AMITY GLOBAL BUSINESS SCHOOL MUMBAI

MINOR PROJECT

TOPIC: RBI ROLE IN INDIAN ECONOMY

Submitted by: Sharvil Choudhary

Enrollment Number: A30206420066

Course: B.B.A (2020 - 2023)

Under the Guidance of: Dr. Ajay Tekchandani

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 DECLARATION
I hereby declare that the project work entitled A study on RBI ROLE IN INDIAN ECONOMY
submitted to Dr. Ajay Tekchandani is a project report of the work done by me under his guidance.
This work is submitted in partial fulfillment of my Minor project.

The result embodied in this thesis has not been submitted to any university before.

I assert the statements made and conclusions drawn are an outcome of my work. I further clarify
that the work contained in the report is original and has been done by me. Also, whenever I have
used any data or text from other sources, I have duly mentioned it.

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 ACKNOWLEDGEMENT

I had to take the support, advice and guidance of some important people in preparation of my task,
who won and received my sincere gratitude.

As the completion of this assignment brought me a great deal of enjoyment and awareness, I would
like to express my gratitude to Dr. Ajay Tekchandani, Course Teacher, on the AMITY GLOBAL
BUSINESS SCHOOL for applying me with a fantastic assignment guidance during many
consultations. I would also like to express my thanks to all those who prompted me to compose this
assignment directly and indirectly .

Furthermore I would like to thank everyone involved that led this project to its completion.

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 TABLE OF CONTENTS

SR NO TOPIC PAGE NO.

1 INTRODUCTION 5-6

2 OBJECTIVES AND RESEARCH METHODOLOGY 7

3 ROLE OF RBI 8-9

4 FUNCTIONS OF RBI 10-11

5 MONETARY CONTROL METHODS OF RBI 12-15

6 CASE STUDY 16-17

7 CONCLUSION 18

8 REFERENCES 18

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 INTRODUCTION

The Reserve Bank of India (RBI) is the country's highest financial agency, in charge of controlling,
supervising, promoting, developing, and planning the country's financial system. The Reserve Bank
of India (RBI) is the queen bee of the Indian financial system, influencing the operation of
commercial banks in a variety of ways.

Through its many policies, directives, and regulations, the RBI has an impact on commercial bank
management. It has a one-of-a-kind position in bank management. In reality, the RBI lays a firm
basis for the functioning of commercial banks by performing the four core management
responsibilities of planning, organizing, directing, and regulating.

The Reserve Bank of India (RBI) was founded in 1935 by the Reserve Bank of India Act of 1934.
The Reserve Bank of India is the country's central bank, having a multifaceted role. It is responsible
for a variety of monetary responsibilities, including the issuance of currency notes and the
preservation of the country's monetary stability. The Reserve Bank of India began as a private stock
business that was nationalized in 1949. The Central Board of Directors, which is nominated by the
Indian government, oversees the company's operations. The Reserve Bank of India has played a
significant role in the country's economic development and monetary stability since its creation.

The Royal Commission on Indian Currency and Finance, established by the Government of India,
which was established on August 25, 1925, recommended the formation of a central bank in India,
and the Indian Central Banking Enquiry Committee, which was established in 1931, emphasized
the same. The Reserve Bank of India Act, 1934, established the Reserve Bank of India on April 1,
1935. The Reserve Bank of India's major goal is to "control the issuing To ensure monetary stability
in India and, in general, to operate the country's currency and credit system to its benefit, the
Reserve Bank of India issued bank notes and held reserves."

The Reserve Bank of India was founded as a private bank for shareholders. The Reserve Bank of
India's headquarters were originally in Calcutta, but were eventually relocated to Bombay. In
January 1938, the Reserve Bank of India released its first currency notes in denominations of Rs.5
and Rs.10, followed by denominations of Rs.100, Rs.1000, and Rs.10000 later that year.

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Following the Declaration of Independence Through the Reserve Bank (Transfer of Public
Ownership) Act, 1948, the Reserve Bank of India was nationalized in 1949, and all shares were
given to the Central Government. The Reserve Bank of India was established in line with the Act
for the administration of currency and the conduct of banking activities. It is a legal entity with
perpetual succession, a common seal, and the ability to be sued or sued in its name. The Central
Board of Directors is in charge of overseeing and directing the Reserve Bank's operations.

The Governor, Deputy Governor, Ten Directors selected by the Central Government, and two
Government officials recommended by the Central Government make up the Central Board. The
deputy governor and director are welcome to attend Central Board meetings, but they are not
allowed to vote. The Governor and Deputy Governor are appointed for a five-year term and are
eligible for reappointment. The Directors are selected for a four-year term and serve at the
president's discretion. The Central Board meets at least six times per year.

In each of the four zones, a local board of five members is constituted, all of whom are selected by
the central government. The Board's Chairperson is chosen from among the members. Members of
the Board are appointed for a four-year term and are eligible for reappointment. The Central Board
refers topics to the Local Board for guidance, and the Central Board assigned tasks to it.

Objectives of Study:

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1. To analyze the role and functions of RBI.

2. To assess the Monetary Control Methods of RBI.

Research Methodology :

Methodology of Study It's crucial to be skeptical of information offered in sources, especially if the
information was acquired for a different International Journal of Business Administration and
Management.. Furthermore, many secondary sources do not clearly define problems such as the
study's goal, how the data was acquired, evaluated, and interpreted, making it difficult for the
researcher to evaluate their relevance. To overcome this issue, I attempted to triangulate secondary
data by utilizing many independent sources.

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ROLE OF RBI

1.Ensuring Stability and Growth of the Infrastructure

The financial markets play a critical role in the financial system, and just a few bodies in the
country, including the RBI, have the power and resources to assure their stability. Financial Market
Infrastructure (FMI) is a multilateral system that comprises participating institutions and entails
clearing, settling, and documenting payments, securities, derivatives, and other financial
transactions by the operator. Payment systems, central securities depository, securities settlement
systems, central counterparties, trade repositories (an institution that keeps electronic records of
transaction data), and so on are all part of the FMI. It is critical that these functions run as smoothly
as possible and that the necessary infrastructure is in place. Financial markets are the conduits
through which the economy's risks are concentrated, and which, if not effectively handled, can
spread shocks across the economy.

2.Ensuring the growth of Payment systems in India

The RBI oversees these payment infrastructures out in place in order to ensure its efficiency and
safety of its participants. This role has been of growing importance especially as the country is
encouraged into adopting the electronics payment system and keeping up with international
developments.
This is only possible because the RBI ensures that the payment and settlement systems are safe,
efficient, and accessible throughout the country.

3. Supervising the Payment and Settlement systems

In order to guarantee that the system is controlled and overseen, the RBI assigns particular
functions to different other organizations it establishes. In addition, the RBI creates the
legislative framework that controls these systems. The RBI, for example, has established the
PSS ( Payment and Settlement Systems Act, 2007).
This statute gives the RBI the authority to establish rules for the format of payment instructions,
the times that must be kept, and the method of fund transfer, among other things. The RBI also

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has the authority to obtain any information related to the functioning of any payment system,
enter and examine any location where the payment system is used, and conduct audits and
inspections.

4. Regulating OTC Derivatives

The Reserve Bank of India ordered the creation of an over-the-counter (OTC) derivatives
trading repository, which is managed by two separate frameworks: the Reserve Bank of India
Act, 1934, and the Forward Contracts (Regulation) Act, 1952.

OTC derivatives include interest rate swaps, forward rate agreements, foreign currency swaps,
foreign currency-rupee swaps, foreign currency options, and foreign currency-rupee options.

5. Other Functions
The RBI has the ability to impact the supply of money through altering the deposits, reserves
(SLR and CRR) that commercial banks are required to hold, and interest rates that they are
charged when borrowing money. These rates and standards fluctuate in response to the
economy's needs.

By keeping gold bullions and foreign currency reserves, the RBI also helps to keep the value of
the Indian rupee stable. Controlling the RBI's arch-nemesis, inflation, is another crucial
consideration.

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FUNCTIONS OF RBI

1. Banker to Government

On behalf of the Central Government, the Reserve Bank of India accepts and makes
payments. It performs the Central Government's exchange, remittance, public debt
management, and other financial functions. The Reserve Bank of India is in charge of
the Central Government's money, remittances, exchange, and financial activities in India.
It is a company that specializes in repo or reverse repo.

2. Right to Issue Bank note

In India, only the Reserve Bank of India has the authority to print bank notes. The bank
notes are guaranteed by the central government as legal money. A second entity called
the issue department is in charge of issuing bank notes. On the proposal of the Central
Board, the Central Government defines bank note denominations, including the
discontinuation of bank notes. On the basis of the Central Board's recommendations, the
Central Government authorizes the design, shape, and substance of bank notes.

3. Formulates Banking policy

In relation to advances, the Reserve has the authority to formulate banking policy in the
public or depositors' interest, including guidance on the purpose of advances, secured
advance margins to be maintained, the maximum amount of advance that can be made,
the rate of interest, terms and conditions for advances, and guarantees that can be given.

4. Licensing Authority

The Reserve Bank of India has the power to give licences to start banking operations in
India and to cancel a licence granted to a banking firm. In a petition filed under Article
226 of the Constitution, the constitutional validity of section 22 of the Banking
Companies Act, 1949 was challenged. The Reserve Bank of India is authorised to give
licences to banks under Section 22 of the Act, and banks that were already in existence
at the time of the Act's conception must apply for a licence within six months of the

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 Act's commencement. The petitioner asserted that section 22 was unconstitutional of the
Banking Regulating Act of 1949 is unconstitutional since it restricts commerce and
business.

5. Banker’s Bank

Banks in the second schedule and non-scheduled banks must maintain a cash reserve
ratio with the Reserve Bank of India to safeguard monetary stability in the country. It
provides foreign currency loans and advances to scheduled banks and other financial
organisations. It buys, sells, and discounts any bill of exchange or promissory note, as
well as providing schedule banks with loans and advances.

6. Depositor Awareness and Education

The Reserve Bank of India established the "Depositor Education and Awareness Fund."
The fund is used to promote depositor interest and for other reasons in the depositor's
best interests.

7. Foreign Exchange Regulation and Management

Foreign exchange trading can be regulated, prohibited, or restricted by the Reserve Bank of
India. It allows banks and other financial organisations to act as approved foreign exchange
market agents.

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MONETARY CONTROL METHODS OF RBI

Monetary policy objectives: Monetary policy refers to a set of procedures used to control the
amount of money in circulation in the economy with the general goal of maintaining economic
and financial stability, as well as ensuring appropriate financial resources for development.
These monetary policy objectives in India have evolved through time and can now be expanded
to include preserving price stability, adequate credit flow to productive sectors, encouragement
of productive investments and trade, promotion of exports, and economic growth. The primary
goals of monetary policy are as follows:

1.Full employment : Full employment has long been seen as one of the most important goals
of monetary policy. It is a critical goal not only because unemployment wastes potential output,
but also because it results in a loss of social status and self-respect.

2.Price stability :.Stabilization of the price level is one of the policy objectives of monetary
policy. This policy is supported by both economists and laypeople because price swings
promote economic uncertainty and instability.

3.Economic growth:The quick economic expansion of an economy has been one of the most
significant objectives of monetary policy in recent years.

"The process by which a country's real per capita income increases over time," according to the
definition of economic growth.

4.Balance of payments: Since the 1950s, another goal of monetary policy has been to ensure
balance-of-payments equilibrium.

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Quantitative Instruments of Monetary Policy

The General Tools of Monetary Policy are also known as Quantitative Instruments. These
instruments are concerned with the money's quantity or volume. Credit Control Quantitative
Tools are also known as Credit Control General Tools. They are intended to restrict or limit the
total amount of bank credit in the economy. These are indirect tools that are used to influence
the amount of credit available in the country.

Following instruments are the most common credit control tools.

1. Bank Rate Policy (BRP)

The Bank Rate Policy (BRP) is a crucial monetary policy tool for controlling the amount of
credit available in a country. The bank rate is the rate at which the central bank (in this case the
RBI) rediscounts commercial bank bills and prepares or provides advance to commercial banks
against recognised assets. According to the RBI, the standard rate is "the rate at which the bank
is willing to acquire or rediscount bills of exchange or other commercial paper eligible for
acquisition under the RBI Act." The actual availability and cost of borrowing are influenced by
the Bank Rate. Any change in the bank rate has an immediate effect on the cost of borrowing
for commercial banks.The volume of commercial banks borrowing from the RBI will decrease
if the RBI raises the bank rate. It discourages banks from expanding loans because it becomes
more expensive. Even with higher bank rates, actual interest rates on short-term loans rise,
putting a brake on credit expansion. If the RBI lowers the bank rate, commercial banks will be
able to borrow more easily and at a lower cost. Credit generation will be boosted as a result of
this.As a result, each change in the bank rate is usually accompanied by changes in the lending
rate and the market rate of interest. The effectiveness of the bank rate as a tool of monetary
policy, on the other hand, is determined by the existing banking network, the interest elasticity
of investment demand, the size and strength of the money market, and the international
movement of funds, among other factors.

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2. Open Market Operation (OMO)

The open market operation refers to the RBI's open market purchases and/or sales of
short and long term securities. This is an extremely successful and popular monetary
policy device. The OMO is used to eliminate money shortages in the money market,
affect the term and structure of interest rates, and stabilize the government securities
market, among other things. It's critical to comprehend how the OMO works.
Commercial banks and private persons will buy securities if the RBI sells them on the
open market. As money is moved from commercial banks to the RBI, the current money
supply is reduced. In contrast, when the RBI buys assets from commercial banks in the
open market, the commercial banks sell them and recoup their investment. Clearly, the
amount of money in the economy grows. When the RBI engages in OMO transactions,
the real stock of money is modified in this way. Normally, the RBI sells securities during
periods of high inflation to diminish buying power, and she buys securities during
periods of low inflation to increase money supply in the economy through the banking
system.

3. Variation in the Reserve Ratios (VRR)

Commercial banks are required to retain a specified percentage of their total assets in
Cash Reserves. Their entire assets in the form of cash make up a portion of these cash
reserves. Apart from these, cash reserves must be stored with the RBI in order to sustain
liquidity and control credit in an economy. The Cash Reserve Ratio (CRR) and the
Statutory Liquidity Ratio are the two reserve ratios (SLR). The CRR is a proportion of
commercial banks' net demand and time obligations that they must keep with the central
bank, whereas the SLR is a percentage of reserves that must be kept in the form of gold
or foreign securities. The CRR in India is regulated to be between 3 and 15% of bank
reserves, whereas the SLR is regulated to be between 25 and 40% of bank reserves. Any
change in the VRR (i.e. CRR + SLR) affects the reserves holdings of commercial banks.
Thus, commercial banks' lending capacity can be affected by altering VRR.

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QUALITATIVE TOOLS OF MONETARY POLICY

The Selective Tools of Monetary Policy are also known as Qualitative Instruments. These tools are
not intended to improve credit quality or credit use. They're used to distinguish between different
types of credit usage. It might be a preference for export over import, or a distinction between
necessary and non-essential credit supply. This strategy has the potential to impact both the credit
lender and the credit borrower.

The following instruments make up the Selective Tools of Credit Control:

1. Fixing Margin Requirements

The "percentage of the loan amount not funded by the bank" is referred to as the margin. Or,
to put it another way, it is the portion of a loan that a borrower must raise in order to obtain
funding for his purpose. When a margin changes, the loan size changes as well. This
strategy is used to boost credit supply for the poor while discouraging it for non-essential
industries. This can be accomplished by boosting margin for non-essential sectors while
decreasing margin for other vulnerable sectors. For instance, If the RBI considers that more
credit should be given to agriculture, the margin will be reduced and 85-90 percent loans
may be authorised.

2. Consumer Credit Regulation

Consumer credit supply is regulated using this strategy, which involves the hire-purchase
and installment selling of consumer products. The down payment, installment amount, loan
period, and other factors are all determined in advance using this approach. This can aid in
monitoring credit usage and, as a result, inflation in a country.

3. Publicity

Another way of selective credit control is this. The Reserve Bank of India (RBI) uses it to
issue numerous reports on what is excellent and what is poor in the system. This publicly
available information can assist commercial banks in targeting loan supply to certain
industries. The information is made public through its weekly and monthly briefings, and
banks can utilize it to achieve monetary policy goals.

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 CASE STUDY

The Reserve Bank of India (RBI) issued new currency notes in 2016. These notes in
denomination of INR 10, 20, 50, 100, 200, 500, and 2,000 are identified and distinguished using
different currency-embedded features.

Tactile markers and embossments on currency notes help the visually challenged ascertain the
denominations of the notes. However, since such marks often fade with use, the visually
challenged people often find it difficult to identify the denominations of the notes. RBI planned
to eliminate this problem through technology.

To execute this initiative, Reserve Bank of India (RBI) zeroed on Daffodil Software after a
rigorous partner selection process as their technology partner, who would be responsible for
managing the technical and functional aspects of the project.

Solution

At the inception, team Daffodil presented a technical proposal, project management plan,
software requirement specifications, high-level & low-level design documents, user acceptance
test cases to RBI, which were approved by their technical team to proceed for the development
process.

To counter the usage of the app in poor internet connectivity areas, the app was required to
work in the offline mode as well. Since the app would not be able to learn by itself due to its
offline nature, it was important for the Daffodil team to train the app for the live release.
Daffodil created a data set of 150,000 images of Mahatma Gandhi series banknotes in the
denomination of Rs 10, 20, 50, 100, 200, 500, and 2,000 in order to train the app. Whenever a
user scans a note, the app compares the scanned image of the note with 150,000 images in the
data set and gives accurate results in the offline mode or low lighting conditions.

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RESULT

The application has been downloaded by more than 500,000 users since its launch in January 2020.
This initiative has also been lauded by several mainstream media agencies throughout the country.
The mobile app developed by team Daffodil is enabling the visually and hearing impaired to
perform the following actions:

​ 1. Identifying the denominations of Mahatma Gandhi Series and Mahatma Gandhi (New)
series banknote (Rs 10, 20, 50, 100, 200, 500, and 2,000) by checking front or reverse
side/part of the note including half folded notes at various holding angles and a broad range
of light conditions (normal light, low light, daylight, etc.).
​ 2. Identifying the denomination through an audio notification in Hindi/English and
non-sonic mode such as vibration.
​ 3. Identifying the banknotes denomination without the internet.
The app works in offline mode and automatically turns on/off the flash light of the
smartphone to adjust lights.
​ 4. Navigating the mobile application via Siri and Talkback feature for accessing the
application features wherever the underlying device & operating system combination
supports voice-enabled controls.

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CONCLUSION

These are monetary policy's different selection instruments. However, the availability of alternative
sources of credit in the economy, the activities of Non-Banking Financial Institutions (NBFIs), the
profit motivation of commercial banks, and the undemocratic character of these instruments restrict
their success. However, the intended objectives can be achieved by using a combination of both
general and selective monetary policy instruments.

The Reserve Bank of India was established with a view to fostering the banking business and not
for impeding the growth of such business.

References :

Ripublication.com

Case Study | Reserve Bank of India | Daffodil Software (daffodilsw.com)

What is Role of RBI in Financial Market? Functions & Responsibilities! (tradebrains.in)

https://exampariksha.com/role-functions-rbi-economics-study-material-notes

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