IntroductionIt is the central bank of India.The Reserve Bank of India was established onApril 1, 1935 in accordance with the provisions of theReserve Bank of India Act, 1934.It was originally constituted with a capital of Rs.5 crores.The entire share capital was contributed privately with theexception of the nominal value of Rs 2.2 lakh subscribedby the central bank.After independence, the reserve bank of India wasnationalized.
RBI Central Office Building, Mumbai
Management Structure of Reserve Bank Of India D. Subbarao Current Governor of R.B.I
Objectives Of R.B.I To manage the monetary and credit system of the country.To stabilizes 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.
For proper arrangement of agriculture finance. For proper arrangement of industrial finance.For proper management of public debts To establish monetary relations with other countries ofthe world and international financial institutions.For centralization of cash reserves of commercial banks. To maintain balance between the demand and supplyof currency.
I --- ISSUER OF CURRENCY NOTES
The RBI has the sole right or authority or monopoly ofissuing currency notes except one rupee note and coins ofsmaller denomination.These currency notes are legal tender issued by the RBI.Currently it is in denominations of Rs.2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powersnot only to issue and withdraw but even to exchangethese currency notes for other denominations.It issues these notes against the security of goldbullion, foreign securities, rupee coins, exchange bills andpromissory notes and government of India bonds.
II---Banker and Debt Manager To Government
TheRBI being the apex monitory body has to work as anagent of the central and state governments.It performs various banking function such as to acceptdeposits, taxes and make payments on behalf of thegovernment. It works as a representative of the government even atthe international level. It maintains governmentaccounts, provides financial advice to the government. It manages government public debts and maintainsforeign exchange reserves on behalf of the government. Itprovides overdraft facility to the government when it facesfinancial crunch.
III---BANKER TO BANKS
The RBI being an apex monitory institution has obligatorypowers to guide, help and direct other commercial banks inthe country.Every commercial bank has to maintain a part of theirreserves with the RBI. The RBI controls the credit created bycommercial banks by varying the proportion of reserves. It facilitates the clearing & rediscounting of promissorynotes, bills of exchange and cheques and also helps in interbank transfer of funds.Similarly in need or in urgency these banks approach theRBI for funds. Thus it is called as the lender of the lastresort.
The RBI controls the credit creation by commercial banks.For this, the RBI uses both quantitative and qualitativemethods.By controlling credit, the RBI achieves the following: Maintains the desired level of circulation of money in the economy. Maintains the stability in the price level prevailing in the economy. Controls the effects of trade cycles Controls the fluctuations in the foreign exchange rate Channelizes credit to the productive sectors of the economy
Along with the routine traditional functions, central banks especiallyin the developing country like India have to perform numerousfunctions. These functions are country specific functions and canchange according to the requirements of that country.Development of the Financial System : The financial systemcomprises the financial institutions, financial markets and financialinstruments. The sound and efficient financial system is aprecondition of the rapid economic development of the nation.The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diversesectors of the economy.Development of Agriculture : In an agrarian economy like ours,the RBI has to provide special attention for the credit need ofagriculture and allied activities. It has successfully renderedservice in this direction by increasing the flow of credit to thissector.
Provision of Industrial Finance : In this regard the RBI has always beeninstrumental in setting up special financial institutions such as ICICI Ltd.IDBI, SIDBI and EXIM BANK etc for the adequate and timely availabilityof credit to small, medium and large industry is very significant.Collection of Data : Being the apex monetary authority of thecountry, the RBI collects process and disseminates statistical data onseveral topics..This data proves to be quite useful for researchers andpolicy makers.Publication of the Reports : This RBI collects and publishes data onseveral sectors of the economy. The reports and bulletins are regularlypublished by the RBI. It includes RBI weekly reports, RBI Annual ReportThis information is made available to the public also at cheaper rates.Promotion of Banking Habits : As an apex organization, the RBI alwaystries to promote the banking habits in the country. It institutionalizessavings and takes measures for an expansion of the banking network.
The reserve bank also performs many supervisory functions. It hasauthority to regulate and administer the entire banking and financialsystem. Some of its supervisory functions are given below.Granting license to banks : The RBI grants license to banks forcarrying its business. License is also given for opening extensioncounters, new branches, even to close down existing branches.Bank Inspection : The RBI grants license to banks working as per thedirectives and in a prudent manner without undue risk. In addition tothis it can ask for periodical information from banks on variouscomponents of assets and liabilities.Control over NBFIs : The Non-Bank Financial Institutions are notinfluenced by the working of a monitory policy. However RBI has aright to issue directives to the NBFIs from time to time regarding theirfunctioning. Through periodic inspection, it can control the NBFIs.
Monetary Policy ByReserve Bank Of India
Monetary policy of India Monetary policy is the process by which the central bank controls thesupply of money in the economy by exercising its control over interestrates in order to maintain price stability and achieve high economicgrowth. It is so designed as to maintain the price stability in theeconomy.Other objectives of the monetary policy of India, as stated by RBI, are:Rapid Economic GrowthPrice StabilityExchange Rate StabilityBalance of Payments (BOP)EquilibriumFull EmploymentNeutrality of MoneyEqual Income Distribution
Instruments of Monetary Policy
I. Quantitative Tools Bank Rate Policy – It refers to rate at which the central bank(i.e. RBI) rediscounts bills and prepares of commercial banks orprovides advance to commercial banks against approvedsecurities. Open Market Operations- It refers to the purchase and/or saleof short term and long term securities by the RBI in the openmarket. The OMO is used to wipe out shortage of money in themoney market Variations in Reserve Ratios- SLR & CRR -RBI increases VRRduring the inflation to reduce the purchasing power and creditcreation. But during the recession or depression it lowers the VRRmaking more cash reserves available for credit expansion.
2. Qualitative ToolsPrescription of margin requirements- It refers to the"proportion of the loan amount which is not financed by the bank". Orin other words, it is that part of a loan which a borrower has to raise inorder to get finance for his purpose.Consumer credit regulation - RBI fixes the quota of credit forcommercial banks. It means at maximum, how much volume of money acommercial bank can grant as loan for a particular activity. Thusby increasing this quota RBI can increase the credit supply in aneconomy and by decreasing quota RBI can restrict credit supply. Moral suasion- It means persuasion and request. To arrestinflationary situation RBI persuades and request the commercial banksto refrain from giving loans for non-essential purposes. On the otherhand, to counteract deflation central bank persuades the commercialbanks to extend credit for different purposes.
Direct action -This method is adopted when a commercial bankdoes not co-operate the central bank in achieving its desirableobjectives. Direct action may take any of the following forms:•Central banks may charge a penal rate of interest over and above thebank rate upon the defaulting banks;•Central bank may refuse to rediscount the bills of those banks whichare not following its directives;•Central bank may refuse to grant further accommodation to thosebanks whose borrowings are in excess of their capital and reserves.