RBI

INTRODUCTION
 The central bank is the Apex bank that control the
entire banking system of country
 It is the sole agency of note issusing and control the
supply of money in the economy
 It serves as a banker to the government and manages
forex(foreign exchange) reserves of the country
 It regulates the banking system
 It control money supply
 In india central bank is rbi
 USA –Federal Reserve System
 UK Central Bank-Bank of England

Money and banking (central

bank)
Bank of issuing notes(currency authority function
of CB)
Banker to the government (management of
government bank)
Banker to the agent
Financial advisory to the government
Manage the accounts of government
Agent to government(securities and bonds buys
and sell)
Control,regulate and stabilise money supply in the
economy.

Function of central bank

QUALITATIVE INSTRUMENT
 A. BANK RATE
B.REPO RATE
C.REVERSE REPO RATE
D.CASH RESERVE RATIO
 E.STAUTORY LIQUID RATIO
OPEN MARKET OPERATION

Instrument of credit control in

economy
 Rate of interest at which RBI lends money to the commercial
banks .it relates to the instant immediate loan requirement of the
commerical bank.
 Rise in bank rate
 Rise in market rate of interest
 Rise in cost of capital
 Fall in demand of credit
 Fall in supply of money
 Inflation is controlled
 Fall in bank rate
 Fall in market rate of interest
 Fall in cost of capital
 Rise in demand for credit
 Rise in supply of money
 Deflation is controlled and inflation increase

Bank rate
 Sale and purchase of securities in the open market by the RBI on behalf of
the government
 Selling the securities (like NSC) RBI soaks liquidity
 Buying the securities RBI release liquidity
 Purchase of securities by RBI
 RBI realse liquidity
 Rise in cash reserve of commerical bank
 Rise in credit creation capacity of commerical bank
 Rise in money supply
 Rise in inflation
 Sales of securities by RBI
 Soaks liquidity
 Fall in cash reserve of commerical bank
 Fall in credit creation capacity of commerical bank
 Fall in money supply
 Inflation is contolled

Open market operation

 Rate at which the RBI(CENTRAL BANK) offers short period loans
to the commerical banks by buying the government securities in
open market is called Repo Rate.
 In fact it is a Repurchase Rate.
 Rise in Repo rate
 rise in cost of capital
 Fall in demand for credit
 Fall in supply of money by the commercials bank
 Inflation is controlled
 Fall in Repo rate
 Fall in cost of capital
 Rise in demand for credit
 Rise in supply of money by the commerical banks
 Deflation is contolled

REPO RATE
 Rate at which the RBIaccepts deposits from commerical banks (through
government securities)is called Reverse Repo Rate .It is called Reverse
Repurchase Ratw.
 Fall in Reverse Repo Rate
 Less funds are parked by commerical banks with the RBI to generate
interest income
 More funds funds are parked by the commerical banks with the RBI ,for
creation of credit
 Supply of money increases
 Deflation is controlled.
 Rise in reverse repo rate
 More funds are parked by the commerical banks with the RBI to generate
interest income
 Less funds are used as CRR-funds with the RBI ,for the creation of credit
 Supply of money decrease
 Inflation is controlled

Reverse repo rate

 Minimum percentage of a bank’s total deposits required to be
kept with the RBI.
 It is fixed by the RBI and is varied from time to time regulate
the supply of money in the economy
 To control and regulate supply of money
 RISE IN CRR
 Rise in cash reserve for a given amount of demand deposits
 Fall in money supply of commerical banks
 Inflation is controlled
 FALL IN CRR
 Fall in cash reserve for given amount of demand deposits
 Rise in the money supply of the commerical banks
 Deflation is controlled

Cash Reserve Ratio(CRR)

 Every bank is required to maintain is fixed percentage of its asses in
the form of liquid assets called SLR
 Liquid assets 1.cash 2.gold 3.unencumbered approved securities
 Rate of SLR-Fixed by RBI varied from time to time
 Rise in SLR
 Rise in liquid assets to be held by commerical bank with themselves
 Fall in the availability of fund for CRR-deposits with RBI
 Fall in the money supply of the commercial banks.
 Inflation is controlled
 Fall in SLR
 Fall in liquid assets to be held by the commerical bank with
themselves
 Rise in the availability of fund for CRR –deposits with the RBA
 Rise in money supply of commerical bank
 Deflation contolled

STAUTORY LIQUID RATIO

 MARGIN REQUIRMENT
Difference between the current value of the security
offered for loan (called collateral and the value of loan
granted)
Ex.A person mortgages his house worth Rs.1 crore with
bank for the loan of Rs.90 lakh ,the margin
requirements in the case Rs 10 lakh
Rise in the Margin Requirements
Fall in the demand for credit
Fall in supply of credit by the commerical bank
Fall in money supply
Inflation is controlled.

QUALITATIVE INSTRUMENT OF
CREDIT CONTROL
Fall in margin requirements
rise in demand for credit
Rise in supply of credit by commerical
bank
Rise in money supply
Deflation in controlled
 Rationing of credit is introduced when the supply of credit is to
be checked particularly for speculative activities in the
speculative activities in the economy the RBI fixes credit quota
limit for different business activities
 The commerical bank cannot exceeds the quota limit while
granting loans.
 Introduction of credit rationing
 Decrease the supply of credit by the commercial bank
 Decrease the supply of money
 Inflation is controlled
 Withdrawal of credit rationing
 Increase the supply of credit by the commerical bank
 Increase the supply of money
 Deflation is controlled

Rationing of credit (credit quota)

It is advice to the commerical bank by the
RBI to follow its advices
The bank are adviced
Restricts loan during inflation
Liberal in lending during deflation.

Moral suasion