RBI V/S INDIAN GOVERNMENT

PRESENTED BY
VYSHNAV.PC
VYSHAK.M
VISHNU.PV
SHIVAM SINGH
AKSHAY MOHAN
 INTRODUCTION

 The reserve bank of India (RBI) is India's central banking institution

 It was established on 1st April 1935 during the British raj in accordance
with the provisions of reserve bank of India 1934 . After
recommendation from Hilton young commission
 The reserve bank of India was nationalised in 1949 under the reserve
bank (transfer of public ownership ) Act, 1948
 The head quarters of RBI are located in Mumbai
 RBI 19 regional offices most of them in state capitals and 9 sub offices
 Present governor: shaktikanati das
 Functions of RBI

 Issue of currency
 Development role
 Banker to government
 Banker to bank
 Formulate monitory policy
 Manager of foreign reserve
 Act as a clearing house
 Regulations of banking system
OBECTIVES AND REASONS FOR ESTABLISHMENT
OF RBI
 To manage the monetary and credit system of country
 To stabilize internal and external value of rupee
 For balanced and systematic development of banking in the
country
 For the development of organized money market in the
country
 To establish monetary relations with other countries of the
world and international financial institutions
 For centralization of cash reserve of commercial banks
 Instruments of Monetary policy of RBI

 Open Market Operations

An open market operation is an instrument of monetary policy which
involves buying or selling of government securities from or to the public
and banks. 
 Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks
are required to keep with RBI in the form of reserves or balances. As of 27
December 2018, the CRR is 4.00 percent
 Statutory Liquidity Ratio
Every financial institution has to maintain a certain quantity of liquid
assets with themselves at any point of time of their total time and demand
liabilities. The current SLR is 19.50%
 Bank Rate Policy
The bank rate, also known as the discount rate, is the rate of interest
charged by the RBI for providing funds or loans to the banking system. As
of 1st August 2018, the bank rate is 6.75 percent
 Credit Ceiling
In this operation, RBI issues prior information or direction that loans to the commercial
banks will be given up to a certain limit. In this case, commercial bank will be tight in
advancing loans to the public.
 Credit Authorisation Scheme
Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya
was the chairman of RBI. Under this instrument of credit regulation, RBI, as per the
guideline, authorize the banks to advance loans to desired sectors
 Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to its clients generally against government
securities. Reverse repo rate is the rate at which RBI borrows money from the commercial
banks
 Role of RBI IN INFLATION CONTROL

 Monetary policy: it includes the interest rate. When the bank

increases the interest rate than there is a reduction in the
borrowers and people try to save more as the rate of interest as
increased
 Fiscal policy: it is related to direct accesses and government
spending. When direct tax increases and government spend
increased then the disposed income of the people reduces and
hence the demand reduced
Structure of RBI
 Role of government in inflation
control
 Contractionary Monetary Policy: The goal of a 
Contractionary Monetary Policy is to reduce the money supply within
an economy by decreasing bond prices and increasing interest rates.
This helps reduce spending because when there is less money to go
around, those who have money want to keep it and save it, instead
of spending it.
 There are three main tools to carry out a contractionary policy
  increase interest rate
 increase reserve requirements
 Reducing the Money Supply
 Governments Fight
Deflation
Monetary Policy Tools
 Lowering bank reserve limits
 Open market operations
 Lowering the target interest rate 
   Quantitative easing 
 Negative interest rates 

Fiscal Policy Tools

 Increase government spending 
 Cut tax rates 
RBI controls deflation

 As RBI controls money supply, inflation is regulated

when it resorts to dear money policy or increases
rate of interest.
 When it resorts to cheap money policy, investment
is increased as rate of interest goes down. When
investment increases, income and employment
rises and deflation is controlled.
 In 2018, the RBI and the government developed differences over at least six
major issues
1. Interest rates 
The spat began with the government unhappy with the inflation-focused RBI for not cutting
interest rates – and even raising them. However, it spilled over into regulation, something
the central bank believes is its exclusive domain. What followed was a host of issues
related to regulation where both the parties asserted against each other. 

2. NPA classification
RBI’s February 12 circular on classification of non-performing assets (NPAs) and norms of
loan restructuring was the next flashpoint. The government saw it as overly harsh, and
indeed it drove all but two state-run lenders into the red. 
3. Nirav Modi scam 
Around the same time, as the Nirav Modi scam broke, the government hit out at the RBI on
supervision, drawing an almost-immediate rebuttal with Patel seeking more powers to
oversee public sector banks so that they are at par with their private sector peers. 
4. NBFCs 
The government has been insisting that RBI step in to provide relief to non-banking
finance companies (NBFCs), which are grappling with a cash crunch after IL&FS
defaulted on repayments. The central bank has refused to play ball 
5. Mor's removal 
In September, Nachiket Mor was removed from the RBI board more than two years
before his term was to end without formally informing him. This irked the central bank
brass. His removal was seen to be linked to his vocal opposition to the government's
demand for a higher dividend 
6. Payments regulator 
A separate payments regulator has been another friction point with RBI stating its
position publicly on why it did not support the move. In fact, it went to the extent of
releasing its dissent note on a separate regulator on its website. 
 Main conflict between RBI and
Government
 Section 7 of the Reserve Bank of India Act
Section 7(1) of the RBI Act says: "The Central Government may from time to time give
such directions to the Bank as it may, after consultation with the Governor of the Bank,
consider necessary in the public interest." Section 7(2) gives the government powers to
entrust the running of the RBI to its board of directors
 RBI's reserves
The RBI keeps a large reserve of cash in its money jar, which the government is looking
to dip its fingers into, financial analysts and economists say. The government may be of
the view that the RBI's large reserve cash, if it is sitting idle, may be put into use. But
the RBI is called the "lender of last resort" for a reason -- it may need its reserves to
step in if a crisis threatens to bring down the entire financial system
 Dividends to government
The RBI holds Rs. 28,724 billion in reserves, which includes foreign currency assets,
gold and sovereign debt receipts, according to the latest weekly data released by the
RBI. The RBI also gives some of the profit it earns from interest on its bonds to the
government. But the government may want more "in public interest“.
 Handling of weak public sector banks
Differences between the government and the RBI have cropped up over various issues,
including the central bank's handling of weak public sector banks under the PCA
framework and ways to resolve bad loans in the power sector.
 Prompt corrective action or PCA framework
The government wants the RBI to exempt power companies under the prompt corrective
action or PCA framework, which outlines triggers for declaring a loan account as stressed
or non-performing asset (NPA), people familiar with the matter said. The RBI uses the
PCA framework -- based on three parameters -- as an early-warning tool to check danger
signs in the health of lenders. The PCA framework is applicable only to commercial
banks.
 Easing loans to small and medium enterprises or SMEs
The government has asked the central bank, reportedly using the privilege provided
under Section 7 of the RBI Act, to ease its hold on the reserves for providing liquidity to
the market. It has also sought for some constraints on banks for loans to small and
medium enterprises or SMEs to be removed
 Emergence of the conflict
Time and the issue
2010 -Setting up of a
regulatory super body –
the Financial Stability and
Development Council
(FSDC) by the government to
coordinate financial
regulation functions. Finance
Minister is the Chairman of
FSDC.
2012 – Continuous increase
in repo rate by the RBI
despite requests for repo cut rate by the RBI. He says that the
by the Finance Ministry.
2013 – Financial Sector
Legislative Reforms
Commission (FSLRC) makes
its recommendations.
Finance Ministry
Finance Minister was made as
the Chairman of FSDC.
Finance Minister P Chidambaram
disappointed about the
consecutive increase in Repo
government will make a walk-
alone in the growth path.
Made several recommendations
that changed the relationship
between the Government and
the RBI, including taking away
the functions of deposit
The fact
Usually, in every financial
regulation bodies, the RBI
Governor gets the apex
authority. But here, the Finance
Ministry occupied the
Chairman’s role.
D Subbrao was not cutting the
repo rate. He said that lowering
rates will add to excessive
lending.
Most of the current initiatives by
the government to curtail the
regulatory powers of the RBI are
rooted in the recommendations
 The proposal was
2017- Proposal for the
The Bill was proposed to abandoned. But again,
creation of a Resolution
take away deposit deposit insurance is a
Corporation through
insurance business from core central banking
Financial Resolution and
the RBI to the proposed business. Taking away
Deposit Insurance Bill
Resolution Corporation. the function from the RBI
(later abandoned).
will be problematic.
The Government included
several government Expansion of FSDC diluted
2018 – Expansion of FSDC
secretaries in the FSDC. the representation of real
by including several
Government members regulators including the RBI,
government secretaries.
increased to 8 (out of total SEBI, PFRDA and IRDA.
12 members)

The section powers

2018 Government The Government-RBI
government to issue
threatens to invoke interaction after the
directives to the RBI on
section 7 of the RBI Act invoking of section 7 will
the affairs and
for the first time since give higher command to
businesses of the RBI in
the inception of the RBI the government in the
consultation with the
in 1935. RBI affairs.
Governor.
HIGHLIGHTS
 The slugfest between the RBI and the government has come to the
fore now but it had been brewing, at least, since February
 On October 26, RBI deputy governor Viral Acharya virtually accused
the government of interfering with the working of the central bank
 Union Finance Minister Arun Jaitely blamed the RBI for unmanageable
figures of stressed assets
FINDINGS

 The Reserve Bank of India wants more powers over regulating

public sector banks (PSBs)
 It feels that the government should not dictate the quantum of
its surplus that can be paid as annual dividend
 It is miffed that the Centre has suggested a separate payments
regulator.