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RBI Functions , Roles and Monetary Policies

It is the central bank of India Established on the 1st of April 1935 under the Reserve Bank of India act. Headquarters in Mumbai Present Governor is Dr. D. Subbarao. Reserve Bank of India was nationalized in the year 1949. It is the monetary authority of India. It is the supervisor of the financial system Issuer of currency

Functions and Roles of Reserve Bank of India

Monetary Authority Issuer of Currency Banker and Debt Manager to Government Banker to Banks Regulator of the Banking System Manager of Foreign Exchange Regulator and Supervisor of the Payment and Settlement Systems Developmental Role

MONETARY AUTHORITY Objectives of Monetary Policy in India Maintaining price stability Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth Financial stability RBIs Approach RBI monitors and analyses the movement of a number of indicators including interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output.

Issuer of Currency
Nations sole note issuing authority. Ensuring an adequate supply of genuine notes. Makes sure there is an adequate supply of coins, produced by the government. Enhance security features to reduce the risk of counterfeiting or forgery. Responsible for the design and production and overall management of the nations currency.

RBIs Approach
Overseeing the production and mgt of distribution of currency. Currency chests at more than 4,000 bank branches contain adequate quantity of notes and coins so that currency is accessible to the public in all parts of the country. Has the authority to issue notes up to value of Rs 10,000/-

Banker and Debt Manager to Government

Managing the governments banking transactions Raising of resources from the public Maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds. Acts as the banker to those state governments that have entered into an agreement with us.

RBIs Approach
Undertaking banking transactions for the central and state governments to facilitate receipts and payments Managing the governments domestic debt Developing the market for government securities to enable the government to raise debt at a reasonable cost. Facilitate transmission of monetary policy actions.

Banker to Banks
Transfer funds and settle inter-bank transactions. All banks operating in the country have accounts with the Reserve Bank

RBIs Approach
Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations. Providing an efficient means of funds transfer for banks. Enabling banks to maintain their accounts with us for purpose of statutory reserve requirements and maintain transaction balances. Acting as lender of the last resort.

Regulator of the Banking System

Licensing and Monitoring governance Prescribing capital requirements Setting prudential regulations. Regulating interest rates in specific areas Initiating new regulation. Prescribing lending to certain priority sectors of the economy Setting appropriate regulatory norms related to income recognition, asset classification, investment valuation, etc.

RBIs Approach
Different departments of the Reserve Bank oversee the various entities that comprise Indias financial infrastructure : Department of Banking Operations and Development Department of Banking Supervision Urban Banks Department Rural Planning and Credit Department Department of Non-Banking Supervision

Manager of Foreign Exchange

The Reserve Bank plays a key role in the regulation and development of the foreign exchange market and assumes three broad roles relating to foreign exchange: Regulating transactions related to the external sector and facilitating the development of the foreign exchange market Ensuring smooth conduct and orderly conditions in the domestic foreign exchange market Managing the foreign currency assets and gold reserves of the country

Regulator and Supervisor of Payment and Settlement Systems

The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, we focus on the development and functioning of safe, secure and efficient payment and settlement mechanisms.

Developmental Role
Expanding access to affordable financial services Promoting financial education and literacy. Ensuring that credit is available to the productive sectors of the economy. Establishing institutions designed to build the countrys financial infrastructure.

RBIs Approach
Deposit Insurance and Credit Guarantee Corporation (1962). Unit Trust of India (1964), the first mutual fund of the country. Industrial Development Bank of India (1964). National Bank of Agriculture and Rural Development(1982). Discount and Finance House of India (1988). National Housing Bank (1989). Securities and Trading Corporation of India (1994).


What is the Monetary Policy?

The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy. It refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The Goal Achieving specific economic objectives, such as low and stable inflation and promoting growth. It is announced twice a year - a slack season policy (AprilSeptember) and a busy season policy (October-March) in accordance with agricultural cycles.

Need of Monetary Policy

Regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.

Aims to maintain price stability, full employment and economic growth.

The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.

Direct Instruments
Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Refinance facilities:

Indirect Instruments
Liquidity Adjustment Facility (LAF) Open Market Operations (OMO) Market Stabilization Scheme (MSS) Repo/reverse repo rate Bank rate

Bank Rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Cash Reserve Ratio All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent.

Inflation Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. RBI can reduce the supply of money or increase interest rates to reduce inflation. Open Market Operations An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.

Money Supply (M3) This refers to the total volume of money circulating in the economy. The RBI has adopted three concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts. The second, M2, is a measure of money supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee. The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.

Statutory Liquidity Ratio Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities.
Repo A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.