IILS India
MODULE II: INDIAN ECONOMYPUBLIC FINANCE AND FISCAL POLICYGENERAL CONCEPTS OF BANKING: RESERVE BANK OF INDIA (RBI)After reading this unit you should be able to understand:What is RBIOrigin of RBIHow RBI works?INTRODUCTION“The?Reserve Bank of India?(RBI) is India's?central bank, which controls the issue and?supply?of the?Indian rupee. RBI is the regulator of entire?Banking in India. RBI plays an important part in the Development Strategy of the?Government of India”- According to Wikipedia. Now let us understand in detail what really RBI is and how is it different from other commercial banks, how it works and how it helps the economy to regulate. Like any other central bank, the RBI is the Central Bank of India which was established on April1,01, 1935, acts as a sole currency authority of the country. It was nationalized on January 1, 1949.It issues notes of every denomination, except one-rupee note and coins and small coins, through the Issue Department of the Bank. One- rupee notes and coins and small coins are issued by the Government of India. In actuality, the RBI also issues these coins on behalf of the Government of India. At present, notes of denominations of rupees two, five, ten, twenty, fifty, one hundred and five hundred are issued by the RBI.CHART 1: ORIGIN OF RBICHART II: ORGANISATION OF RBIFUNCTIONS OF RBICURRENT RBI GOVERNOR: MR. SHAKTIKANTA DASCENTRAL OFFICE: MUMBAIRBI formulates, implements and monitors India’s monetary policy which help maintain price stability, ensuring adequate flow of credit to productive sectors and financial stability.RBI issues currency and coins and exchanges and destroys currency notes and coins unfit for circulation.It acts as a banker and debt manager to government of India by performing merchant banking functions for central and state governments, acting as their banker and determining the best to raise money in debt markets to help the government finance its requirements.Acts as a banker to banks by enabling, clearing and settlement of inert bank transactions, maintains bank’s account for statutory reserve requirements and acts as the lender of last resort.RBI also manages foreign exchange. It regulates transactions related to the external sector, enables development of the foreign exchange market, ensures smooth functioning of domestic and forex market and manages India’s foreign currency assets and gold reserves.The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.The amended RBI Act also provides for the inflation target to be set by the Government of India once in every 5years.THE IMPORTANT INSTRUMENTS OF MONETARY POLICY: V.IMPREPO RATE : It is the rate at which the RBI lends money to commercial banks in the event of shortfall of funds. Present repo rate is 4.40%REVERSE REPO RATE: If the bank has surplus money they can park these excess liquidity with RBI and Central Bank will pay interest on this. This interest is called reverse repo rate. The present repo rate is 4%. It can be said that it is the opposite of repo rate.BANK RATE: When banks want to borrow long term funds with RBI, it is the rate e at which RBI charges them. It is for non collateralized loan. Current bank rate is 5.40%CASH RESERVE RATE (CRR): The ratio specifies minimum fraction of the total deposits of customers which commercial banks have to hold as reserves either in cash or in deposits with the central bank. Banks gets no interest on the cash reserve, they want CRR to be as much less as possible. Present CRR is 3%.STATUTORY LIQUIDITY RATIO (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold is SLR. Banks et interest on their investment in such liquid assets. Present SLR is 18.50%.OPEN MARKET OPERATIONS (OMO): It is the activity of buying and selling of government securities in open market to control the supply of money in banking system. When there is excess of money, RBI sells the government securities thereby taking away excess liquidity. Similarly when economy needs more liquidity, RBI buys government securities and infuses more money supply into the economy.RBI CONROL MONEY FLOW IN THE SITUATION OF INFLATIONRBI EXPAND MONEY FLOW IN THE SITUATION OF DEFLATIONREFERENCES: ................
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