Headquarters in Mumbai[48]
Staff College, Chennai and College of Agricultural Banking,
Pune. There are three autonomous institutions run by RBI
namely National Institute of Bank Management (NIBM), Indira Gandhi Institute of Development
Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT).[50]
There are also four zonal training centres at Mumbai, Chennai, Kolkata, and New Delhi.
The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee
to control the financial institutions. It has four members, appointed for two years, and takes
measures to strength the role of statutory auditors in the financial sector, external monitoring, and
internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India
under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map" to
capital account convertibility. The five-member committee recommended a three-year time frame
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 state of Arunachal Pradesh[51]
Functions
The central bank of any country executes many functions such

as overseeing monetary policy, issuing currency, managing
foreign exchange, working as a bank for government and as a
banker of scheduled commercial banks. It also works for
overall economic growth of the country. The preamble of the
Reserve Bank of India describes its main functions as:
..to regulate the issue of Bank Notes and

Reserve Bank of India regional
keeping of reserves with a view to securing office, Delhi entrance with the
monetary stability in India and generally Yakshini sculpture depicting
to operate the currency and credit system "Prosperity through agriculture".[52]
of the country to its advantage.
Financial supervision
The primary objective of RBI is to undertake consolidated
supervision of the financial sector comprising commercial
banks, financial institutions, and non-banking finance
companies.
The board is constituted by co-opting four directors from the The regional office of RBI (right) in
Central Board as members for a term of two years and is front of GPO (left) at Dalhousie
Square, Kolkata.
chaired by the governor. The deputy governors of the reserve
bank are ex-officio members. One deputy governor, usually the
deputy governor in charge of banking regulation and
supervision, is nominated as the vice-chairman of the board. The board is required to meet
normally once every month. It considers inspection reports and other supervisory issues placed
before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit
and internal audit functions in banks and financial institutions. The audit sub-committee includes
deputy governor as the chairman and two directors of the Central Board as members. The BFS
oversees the functioning of the Department of Banking Supervision (DBS), the Department of Non-
Banking Supervision (DNBS) and the Financial Institutions Division (FID) and gives directions on
the regulatory and supervisory issues.
Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad
parameters of banking operations within which the country's banking and financial system
functions. Its objectives are to maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public. The Banking Ombudsman
Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of
complaints by bank customers. The RBI controls the monetary supply, monitors economic
indicators like the gross domestic product and has to decide the design of the rupee banknotes as
well as coins.[53]
Regulator and supervisor of the payment and settlement systems

Payment and settlement systems play an important role in improving overall economic efficiency.
The Payment and Settlement Systems Act of 2007 (PSS Act)[54] gives the Reserve Bank oversight
authority, including regulation and supervision, for the payment and settlement systems in the
country. In this role, the RBI focuses on the development and functioning of safe, secure and
efficient payment and settlement mechanisms. Two payment systems National Electronic Fund
Transfer (NEFT) and Real-Time Gross Settlement (RTGS) allow individuals, companies and firms
to transfer funds from one bank to another. These facilities can only be used for transferring money
within the country.
NEFT operates on a deferred net settlement (DNS) basis and settles transactions in batches. The
settlement takes place for all transactions received until a particular cut-off time. It operates in
hourly batches — there are twelve settlements from 8 am to 7 pm on weekdays and six between
8 am and 1 pm on Saturdays.[55] Any transaction initiated after the designated time would have to
wait until the next settlement time. In RTGS, transactions are processed continuously, all through
the business hours. RBI's settlement time is 9 am to 4:30 pm on weekdays and 9 am to 2 pm on
Saturdays.[56]
Banker and debt manager to government

Just as individuals need a bank to carry out their financial transactions effectively and efficiently,
governments also need a bank to carry out their financial transactions. The RBI serves this purpose
for the Government of India (GoI). As a banker to the GoI, the RBI maintains its accounts, receive
payments into and make payments out of these accounts. The RBI also helps the GoI to raise
money from the public via issuing bonds and government-approved securities. In Sep 2019, a
decision at RBI directors meet was taken to change the RBI financial accounting year to March–
April to align itself with the central government calendar instead of the current June–July year.[57]
Managing foreign exchange

The central bank manages to reach different goals of the Foreign Exchange Management Act,
1999. Their objective is to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India.
With the increasing integration of the Indian economy with the global economy arising from
greater trade and capital flows, the foreign exchange market has evolved as a key segment of the
Indian financial market and the RBI has an important role to play in regulating and managing this
segment. The RBI manages forex and gold reserves of the nation.
On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange
arising from trade and capital transactions. The RBI's Financial Markets Department (FMD)
participates in the foreign exchange market by undertaking sales/purchases of foreign currency to
ease volatility in periods of excess demand for/supply of foreign currency.
Issue of currency
Other than the Government of India, the Reserve Bank of India is the sole body authorised to issue
banknotes in India.
The bank also destroys banknotes when they are not fit for circulation. All the money issued by the
central bank is its monetary liability, i.e., the central bank is obliged to back the currency with
assets of equal value, to enhance public confidence in paper currency. The objectives are to issue
banknotes and give the public adequate supply of the same, to maintain the currency and credit
system of the country to utilise it in its best advantage, and to maintain the reserves.
The RBI maintains the economic structure of the country so that it can achieve the objective of
price stability as well as economic development because both objectives are diverse in themselves.
For the printing of notes, RBI uses four facilities:[17]
The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned
company of the Government of India, has printing presses at Nashik, Maharashtra and Dewas,
Madhya Pradesh.
The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has
printing facilities in Mysore, Karnataka and Salboni, West Bengal.
For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for
coin production.[17]
Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI), the RBI
works as an agent of GoI for the distribution and handling of coins. RBI also works to prevent
counterfeiting of currency by regularly upgrading security features of currency.
The RBI is authorised to issue notes with face values of up to ₹10,000 and coins up to ₹1,000
rupees.
New ₹500 and ₹2,000 notes were been issued on 8 November 2016. The old series of ₹1,000 and
₹500 notes were demonetized from midnight on 8 November 2016.
Earlier ₹1,000 notes have been discarded by the RBI.
Banker's bank
Reserve Bank of India also works as a central bank where
commercial banks are account holders and can deposit money.
RBI maintains banking accounts of all scheduled banks.[62]
Commercial banks create credit. It is the duty of the RBI to
control the credit through the CRR, bank rate and open market
operations. As banker's bank, the RBI facilitates the clearing of
cheques between the commercial banks and helps the inter-
bank transfer of funds. It can grant financial accommodation
to schedule banks. It acts as the lender of the last resort by Nagpur branch holds most of India's
providing emergency advances to the banks. gold deposits.[58][59][60][61]
Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system. As a regulator and supervisor
of the Indian banking system it ensures financial stability & public confidence in the banking
system. RBI uses methods like On-site inspections, off-site surveillance, scrutiny & periodic
meetings to supervise new bank licences, setting capital requirements and regulating interest rates
in specific areas. RBI is currently focused on implementing norms.
Detection of fake currency

To curb the counterfeit money problem in India, RBI has launched a website to raise awareness
among masses about fake banknotes in the market. www.paisaboltahai.rbi.org.in (https://paisabol
tahai.rbi.org.in/) provides information about identifying fake currency.[63]
On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will completely
withdraw from circulation of all banknotes issued prior to 2005. From 1 April 2014, the public will
be required to approach banks for exchanging these notes. Banks will provide exchange facility for
these notes until further communication. The reserve bank has also clarified that the notes issued
before 2005 will continue to be legal tender. This would mean that banks are required to exchange
the notes for their customers as well as for non-customers. From 1 July 2014, however, to exchange
more than 15 pieces of `500 and `1000 notes, non-customers will have to furnish proof of identity
and residence as well as show aadhar to the bank branch in which he/she wants to exchange the
notes.
This move from the reserve bank is expected to unearth black money held in cash. As the new
currency notes have added increased security features, they would help in curbing the menace of
fake currency.[64]
Developmental role
The central bank has to perform a wide range of promotional functions to support national
objectives and industries.[23] The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of these problems are results of the dominant part of the public sector.[65]
Key tools in this effort include Priority Sector Lending such as agriculture, micro and small
enterprises (MSE), housing and education. RBI work towards strengthening and supporting small
local banks and encourage banks to open branches in rural areas to include large section of society
in banking net.
Related functions
The RBI is also a banker to the government and performs merchant banking function for the
central and the state governments. It also acts as their banker. The National Housing Bank (NHB)
was established in 1988 to promote private real estate acquisition.[66] The institution maintains
banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking
system is resilient enough to face the stress caused by the drought-like situation because of poor
monsoon this year.[67]
Custodian to foreign exchange

The Reserve Bank has custody of the country's reserves of international currency, and this enables
the Reserve Bank to deal with crisis connected with adverse balance of payments position.
2016 demonetisation
On 8 November 2016, the Government of India announced the

demonetisation of all ₹500 and ₹1,000 banknotes of the
Mahatma Gandhi Series on the recommendation of the
Reserve Bank of India (RBI).[68] The government claimed that
the action would curtail the shadow economy and crack down
on the use of illicit and counterfeit cash to fund illegal activity
and terrorism.[69][70]
People gathered at ATM of Axis
Bank in Mehsana, Gujarat to
The Reserve Bank of India laid down a detailed procedure for
withdraw cash following deposit of
the exchange of the demonetised banknotes with new ₹500 demonetised currency notes in bank
and ₹2,000 banknotes of the Mahatma Gandhi New Series on 15 November 2016.
and ₹100 banknotes of the preceding Mahatma Gandhi Series.
The key points were:
Citizens had until 30 December 2016 to tender their old

banknotes at any office of the RBI or any bank branch and
credit the value into their respective bank accounts.
Cash withdrawals from bank accounts were restricted to
₹10,000 (US$140) per day and ₹20,000 (US$280) per
week per account from 10 to 13 November 2016. This limit
was increased to ₹24,000 (US$340) per week from 14
November.[71][72]
For immediate cash needs, the old banknotes could be
exchanged for the new ₹500 and ₹2,000 banknotes as well Long queue in front of SBI ATM at
as ₹100 banknotes over the counter of bank branches by Paravur near the city of Kollam in
filling up a requisition form along with a valid ID proof. It Kerala, 19 November 2016.
was announced that this facility would be available until 30
December 2016.
Initially, the limit was fixed at ₹4,000 (US$56) per person from 8 to 13 November 2016.
This limit was increased to ₹4,500 (US$63) per person from 14 to 17 November
2016.[71][72]
The limit was reduced to ₹2,000 (US$28) per person from 18 November 2016.[73]
All exchange of banknotes was abruptly stopped from 25 November 2016.[74]
Initially, all ATMs were dispensing banknotes of only ₹50 and ₹100 denominations and cash
withdrawals from ATMs were restricted to ₹2,000 (US$28) per day.[75] From 14 November
onwards, ATMs were recalibrated to dispense new ₹500 and ₹2,000 notes and to allow a
maximum withdrawal of ₹2,500 (US$35) per day, while other ATMs dispensing banknotes of
only ₹50 and ₹100 denominations will allow a maximum withdrawal of ₹2,000 (US$28) per
day.[71][72]
However, exceptions were given to petrol, CNG and gas stations, government hospitals, railway
and airline booking counters, state-government recognised dairies and ration stores, and
crematoriums to accept the old ₹500 and ₹1,000 banknotes until 11 November 2016, which was
later extended to 14 November 2016 and once again to 24 November 2016.[76][77] International
airports were also instructed to facilitate an exchange of notes amounting to a total value of ₹5,000
(US$70) for foreign tourists and outbound passengers.[78]
Under the revised guidelines issued on 17 November 2016, families were allowed to withdraw
₹250,000 (US$3,500) for wedding expenses from one account provided it was KYC compliant.
The rules were also changed for farmers who are permitted to withdraw ₹25,000 (US$350) per
week from their accounts against crop loan.[73][79]
Cash crunch and effects

The scarcity of cash due to demonetisation led to chaos, and
most people holding old banknotes faced difficulties
exchanging them due to endless lines outside banks and ATMs
across India, which became a daily routine for millions of
people waiting to deposit or exchange the ₹500 and ₹1,000
banknotes since 9 November.[80][81][82][83] ATMs were
running out of cash after a few hours of being functional, and
around half the ATMs in the country were non-functional.[81] Queue at an ATM for ₹100
Sporadic violence was reported in New Delhi, but there were banknotes in Howrah, on 8
no reports of any grievous injury,[84] people attacked bank November 2016, 22:23 (IST)
premises and ATMs,[85][86][87][88][89][90] and a ration shop
was looted in Madhya Pradesh after the shop owner refused to
accept ₹500 banknotes.[91][92][93][94]
Policy rates and reserve ratios
Repo rate
Repo (repurchase) rate also known as the benchmark interest
rate is the rate at which the RBI lends money to the
People queue outside a private
commercial banks for a short-term (a maximum of 90 days). bank to deposit and exchange old
When the repo rate increases, borrowing from RBI becomes ₹500 and ₹1,000 banknotes in
more expensive. If RBI wants to make it more expensive for Kolkata on 10 November 2016.
the banks to borrow money, it increases the repo rate similarly,
if it wants to make it cheaper
Rates as of third bi-monthly monetary policy meet of FY1920 (6 February
for banks to borrow money it
2020)[95]
reduces the repo rate. If the
repo rate is increased, banks Policy rates
can't carry out their business Policy repo rate 5.15 %

at a profit whereas the very Reverse repo rate 4.90 %
opposite happens when the
Marginal standing facility rate 5.40 %
repo rate is cut down.
Generally, repo rates are cut Bank rate 5.40 %
down whenever the country Reserve ratios

needs to progress in banking Cash reserve ratio (CRR) 4.00 %
and economy. Statutory liquidity ratio (SLR) 18.50 %
If banks want to borrow Lending and deposit rates[96]

money (for short term, Base rate 8.95%–9.40%
usually overnight) from RBI
Marginal Cost of funds-based overnight Lending Rate (MCLR) 7.80%–8.30%
then banks have to charge
this interest rate. Banks have Savings deposit rate 3.25%–3.50%
to pledge government Term deposit rate for > 1 year 6.25%–7.00%

securities as collateral. This
kind of deal happens through a re-purchase agreement. If a bank wants to borrow , it has to
provide government securities at least worth ₹100 crore (could be more because of margin
requirement which is 5%–10% of loan amount) and agree to repurchase them at ₹106.5 crore
(US$15 million) at the end of borrowing period. So the bank has paid ₹6.5 crore (US$910,000) as
interest. This is the reason it is called repo rate.
The government securities which are provided by banks as collateral can not come from SLR quota
(otherwise the SLR will go below 19.5% of NDTL and attract penalties).
To curb inflation, the RBI increases repo rate which will make borrowing costs for banks. Banks
will pass this increased cost to their customers which make borrowing costly in the whole economy.
Fewer people will apply for loans and aggregate demand will be reduced. This will result in
inflation coming down. The RBI does the opposite to fight deflation. When the RBI reduces the
repo rate, banks are not legally required to reduce their own base rate.
The present repo rate is 5.15%.[97]
Reverse repo rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is the
short term borrowing rate at which RBI borrows money from banks. The reserve bank uses this
tool when it feels there is too much money floating in the banking system. An increase in the
reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks
prefer to lend their money to RBI which is always safe instead of lending it to others (people,
companies, etc.) which is always risky.
Repo rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas
reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks.
Currently, reverse repo rate is pegged to be 0.25% (or 25 bit/s) below the repo rate.
Statutory liquidity ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and
approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion
of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus
it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and
advances to investment in government and approved securities.
In well-developed economies, central banks use open market operations—buying and selling of
eligible securities by the central bank in the money market—to influence the volume of cash
reserves with commercial banks and thus influence the volume of loans and advances they can
make to the commercial and industrial sectors. In the open money market, government securities
are traded at market-related rates of interest. The RBI is resorting increasing to open market
operations in recent years. Generally, the RBI uses
1. Minimum margins for lending against specific securities.

2. A ceiling on the amounts of credit for certain purposes.
3. The discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1. Part of the interest rate structure, i.e., on small savings and provident funds, are
administratively set.
2. Banks are mandatory required to keep 19.50% of their NDTL (net demand and time liabilities)
in the form of liquid assets.
3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.
The share of net demand and time liabilities that banks must maintain in safe and liquid assets,
such as government securities, cash, and gold. Here it would be pertinent to mention the gold swap
of July 2014.[98][99][100] The present SLR is 18.75%.
Bank rate
Bank rate is defined in Section 49 of the RBI Act of 1934 as the ‘standard rate at which RBI is
prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase'.
When banks want to borrow long term funds from the RBI, it is the interest rate which the RBI
charges to them. It is currently set to 5.40%.[95] The bank rate is not used to control money supply,
but penal rates continue to be linked to the bank rate. If a bank fails to meet SLR or CRR
requirements then the RBI will impose a penalty of 300 basis points above bank rate.
Liquidity adjustment facility (LAF)

Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve
Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess
funds with the RBI on an overnight basis against the collateral of government securities.
RBI accepts applications for a minimum amount of ₹5 crore (US$700,000) and in multiples of
₹5 crore thereafter.
Cash reserve ratio (CRR)

CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the bank's net
demand and time liabilities to ensure the liquidity and solvency of the scheduled banks. The share
of net demand and time liabilities that banks must maintain as cash with the RBI. The RBI has set
CRR at 4%. A 1% change in CRR affects the economy by ₹1,000,000 crore (US$140 billion). An
increase draw this amount from the economy, while a decrease injects this amount into the
economy. So if a bank has ₹200 crore (US$28 million) of NDTL then it has to keep ₹8 crore
(US$1.1 million) in cash with RBI. RBI pays no interest on CRR.
Let's assume the economy is showing inflationary trends and the RBI wants to control this
situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to 20% then bank
will be left only with ₹60 crore (US$8.4 million) for operations. Now it will be very difficult for the
bank to maintain profitability with such a small amount of capital. The bank will be left with no
choice but to raise its interest rate which will make borrowing by its customers more costly. This
will in turn reduce the overall demand and hence prices will eventually come down.
Open market operation (OMO)

Open market operation is the activity of buying and selling of government securities in open
market to control the supply of money in banking system. When there is excess supply of money,
central bank sells government securities thereby sucking out excess liquidity. Similarly, when
liquidity is tight, RBI will buy government securities and thereby inject money supply into the
economy.
Marginal standing facility (MSF)

This scheme was introduced in May 2011 and all the scheduled commercial bank can participate in
this scheme. Banks can borrow up to 2.5%[101] percent of their respective net demand and time
liabilities. The RBI receives application under this facility for a minimum amount of Rs. 1 crore and
in multiples of Rs. 1 crore thereafter.
The important difference from repo rate is that bank can pledge government securities from its
SLR quota (up to one percent). So even if SLR goes below 20.5%[102] by pledging SLR quota
securities under MSF, the bank will not have to pay any penalty. The MSF rate is set to 100 basis
points above bank rate and currently is at 5.65% as of 7 August 2019.[95]
Qualitative tools
Margin requirements
Loan-to-value (LTV) is the ratio of loan amount to the actual value of asset purchased.
The RBI regulates this ratio so as to control the amount a bank can lend to its customers. For
example, an individual wants to buy a car using borrowed money and the car's value is ₹10 lakh
(US$14,000). If the LTV is set to 70% he can borrow a maximum of ₹7 lakh (US$9,800).
The RBI can decrease or increase to curb inflation or deflation respectively.
Selective credit control

Under this measure, the RBI can specifically instruct banks not to give loans to traders of certain
commodities e.g. sugar, edible oil, etc.
This prevents the speculation/hoarding of commodities using money borrowed from banks.
Moral suasion
Under this measure, the RBI try to persuade banks through meetings, conferences, media
statements to do specific things under certain economic trends. For example, when the RBI
reduces repo rate, it asks banks to reduce their base rate as well. Another example of this measure
is to ask banks to reduce their non-performing assets.
Limitations of monetary policy

In developing countries like India, monetary policy fails to show immediate or no results because
the following factors:
1. People do not employ alternative investment options. A large section of society still depends on
saving accounts, fixed deposits, Public Provident Fund for investment. Commercial banks have
large deposits. RBI is not the main or even prominent money supplier for these banks. So
whatever monetary action central bank takes has little or late impact on the economy.
2. Many people in rural areas are out of the banking net and whatever the RBI does, has no
impact on their financial activities.
3. Monsoon uncertainty adversely affects food production and thereby cause food inflation.
Monetary policy has no impact on food inflation.
RTGS and NEFT transactions' charges removal

RBI decided to remove charges on RTGS (Real Time Gross Settlement System) and NEFT
(National Electronic Funds Transfer).[103]
Regulation of variable pay of bank management

In November, RBI introduced a set of draft guidelines to regulate the variable pay of CEOs and top
management at private banks. The new rules are in line with the Sound Compensation Practices
issued by the Financial Stability Board in April 2009. The rules will apply to CEOs, wholetime
directors, and material risk takers at private banks, small finance banks and domestic executives of
foreign banks. As per the new rules at least 50% of the pay should be based on individual, unit,
business and firm wide performance evaluation which will be capped at 300% of the fixed pay. In
case of variable pay above 200% then at least 50% of this amount should be via non cash
instruments. Share linked instruments are included as part of variable pay. Guaranteed bonus
should not be part of the compensation package except in case of joining bonus. The RBI also has
put clauses in place to clawback/malus in case of deteriorating performance. The bank shall
identify a representative set of conditions when the recovery clause for clawback /malus can be
invoked.[104]
Publications
A report titled "Trend and Progress of Banking In India" is published annually, as required by the
Banking Regulation Act, 1949. The report sums up trends and developments throughout the
financial sector.[105] Starting in April 2014, the Reserve Bank of India publishes bi-monthly policy
updates.[106]
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4500/- to Rs. 2000/-with effect from 18th November, 2016" (https://web.archive.org/web/201611
17213433/http://finmin.nic.in/press_room/2016/Govt_decisions_on_oldNotes17112016.pdf)
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74. All note exchange stopped from today, PM Modi goes back on promise of hike after November
24 (http://indianexpress.com/article/india/india-news-india/pm-modi-said-exchange-limit-to-be-h
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75. "ATMs –Non-dispensing of Old High Denomination Notes – Closure of operations" (https://rbi.o
rg.in/Scripts/NotificationUser.aspx?Id=10683&Mode=0). Reserve Bank of India. 8 November
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77. "FAQs on Withdrawal of Legal Tender Character of the existing Bank Notes in the
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78. "Outlets that will accept Rs 1,000 and Rs 500 notes in next 72 hours" (http://economictimes.indi
atimes.com/news/economy/policy/outlets-that-will-accept-rs-1000-and-rs-500-notes-in-next-72-
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9 November 2016.
79. "Demonetisation rule modified, families can withdraw Rs 2.5 lakh for weddings from one
account" (http://indiatoday.intoday.in/story/demonetisation-weddings-shaktikanta-das-governme
nt-economic-affairs-secretary/1/812730.html). India Today. 17 November 2016. Retrieved
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80. "India demonetisation: Chaos as ATMs run dry" (http://www.aljazeera.com/news/2016/11/india-
demonetisation-chaos-atms-run-dry-161109061403011.html). Al Jazeera. Retrieved
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81. "Demonetisation: Chaos grows, queues get longer at banks, ATMs on weekend" (http://indiane
xpress.com/article/india/india-news-india/demonetisation-chaos-grows-queues-get-longer-at-ba
nks-atms-on-weekend-4371373/). 12 November 2016.
82. "India: Demonetisation takes its toll on the poor" (http://www.aljazeera.com/news/2016/11/india-
demonetisation-takes-toll-poor-161116172745225.html). Al Jazeera. 16 November 2016.
83. "Queues get longer at banks, ATMs on weekend" (http://www.thehindu.com/news/national/dem
onetisation-move-chaos-grows-queues-get-longer-at-banks-atms-on-weekend/article9337803.
ece). The Hindu. 12 November 2016.
84. "Demonetisation: Sporadic violence in Delhi, cops receive 4.5K calls" (http://www.newindianexp
ress.com/cities/delhi/2016/nov/13/demonetisation-sporadic-violence-in-delhi-cops-receive-45k-
calls-1538063.html). New Indian Express.
85. "Unrest erupts in UP towns as cashless crowds vent ire on bank staff – Times of India" (http://ti
mesofindia.indiatimes.com/city/bareilly/Unrest-erupts-in-UP-towns-as-cashless-crowds-vent-ire
-on-bank-staff/articleshow/55528509.cms). Retrieved 24 November 2016.
86. "In western UP, violence marks day 13 of demonetisation – Times of India" (http://timesofindia.i
ndiatimes.com/city/meerut/In-western-UP-violence-marks-day-13-of-demonetisation/articlesho
w/55545397.cms). Retrieved 24 November 2016.
87. "Demonetisation effect: ATM vandalism on rise" (http://www.india.com/news/india/demonetisati
on-effect-atm-vandalism-on-rise-1652843/). 18 November 2016. Retrieved 24 November 2016.
88. "Demonetisation: Angry customers break bank's glass door in Kollam" (http://indianexpress.co
m/article/india/india-news-india/demonetisation-angry-customers-break-banks-glass-door-in-kol
lam-4371720/). The Indian Express. 12 November 2016.
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Further reading
S. L. N. Simha. History of the Reserve Bank of India, Volume 1: 1935–1951. RBI. 1970.
ISBN 81-7596-247-X. (2005 reprint PDF (http://rbidocs.rbi.org.in/rdocs/content/PDFs/89630.pd
f))
Reserve Bank of India: Functions and Working. RBI. 2005.(2005 reprint PDF (https://rbidocs.rb
i.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf))
G. Balachandran. The Reserve Bank of India, 1951–1967. Oxford University Press. 1998.
ISBN 0-19-564468-9. (PDF (http://rbidocs.rbi.org.in/rdocs/content/PDFs/90010.pdf))
A. Vasudevan et al. The Reserve Bank of India, Volume 3: 1967–1981. RBI. 2005. ISBN 81-
7596-299-2. (PDF (http://rbidocs.rbi.org.in/rdocs/content/PDFs/90060.pdf))
Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The
Economic Journal. Vol. 59, No. 235 (Sep. 1949), pp. 436–438.
Findlay G. Shirras: The Reserve Bank of India. In The Economic Journal. Vol. 44, No. 174
(Jun. 1934), pp. 258–274.
External links
Official website (http://www.rbi.org.in/)
FAQ answers and Guidelines on Reserve Bank of India (https://rbi.org.in/Scripts/FAQView.asp
x?Id=119)
What the FAQ just happened! All your questions about Rs 500–1000 notes answered (http://ind
iatoday.intoday.in/story/rupees-500-1000-currency-note-faq-narendra-modi/1/805954.html),
India Today, 8 November 2016
Ministry of Finance, Government of India (http://www.finmin.nic.in/)
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23/02/2020 Reserve Bank of India - Wikipedia

Coordinates: 18.932679°N 72.836933°E

RBI regulates commercial banks and non-banking finance

Sudha Balakrishnan, a former vice-president at National Securities Depository Limited, assumed

Branches and support bodies

The central bank of any country executes many functions such

..to regulate the issue of Bank Notes and

Regulator and supervisor of the ﬁnancial system

Regulator and supervisor of the payment and settlement systems

Banker and debt manager to government

Managing foreign exchange

For the printing of notes, RBI uses four facilities:[17]

Earlier ₹1,000 notes have been discarded by the RBI.

Regulator of the Banking System

Detection of fake currency

Custodian to foreign exchange

On 8 November 2016, the Government of India announced the

Citizens had until 30 December 2016 to tender their old

Cash crunch and effects

Policy rates and reserve ratios

can't carry out their business Policy repo rate 5.15 %

down whenever the country Reserve ratios

If banks want to borrow Lending and deposit rates[96]

to pledge government Term deposit rate for > 1 year 6.25%–7.00%

The present repo rate is 5.15%.[97]

Reverse repo rate (RRR)

Statutory liquidity ratio (SLR)

1. Minimum margins for lending against speciﬁc securities.

Liquidity adjustment facility (LAF)

Cash reserve ratio (CRR)

Open market operation (OMO)

Marginal standing facility (MSF)

The RBI can decrease or increase to curb inflation or deflation respectively.

Selective credit control

Limitations of monetary policy

RTGS and NEFT transactions' charges removal

Regulation of variable pay of bank management

28. "Banking Commission Announced I January 1969" (http://indiabefore91.in/newspapers/banking

46. "Michael Patra named RBI Deputy Governor" (https://indianexpress.com/article/business/banki

67. "Indian banks can weather impact of drought: RBI" (http://economictimes.indiatimes.com/news/

Retrieved from "https://en.wikipedia.org/w/index.php?title=Reserve_Bank_of_India&oldid=941776885"

This page was last edited on 20 February 2020, at 16:30 (UTC).

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