FINANCIAL SYSTEMS AND INSTITUTIONS

UNIT-1

INDIAN FINANCIAL SYSTEM

The Indian Financial System plays a very important role in the Indian Economy and it shows the
economic growth of our economy. It helps in the flow of funds to people and the people use this
money economically for their betterment. The Indian financial system is a complex network of
financial institutions, markets, instruments, and services that facilitate the flow of funds between
savers and investors. It comprises of various entities such as banks, non-banking financial companies
(NBFCs), insurance companies, stock exchanges, mutual funds, pension funds, and other financial
intermediaries.

The Indian Financial System plays a crucial role in mobilizing savings, allocating capital, and
facilitating economic growth and development in the country.

COMPONENTS OF INDIAN FINANCIAL SYSTEM

The main financial system components include financial institutions, financial services,
financial markets, and financial instruments.

 Financial institutions. Financial institutions play a significant role in bringing

together lenders and borrowers. This is done by using various financial instruments
and services, all of which contribute to an efficient financial system. The financial
institution is one of the main components which ensure liquidity in the financial
system through the development of credit and other liquid assets.
 Financial services. Financial services include credit rating agencies, mutual funds,
pension funds, venture capital, and other institutions that are part of the financial
system. Financial services are an important component of the financial system due to
their specific tasks.
 Financial markets. A financial market is where both the creation of new financial
assets and the trading of existing ones occur. Financial markets move funds from
savers to borrowers much more efficiently and ensure that there is always liquidity.
 Financial instruments. Financial instruments are another main component of the
financial system. Financial instruments are papers that entitle the buyer to future
income from the seller. That's because there are different needs between investors and
those looking for credit.

IMPORTANCE OF INDIAN FINANCIAL

SYSTEM
Financial system importance comes from its role in stimulating higher savings and
investment expenditure, leading to higher economic growth. A well-functioning financial
system is crucial in attaining sustained economic development over the long term.
Additionally, it guarantees that expenditures on investments and savings are carried out
effectively.

Financial systems contribute to the local and international economies' overall economic and
financial stability. They serve as the foundation upon which economic transactions may occur
and upon which monetary policy can be based.

Due to financial regulations, economic and financial institutions between parties involved in
the financial system are safe and secure. The financial system ensures that companies
disclose all relevant information about their current financial situation, which helps investors
make better decisions.

The financial systems also guarantee that monetary policies can successfully assist in
managing and mitigating risk and avert various issues, such as an economic slowdown or a
rise in fiscal expenses.

This is becoming increasingly important as there are more financial technology businesses,
more ways to connect, and stronger economic and commercial ties between countries.
Financial systems help prevent problems by ensuring rules are followed across many
industries and borders.

FUNCTIONS OF INDIAN FINANCIAL SYSTEM

The Indian financial system has several functions that help to meet the financial needs of individuals
and businesses. Here are some of the key functions of the Indian financial system:

Mobilization of Savings: The Indian financial system helps to mobilize savings from various sectors
of the economy and channel them towards productive investments. This is achieved through various
financial intermediaries such as banks, mutual funds, and insurance companies.

Allocation of Credit: The Indian financial system also plays a key role in allocating credit to different
sectors of the economy. Banks and other financial institutions provide loans and credit facilities to
businesses and individuals to help them meet their financial needs.

Payment System: The financial system provides a safe and efficient payment mechanism to
facilitate transactions between different individuals and businesses. This is achieved through various
payment systems such as NEFT, RTGS, and IMPS.

Risk Management: The financial system helps to manage risks associated with financial
transactions. Financial intermediaries such as insurance companies provide risk management
products such as life insurance, health insurance, and property insurance.
 Price Discovery: The Indian financial system also helps in the discovery of prices of financial assets
such as stocks, bonds, and commodities. This is achieved through various financial intermediaries
such as stock exchanges and commodity exchanges.

Economic Development: The financial system plays a critical role in the economic development of
the country. It provides financial resources for investment in infrastructure, industries, and other
productive sectors of the economy.

Financial Inclusion: The Indian financial system also strives to promote financial inclusion by
providing access to financial services to individuals and businesses in remote and underdeveloped
areas of the country.

INDIAN FINANCIAL SYSTEM STRUCTURE

The Indian Financial System is made up of various components that work together to facilitate the
flow of funds between savers and investors. The structure of the Indian financial system can be
broadly divided into two parts: the organized sector and the unorganized sector.

The organized sector includes formal financial institutions such as banks, insurance companies,
NBFCs, mutual funds, stock exchanges, and pension funds. These institutions are regulated by the
Reserve Bank of India (RBI) and other regulatory bodies such as the Securities and Exchange Board of
India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension
Fund Regulatory and Development Authority (PFRDA).

The unorganized sector, on the other hand, includes informal financial intermediaries such as
moneylenders, chit funds, and other unregulated entities that cater to the financial needs of the
unbanked and underserved sections of society.

ECONOMY OF INDIA
The economy of India has transitioned from a mixed planned economy to a mixed middle-
income developing social market economy and largest South Asian economy with notable
public sector in strategic sectors.[49] It is the world's fifth-largest economy by nominal GDP
and the third-largest by purchasing power parity (PPP). According to the International
Monetary Fund (IMF), on a per capita income basis, India ranked 139th by GDP (nominal)
and 127th by GDP (PPP).[50] From independence in 1947 until 1991, successive governments
followed Soviet model and promoted protectionist economic policies, with extensive
sovietization, state intervention, bureaucrat driven enterprises and economic regulation. This
is characterised as dirigism, in the form of the Licence Raj.[51][52] The end of the Cold War and
an acute balance of payments crisis in 1991 led to the adoption of a broad economic
liberalisation in India and indicative planning.[53][54] Since the start of the 21st century, annual
average GDP growth has been 6% to 7%.[49] The economy of the Indian subcontinent was the
largest in the world for most of recorded history up until the onset of colonialism in early
19th century.[55][56][57] India accounts for 7.2% of global economy in 2022 in PPP terms, and
around 3.4% in nominal terms in 2022.[58][59]

India still has informal domestic economies; COVID-19 reversed both economic growth and
poverty reduction; credit access weaknesses contributed to lower private consumption and
inflation; and new social and infrastructure equity efforts.[60] Economic growth slowed down
in 2017 due to the shocks of "demonetisation" in 2016 and the introduction of the Goods and
Services Tax in 2017.[61] Nearly 70% of India's GDP is driven by domestic consumption.[62]
The country remains the world's sixth-largest consumer market.[63] Apart from private
consumption, India's GDP is also fueled by government spending, investments, and exports.
[64]
In 2022, India was the world's 6th-largest importer and the 9th-largest exporter.[65] India
has been a member of the World Trade Organization since 1 January 1995.[66] It ranks 63rd on
the Ease of doing business index and 68th on the Global Competitiveness Report.[67] Due to
extreme rupee/dollar rate fluctuations India's nominal GDP fluctuates significantly.[68] With
476 million workers, the Indian labour force is the world's second-largest.[22] India has one of
the world's highest number of billionaires and extreme income inequality.[69][70] It is an
admitted fact that in India that it lacks tax culture. Despite considerable efforts for widening
the tax base, still the number of taxpayers in the country, is about 82.7 million people which
is 6.25 per cent of the over 132 crore population, which is too small for the country.[71]

During the 2008 global financial crisis, the economy faced a mild slowdown. India endorsed
Keynesian policy and initiated stimulus measures (both fiscal and monetary) to boost growth
and generate demand. In subsequent years, economic growth revived.[72] According to the
World Bank, to achieve sustainable economic development, India must focus on public sector
reform, infrastructure, agricultural and rural development, removal of land and labour
regulations, financial inclusion, spur private investment and exports, education, and public
health.[73] Over 66 million Indians are categorised as middle class, and just 16 million are
upper middle class, according to a 2021 Pew Research Center survey.[74]

In 2022, India's ten largest trading partners were the United States, China, United Arab
Emirates (UAE), Saudi Arabia, Russia, Germany, Hong Kong, Indonesia, South Korea, and
Malaysia.[75] In 2021–22, the foreign direct investment (FDI) in India was $82 billion. The
leading sectors for FDI inflows were the service sector, the computer industry, and the
telecom industry.[76] India has free trade agreements with several nations and blocs, including
ASEAN, SAFTA, Mercosur, South Korea, Japan, Australia, UAE, and several others which
are in effect or under negotiating stage.[77][78]

The service sector makes up more than 50% of GDP and remains the fastest growing sector,
while the industrial sector and the agricultural sector employs a majority of the labor force.[79]
The Bombay Stock Exchange and National Stock Exchange are some of the world's largest
stock exchanges by market capitalisation.[80] India is the world's sixth-largest manufacturer,
representing 2.6% of global manufacturing output.[81] Nearly 65% of India's population is
rural,[82] and contributes about 50% of India's GDP.[83] It has the world's fifth-largest foreign-
exchange reserves worth $561 billion.[84] India has a high public debt with 83% of GDP,
while its fiscal deficit stood at 6.4% of GDP.[85] India faces high unemployment, rising
income inequality, and a drop in aggregate demand.[86][87] India's gross domestic savings rate
stood at 29.3% of GDP in 2022.[88] In recent years, independent economists and financial
institutions have accused the government of manipulating various economic data, especially
GDP growth.[89][90] India's overall social spending as a share of GDP in 2021–22 will be 8.6%,
which is much lower than the average for OECD nations
 Currency Indian rupee (INR, ₹)
Fiscal year 1 April – 31 March
WTO, WCO, SAFTA, BIMSTEC, WFTU,
Trade organisations
BRICS, G-20, BIS, AIIB, ADB and others
 Developing/Emerging[3]
 Lower-middle income economy[4]
Country group
 Newly industrialized country

Statistics
Population 1,417,173,173 (2nd; 2022 est.)[5][6]
 $3.75 trillion (nominal; 2023 est.)
[7]
GDP
 $13.033 trillion (PPP; 2023 est.)[7]

 5th (nominal; 2023)

GDP rank  3rd (PPP; 2023)

 9.1% (FY2021-22)[8]
 7.2% (FY2022-23)[8]
GDP growth
 6.3% (FY2023-24)[9]

 $2,601 (nominal; 2023 est.)[7]

GDP per capita  $9,073 (PPP; 2023 est.)[7]

 139th (nominal; 2023)[a]

GDP per capita
 127th (PPP; 2023)[a]
rank
 Agriculture: 18.8%
 Industry: 28.2%
GDP by sector  Services: 53%
 (FY 2021–22)[10]

 Private final consumption: 57.2%

 Government final consumption:
10.3%
 Gross fixed capital formation:
33.9%
 Exports of goods and services:
GDP by component
22.7%
 Imports of goods and services: -
29.7%
 Other source: 5.7%
 (FY 2022–23)[11]

 7.44% (July 2023)[12]

Inflation (CPI)
Base borrowing 4.50% (18 August 2023)[13]
 rate
 3% in extreme poverty (2022
est.)[14]
 0.9% on less than $1.9/day
(2020)[15]
Population below
 18.2% on less than $3.2/day
poverty line
(2020)[15]
 83.83% on less than $6.85/day
(2019)[16]

 35.7 medium (2019)[17]

Gini coefficient  33.9 medium (2013)[18]

 0.633 medium (2021)[19] (132nd)

Human
 0.475 low (2021)[20] (108th)
Development Index
Corruption
40 (2022)[21] (85th)
Perceptions Index
 523,839,158 (2022)[22]
Labour force  49.8% employment rate (2022)[23]

 Agriculture: 42.60% [24]

 Industry: 25.12% [25]
Labour force by
 Services: 32.28% [26]
occupation
 (2019)

 7.95% (July 2023)[27]

 28.3% youth unemployment (15 to
Unemployment
24 year-olds; 2021)[17]

Gross savings 29.345% of GDP (2022)[28]

Yield curve 10-year bond 7.278% (Jan 2023)[29][30]
 55.3 Manufacturing (Feb 2023)[31]
Purchasing
 59.4 Services (Feb 2023)[32]
Managers' Index
 Textiles
 chemicals
 food processing
 steel
 transportation equipment
 cement
Main industries
 mining
 petroleum
 machinery
 software
 pharmaceuticals[33]

External
Exports $770.18 billion (FY2022-23)[34]
Export goods  Manufacturers 70.7%
  Fuels and mining products 14.7%
 Agricultural products 14.1%
 Others 0.5%[35] (2022)

 United States 18.1%

 European Union 14.9%
 United Arab Emirates 6.4%
Main export
 China 5.8%
partners
 Bangladesh 3.6%
 Other 51.1%[35] (FY 2021–22)

Imports $892.18 billion (FY2022-23)[34]

 Agricultural products 7%
 Fuels and mining products 33.2%
Import goods  Manufacturers 52.1%
 Other 7.7 %[35] (2022)

 China 14.07%
 United Arab Emirates 7.43%
 United States 7.21%
Main import
 Russia 6.32%
partners
 Saudi Arabia 5.97%
 Other 59%[36] (FY 2022–23)

 $514 Billion (2021–22) [37][38]

FDI stock
 –$120.569 billion (2022)[28][39]
Current account  –3.476% of GDP (2022)[28]

 $617.1 billion (2022)[40]

Gross external debt  19.4% of GDP (2022)

Net international
–$359.5 billion (June 2022)[41]
investment position
Public finances
 ₹253.973 trillion
(US$3.2 trillion)[28]
Government debt
 81.8% of GDP (2023)[42]

Budget balance 6.4% of GDP (2022–23)[43]

 ₹27.163 trillion (US$340 billion)
Revenues  (2023–24) [44]

 ₹45.031 trillion (US$560 billion)

Expenses  (2023–24) [44]

Donor:
$4.234 billion (2021)
Economic aid
($30.59 billions Line of Credit in
total)[45]
  Standard & Poor's:[46]
 BBB-
 Outlook: Positive

 Moody's:[46]
 Baa3
 Outlook: Stable

Credit rating
 Fitch:[46]
 BBB−
 Outlook: Stable

 DBRS:[47]
 BBB(low)
 Outlook: Positive

$602.154 billion[b][48] (4th)

Foreign reserves (as of 11 August 2023)

RESERVE BANK OF INDIA

The Reserve Bank of India, abbreviated as RBI, is India's central bank and regulatory body responsible
for regulation of the Indian banking system. It is under the ownership of Ministry of Finance,
Government of India. It is responsible for the control, issue and maintaining supply of the Indian
rupee.

Governor: Shaktikanta Das

Founded: 1 April 1935, Kolkata

The Central Office of the Reserve Bank was initially established in Kolkata but was
permanently moved to Mumbai in 1937.

The Central Office of the Reserve Bank was initially established in Kolkata but was
permanently moved to Mumbai in 1937.

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."

Functions
Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity
through agriculture".[63] The regional office of RBI (right) in front of GPO (left) at Dalhousie Square,
Kolkata.

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 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."

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 Central Board as members for a
term of two years and is 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.[64]

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)[65] 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.

From 16 December 2019, one can transfer money online using the National Electronic Funds
Transfer (NEFT) route 24x7, i.e., any time of the day and any day of the week. The Reserve
Bank of India stated earlier in December 2019 that bank customers will be able to transfer
funds through NEFT around the clock on all days including weekends and holidays from 16
December.[66] In RTGS, transactions are processed continuously 24x7.[67]

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 Government of
India, 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.[68]

RBI issue taxable bonds for investments. From 1 July 2020, RBI is offering Floating Rate
Savings Bonds, 2020 (Taxable) – FRSB 2020 (T). The interest on the bonds is payable semi-
annually on 1 Jan and 1 July every year. The coupon on 1 January 2021 shall be paid at
7.15%. The Interest rate for next half-year will be reset every six months, the first reset being
on 1 January 2021. There is no option to pay interest on cumulative basis.[69]

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:[70]

 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.[70]

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 issued on 8 November 2016. The old series of ₹1,000 and
₹500 notes were banned on 8 November 2016, and are no longer in use.

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

Bankers' 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.[75]
Commercial banks create credit. It is the duty of the RBI to control the credit through the
CRR, repo rate, and open market operations. As the bankers' 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 providing emergency advances to the banks.

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
provides information about identifying fake currency.[76]

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. After 1 July 2014, to exchange more than 15 pieces of '500 and '1000 notes, non-
customers must furnish proof of identity and residence as well as show aadhar to the bank
branch in order 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.

Developmental role

The central bank has to perform a wide range of promotional functions to support national
objectives and industries. 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.

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.
Banker to the Government

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.[79] 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.

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.

CSD for G-Sec (Government Securities)

Public Debt Office (PDO) acts as CSD (Central Securities Depository) for G-Sec.

MIFOR (Mumbai Interbank Forward Offer Rate)

With LIBOR cessation in 2021, RBI is set to replace MIFOR with a new benchmark. MIFOR
has LIBOR as one of the components and used in interest rate swap (IRS) markets.

DIFFERENT RATES SET BY RBI

Repo rate

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI
lends money to the commercial banks for a short-term (a maximum of 90 days). When the
repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it
more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants
to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is
increased, banks can't carry out their business at a profit whereas the very opposite happens
when the repo rate is cut down. Generally, repo rates are cut down whenever the country
needs to progress in banking and economy.

Policy repo rate 6.50%

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 in which commercial bank Park their surplus in RBI 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 3.35%.

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.

Statutory liquidity ratio (SLR) 18.00%

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. 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.

It is currently set to 4.65%.

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. A
1% change in CRR affects the economy by ₹1.37 trillion. An increase draw this amount from
the economy, while a decrease injects this amount into the economy. So if a bank has ₹2
billion (US$25 million) of NDTL then it has to keep ₹80 million (US$1.0 million) in cash
with RBI. RBI pays no interest on CRR.

The RBI has set CRR at 4.5% .

SEBI
Securities and Exchange Board of India (SEBI) was first established in 1988 as a non-
statutory body for regulating the securities market. It became an autonomous body on 30
January 1992 and was accorded statutory powers with the passing of the SEBI Act 1992 by
the Parliament of India. SEBI has its headquarters at the business district of Bandra Kurla
Complex in Mumbai and has Northern, Eastern, Southern and Western Regional Offices in
New Delhi, Kolkata, Chennai, and Ahmedabad respectively. It has opened local offices at
Jaipur and Bangalore and has also opened offices at Guwahati, Bhubaneshwar, Patna, Kochi
and Chandigarh in Financial Year 2013–2014.

Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.

Organisation structure

Madhabi Puri Buch took charge of chairman on 1 March 2022, replacing Ajay Tyagi, whose
term ended on 28 February 2022. Madhabi Puri Buch is the first woman chairperson of SEBI.

The board comprises:

Name Designation

Madhabi Puri Buch Chairman

S.K Mohanty Whole time member

Ananth Narayan G Whole time member

Ashwini Bhatia Whole time member

Ajay Seth Part-time member

Rajesh Verma Part-time member

M. Rajeshwar Rao Part-time member

V Ravi Anshuman Part-time member

Objectives of SEBI
Following are some of the objectives of the SEBI:

1. Investor Protection: This is one of the most important objectives of setting up SEBI. It
involves protecting the interests of investors by providing guidance and ensuring that the
investment done is safe.

2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange

3. To develop a code of conduct for the financial intermediaries such as underwriters,

brokers, etc.
4. To maintain a balance between statutory regulations and self regulation.

Functions of SEBI
SEBI has the following functions

1. Protective Function

2. Regulatory Function

3. Development Function

The following functions will be discussed in detail

Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To
prevent such trading SEBI has barred the companies to purchase their own shares from the
secondary market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price
of securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.

c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.

Regulatory Function: Regulatory functions involve establishment of rules and regulations

for the financial intermediaries along with corporates that helps in efficient management of
the market.

The following are some of the regulatory functions.

a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.

b. Regulating the process of taking over of a company.

c. Conducting inquiries and audit of stock exchanges.

d. Regulates the working of stock brokers, merchant brokers.

Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.

1. Training of intermediaries who are a part of the security market.

2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.

3. By making the underwriting an optional system in order to reduce cost of issue.

Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.

It meets the needs of the following groups:

1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.

2. Investors: It provides protection and supply of accurate information that is maintained on a

regular basis.

3. Intermediaries: It provides a competitive market for the intermediaries by arranging for

proper infrastructure.

SEBI departments
SEBI regulates Indian financial market through its 20 departments.

 Commodity Derivatives Market Regulation Department (CDMRD)

 Corporation Finance Department (CFD)
 Department of Economic and Policy Analysis (DEPA)
 Department of Debt and Hybrid Securities (DDHS)
 Enforcement Department – 1 (EFD1)
 Enforcement Department – 2 (EFD2)
 Enquiries and Adjudication Department (EAD)
 General Services Department (GSD)
 Human Resources Department (HRD)
 Information Technology Department (ITD)
 Integrated Surveillance Department (ISD)
 Investigations Department (IVD)
 Investment Management Department (IMD)
 Legal Affairs Department (LAD)
 Market Intermediaries Regulation and Supervision Department (MIRSD)
 Market Regulation Department (MRD)
 Office of International Affairs (OIA)
 Office of Investor Assistance and Education (OIAE)
  Office of the chairman (OCH)
 Regional offices (ROs)

MINISTY OF FINANCE

The Ministry of Finance is a service within the Indian Government dealing with the Indian
economy, acting as the Treasurer of India. In particular, it concerns tax, financial law,
financial institutions, financial markets, institutional and provincial finances, and the Union
Budget.

The Ministry of Finance is the main regulatory authority for the four public services, namely
Indian Revenue Service, the Indian Audit and Accounts Service, Indian Economic Service
and the Indian Civil Accounts Service. It is also a senior management officer of one of the
central operating services, namely the Indian Cost and Management Accounts Service.

R. K. Shanmukham Chetty was the first Finance Minister of independent India. He presented
the first budget of independent India on 26 November 1947.

Functions of Ministry
 Ensuring national and government financial stability.
 Allocate annual costs for the implementation of government infrastructure projects.
 Ensuring food security for the country; and public safety through TAP and SCP schemes.
 Provide policies and guidelines to promote national economic growth.
 To provide quality service to the various customers of the Unit.
 To develop and establish adequate human resource management.
 Improve the functions of administrative support services.
 Develop and implement a fully integrated Public Works Accounting system.
 Improving the structure and format of Consolidated National Accounts.

Main Departments Under Finance MINISTRY

Department of Economic Affairs

The Department of Economic Affairs is the primary agency of the Union Government to
formulate and monitor national economic policies and programs that affect the domestic and
international aspects of economic governance. The main function of this department is to
prepare and present the Union Budget in Parliament and the Provincial Government Budget
under the Presidential Act and the administration of the union premises.
Department of Expenditure

The Treasury Department is the main department responsible for overseeing the Public
Finance Management System (PFMS) in Central Government and state financial matters. The
main functions of the department include pre-evaluation of the approval of major
programs/projects (both Program and non-Programme costs), managing a large portion of
Central Referral budget sources, and the implementation of the recommendations of the
Finance Commission and Medium Revenue, which oversees expenditure management in
Central Organizations.

Department of Revenue

The Treasury is operating under the direction and control of the Secretary (Revenue).
Exercises control over matters relating to all direct and indirect union taxes through two
statutory Boards, namely, the Central Direct Tax Board (CBDT) and the Central Tax and
Customs Board (CBIC).

Department of Financial Services

The Department of Financial Services oversees Banks, Insurance, and Financial Services
provided by various government agencies and private companies. It also oversees pension
reform and Industrial Finance and Small, Medium and Medium Enterprises.

Department of Investment and Public Asset Management

The Investment Department has been renamed the Department of Investment and Public
Asset Management or ‘DIPAM’, which is a decision aimed at managing the Institute’s
investment equity equally, including its non-investment in state-owned enterprises.

Department of Public Enterprises

The Department of Public Enterprises, which was previously part of the Department of
Industry and Public Enterprises, will now be under the Department of Finance. The
Department of Finance will now have six departments, and the parent division of DPE, the
Department of Hard Industry and Public Enterprises, will now be called the Department of
Hard Industry.

What are the Responsibilities of a Finance Minister?

The Minister of Finance is responsible for the overall portfolio of finance and is responsible
for the following:

 Budget policy and policy advice, and review of government programs.

 Government accountability for finance, governance and financial management
structures, including grants and procurement policy.
 Adviser to shareholders in Government Business Enterprises (GBEs) and trading
entities treated as GBEs.
 Policy direction and management of applications for charitable action and withdrawal
of debts owed to the Commonwealth.
  Comcover policy guide, self-regulatory insurance fund, and risk policy.
 General policy guidelines for Commonwealth official authorities.
 Pension provisions for Australian Government employees under the citizens and
members of parliament, as well as the retirement benefits of Governors-General,
Government Judges and District Court Judges.
 Sales of goods.
 Policy advice on Future Fund and Australian Government Investment Funds and
authorization of payments from Australian Government Investment Funds to
organizations.

MONETORY AND FISCAL POLICY

Monetary Policy
Central banks typically use monetary policy to either stimulate an economy or to check its
growth. By incentivizing individuals and businesses to borrow and spend, the monetary
policy aims to spur economic activity. Conversely, by restricting spending and incentivizing
savings, monetary policy can act as a brake on inflation and other issues associated with an
overheated economy.

The Fed frequently uses three different policy tools to influence the economy:

 Open Market Operations: Open market operations are carried out on a daily basis when the
Fed buys and sells U.S. government bonds to either inject money into the economy or pull
money out of circulation.1
 Reserve Requirements: By setting the reserve ratio, or the percentage of deposits that banks
are required to keep in reserve, the Fed directly influences the amount of money created
when banks make loans.
 Discount Rate: The Fed also can target changes in the discount rate, which is the interest rate
it charges on loans it makes to financial institutions. This tool is intended to impact short-
term interest rates across the entire economy.

Fiscal Policy
Fiscal policy refers to the steps that governments take in order to influence the direction of
the economy. But rather than encouraging or restricting spending by businesses and
consumers, fiscal policy aims to target the total level of spending, the total composition of
spending, or both in an economy.

The two most widely used means of affecting fiscal policy are:

 Government Spending Policies: Governments can increase the amount of money they spend
if they believe there is not enough business activity in an economy. This is often referred to
as stimulus spending. They can borrow money by issuing debt securities (like government
bonds) if there are not enough tax receipts to pay for the spending increases, allowing them
to accumulate debt. This is referred to as deficit spending.
  Government Tax Policies: By increasing taxes, governments pull money out of the economy
and slow business activity. Fiscal policy is typically used when the government seeks to
stimulate the economy. It might lower taxes or offer tax rebates in an effort to encourage
economic growth. Influencing economic outcomes via fiscal policy is one of the core tenets
of Keynesian economics.

Monetary Policy Fiscal Policy

Definition
It is a financial tool that is used by the central
It is a financial tool that is used by the central
government in managing tax revenues and
banks in regulating the flow of money and the
policies related to expenditure for the benefit
interest rates in an economy
of the economy
Managed By
Central Bank of an economy Ministry of Finance of an economy
Measures
It measures the interest rates applicable for It measures the capital expenditure and taxes
lending money in the economy of an economy
Focus Area
Stability of an economy Growth of an economy
Impact on Exchange rates
Exchange rates improve when there is higher
It has no impact on the exchange rates
interest rates
Targets
Monetary policy targets inflation in an
Fiscal policy does not have any specific target
economy
Impact
Monetary policy has an impact on the Fiscal policy has an impact on the budget
borrowing in an economy. deficit.