Reserve Bank of India and Monetary Policy brief description on the topic

1. BPLN0603 – PUBLIC FINANCE
RESERVE BANK OF INDIA
AND MONETARY POLICY
Submit To Submit By
Premjeet Das Gupta Madhavi Nikose
Assistant Professor Bhupendra Pratap Singh
Jyoti

3. RESERVE BANK OF INDIA
The Reserve Bankof Indiawas establishedonApril 1,1935 inaccordance withthe provisionsof the
Reserve Bankof India Act,1934.
The Central Office of the Reserve BankwasinitiallyestablishedinCalcuttabutwas permanently
movedtoMumbai in1937. The Central Office iswhere the Governorsitsand where policiesare
formulated.
Thoughoriginallyprivatelyowned,since nationalisationin1949, the Reserve Bankisfully ownedby
the Governmentof India.
OBJECTIVE
To regulate the issue of Banknotesandthe keepingof reserveswithaview tosecuringmonetary
stabilityinIndiaandgenerallytooperate the currencyandcreditsystemof the country to its
advantage.
BRIEF HISTORY
The historyof Reserve Bankof Indiathusnotonlytraces the evolutionof the central bankinginIndia
but alsoservesasa work of reference andanimportant contributiontothe literature onmonetary,
central bankinganddevelopmenthistoryof India.We have sofar publishedfourvolumesof our
history.
Volume 1, 1935 to 1951 - It detailsthe initiativestakentoputinplace a central bankfor Indiaand
coversthe formative yearsof the Reserve Bank.Ithighlightsthe challengesfacedbythe Reserve
Bank andthe GovernmentduringWorldWarII and the post-independence era.
Volume 2, 1951 to 1967 - This period heraldedaneraof plannedeconomicdevelopmentin India.
Capturesthe initiativestaken tostrengthen,modifyanddevelopthe economicandfinancial
structure of the country. Apartfrom the Reserve Bank’srole asthe monetaryauthority,ithighlights
the endeavourtoestablishaninstitutional infrastructure foragricultural andlong-termindustrial
creditin India.
Volume 3, 1967 to Animportanteventof this periodwasnationalisationof fourteenbanksin1969,
leadingtospreadof bankingin country’shinterland.The issuesof safetyandprudence inbanking
alsogainedprominence. The volume alsodealswiththe mattersof co-ordinationbetweenthe
Reserve Bankandthe Government.
Volume 4, 1981 to 1997 - Publishedintwoparts,PartA and Part B.
Part A focussesonthe transformationof the Indianeconomyfromaregime of restrictionsto
progressive liberalisation.The 1980s were characterisedbyan expansionaryfiscal policy
accompaniedbyautomaticmonetisationof budgetarydeficitthatstrainedthe conductof monetary
policy.The domesticmacroeconomicimbalancescombinedwithdeterioratingexternal conditions
triggeredthe balance of paymentscrisisof 1991.
Part B of the volume capturesthe implementationof structural andfinancial sectorreforms:fiscal
correctionandphasingout of automatic monetisation;developmentof governmentsecurities
market;and greaterintegrationamong money,securitiesandforeignexchangemarkets.Italso
coversthe transformationinbanking withliberalisationandimprovementincreditdelivery.

4. ORGANISATION STRUCTURE
GOVERNOR
DEPUTY GOVERNOR
EXECUTIVE DIRECTORS
PRINCIPAL CHIEF GENERAL MANAGERS
CHIEF GENERAL MANAGERS
GENERAL MANAGERS
DEPUTY GENERAL MANAGERS
ASST. GENERAL MANAGERS
MANAGERS
ASST. MANAGERS
SUPPORT STAFF
LEGAL FRAMEWORK
A legal framework,setof rules,procedural steps,ortest,oftenestablishedthroughprecedentin the
commonlaw,throughwhichjudgmentscanbe determinedinagiven legal case.
Acts administeredby Reserve Bank of India
o Reserve Bankof IndiaAct,1934
o PublicDebtAct, 1944/GovernmentSecuritiesAct,2006
o GovernmentSecuritiesRegulations,2007
o BankingRegulationAct,1949
o ForeignExchange ManagementAct,1999
o SecuritisationandReconstructionof FinancialAssetsandEnforcementof Security
Interest
o Act, 2002 (ChapterII)
o CreditInformationCompanies(Regulation) Act,2005
o PaymentandSettlementSystemsAct,2007
o PaymentandSettlementSystemsRegulations,2008 and Amendedupto2011 and
BPSS
o Regulations,2008
o The PaymentandSettlementSystems(Amendment) Act,2015 - No. 18 of 2015
FUNCTIONSOFRBI
1. Issue of Currency
The RBI is the sole authorityforthe issue of currencyinIndiaotherthan one rupee notes
and subsidiarycoins,the magnitude of whichisrelativelysmall.The RBIisalsocalled'Bank

5. of issue'.The One Rupee notesandcoinsare issuedbythe Central Govt.The Ministryof
Finance.
2. Banker to Government.
It acceptsmoney,makespaymentandalsocarriesouttheirexchange andremittancesfor
the Govt.
It managespublicdebts,advicesthe governmentonthe quantum, timingandterms of new
loans.
It alsosellstreasurybillstomaintainliquidityinthe economy.
Fiscal agentand advisortothe Govt.
3. Banker's Bank
The RBI has extensivepowertocontrol and supervise commercial bankingsystemunderthe
RBI Act, 1934 andthe BankingRegulationAct,1949. The banks are requiredtomaintaina
minimumof cashreserve ratio(CRR) withRBI.The RBI providesfinancial assistance to
scheduledbanksandstate co-operative banks.
4. Custodianof foreignexchange reserves
The RBI is the custodianof monetaryreserve inIndiaandRBIalso isthe custodianof
national reserve of international currency.Ithasto ensure thatnormal shortterm
fluctuationsdonotaffectthe exchange rate.
5. Controllerof credit
Creditcontrol isgenerallyconsideredtobe the principal functionof central bank.Bymaking
frequentchangesinmonetarypolicy,itensuresthatthe monetarysysteminthe economy
functionsaccordingtothe nation'sneedsandgoals.The RBI usesalmostall Quantitative and
Qualitative methodsof creditcontrols.
6. Lenderof last resort
RBI isthe official tenderof the lastresort.Lenderof lastresortmeanscentral bankcoming
to the rescue of other banksintimesof financial crises.
7. Central clearance, settlementand transfer of money
Central bankhas special positionforconductingclearinghouse operations,Inter-bank
transferof fundsand settlementof accounts.i.e.settlingthe mutual Owingsof banks
8. Promotional functions
RBI alsoperformsvarietyof Developmental andPromotional functions.Itisresponsible for
promotingbankinghabitsamongpeople,mobilizingsavings,developmentof the banking
system,andprovisionof finance foragriculture,foreigntrade andsmall scale industries
9. Collectionandpublicationof data
It has alsobeenentrustedwiththe taskof collectionandcompilationof statistical
informationrelatingtobankingandfinancial sectorof the economy.
10. Other miscellaneousfunctionsofRBI
It isresponsibleforoverall monetarypolicyinIndialike monetarystability,Stabilityof
domesticprice levels,Maintenance of the International value of the nation'scurrencyetc.
ROLE OF RESERVE BANKOF INDIA
A. The RBI is apex monetaryinstitutionof the highest authorityinIndia.Itplaysanimportant
role instrengthening,developinganddiversifyingthe country'seconomicandfinancial
structure.
B. It isresponsibleforthe maintenance of economicstabilityandassistingthe growthof the
economy.
C. It isIndia's prominentpublicfinancial institutiongiventhe responsibilityforcontrollingthe
country'smonetarypolicy.

6. D. It acts as an advisorto the governmentinitseconomicandfinancial policies.
E. It isresponsibleforthe developmentof anadequate andsound- bankingsysteminthe
country.
F. RBI has to keepinflationarytrendsundercontrol andtosee that the mainprioritysectors
like agriculture,exportsandsmall scale industrygetcreditatcheaprates.
G. It alsohas to protectthe marketfor governmentsecuritiesandchannelize creditindesired
direction.
MONETARY POLICY
As one of the importantrole of RBI is controllingcountry’smonetaryPolicy whichreferstothe use of
instruments to regulate the availability, cost and use of money and credits under the control of
monetary authority, typically the central bank i.e. Reserve Bank of India.
OBJECTIVES
1. Economic Growth
2. Price stability
3. Exchange rate stability
4. Generate Employment
5. Equitable Distribution of Income
Price stabilityisthe primarygoal,while keeping sustainable growthandfinancialstability. Regulatory
and Financial market Policy is important for smooth transmissionof monetary policy and therefore,
they are oftenannouncedalongwiththemonetarypolicyunder separatepart(partB) of themonetary
policy statements.
Recently, the agreement on Monetary Policy Framework between the Government and the Reserve
Bank of India dated February 20, 2015 defines the price stability objective explicitly in terms of the
target for inflation – as measured by the consumer price index-combined (CPI-C) – in the near to
medium-term
(a) Below 6 per cent by January 2016,
(b) 4 per cent (+/-) 2 per cent for the financial year 2016-17 and all subsequent years.
Withthe agreement,ReserveBankhasformallyadoptedaflexibleinflationtargeting(FIT) framework.
TOOLS FOR MONETARY POLICY
Quantitative Credit Control Method- that directly deal with supply in the market
i) CASH RESERVE RATIO - proportion of total deposit which the commercial bank have
to keep with themselves in liquid form.No interest rate on the depositskept by the
RBI.
ii) STATUTORY LIQUID RATIO - proportion of total deposit which the commercial bank
have tokeepwith themselvesinthe formof cashandgold.Itcanbe raisedto40 % by
the RBI in order to control the credit of money in the market.
iii) REPORATE – (RepostandsforRepurchase Option)Reporate are the rate atwhichthe
RBI lends money to the commercial banks in the event of shortfall of funds.
The increase in the Repo rate will increase the cost of borrowing and lending of the
bankswhichwill discourage the publictoborrow moneyandwill encourage themto
deposit.Asthe ratesare hightheavailabilityof creditanddemanddecreasesresulting

7. to decrease in inflation. As on 5th
April 2016, the RBI lowers the repo rate 25 basis
points in the line and set to 6.50 % and increase reverse repo rate.
iv) REVERSE REPO RATE – Rate at which the central bank borrows money from the
commercial bank. It is 100 basis points to the RR. 1 Basis Point equals to 0.01%.
v) BANK RATE – Interest Rate at which the RBI provides long term credit facility to
commercial bank. It is different from Repo rate on the basis of short term and long
term credit facility.
vi) OPEN MARKET OPERATIONS – Buying and selling of Govt. securities in the open
market.
POLICY FRAMEWORK
The framework aims at setting the policy (repo) rate based on a forward looking assessment of
inflation, growth and other macroeconomic risks, and modulation of liquidity conditions to anchor
money market rates at or around the repo rate. Repo rate changes transmit through the money
marketto alterthe interestratesinthe financial system, whichinturninfluence aggregate demand -
a key determinant of inflation and growth.
RBI ROLE IN MONETARY POLICY PROCESS
The Reserve Bank’s Monetary Policy Department (MPD) assists the Governor in formulating the
monetarypolicy.Withviewsof all keystakeholdersinthe economy,advice of the Technical Advisory
Committee (TAC),andanalytical workof the Reserve Bankcontributetothe processforarrivingatthe
key decision on policy repo rate. The Financial Markets Department (FMD) operationalises the
monetarypolicy,mainlythroughday-to-dayliquiditymanagementoperations.The Financial Markets
Committee (FMC) meets daily to review the consistency between policy rate, money market rates,
and liquidity conditions.
The Reserve Bank explains the rationale of its monetary policy stance in a transparent manner,
provides forward guidance on the near-term likely stance of monetary policy to contain uncertainty
arising. Reserve Bank’s has now changed its normal frequency of monetary policy announcements
from eight times in a year (i.e., four quarterly and four mid- quarter) to six times in a year (i.e., bi-
monthly).
The monetary policy formulation is aided by advice and input from:
 Technical Advisory Committee on Monetary Policy
 Pre-policy consultations with bankers, economists, market participants, chambers of
commerce and industry and other stakeholders
 Regular discussions with credit heads of banks
 Feedback from banks and financial institutions
 Internal analysis
IMPACT OF MONETARY POLICY ON INDIAN ECONOMY
It plays a very important role in the development of an economy. Since it involves manipulationof
moneysupply,the level & structure of interestrates& other conditionseffectingthe level of credit.
The central banksignalsthe marketaboutthe availabilityof credit&interestratesthroughthispolicy.
The RBI fixesthe bankrate in thispolicywhichformsthe basisof the structure of interestrates&the
CRR & SLR, whichdeterminesthe availabilityof credit & the level of money supply in the economy.

8. Let us take an example to understand different monetary rate and their impact on economy.
Dates ICICI SBI
Repo
Rate
Reverse
Repo
Rate
Bank
Rate
CRR SLR
Money
Supply
20-Apr-12 18.5 14.5 8 7 9 4.75 23 17500
04-Jan-12 18.75 14.75 8.5 7.5 6 4.75 24 16000
13-Aug-13 18.75 14.75 8 7.5 6 6 24 16000
04-Jul-11 18.25 14.25 8 7.5 6 6 24 16000
07-May-11 18 14 7.75 7 6 6 24 16000
24-Feb-11 17.5 13 7.25 6.5 6 6 24 15100
03-Jan-11 17 12.75 7 5.5 6 6 24 15100
06-Dec-10 16.75 12.5 6.5 5.25 6 6 24 15000
18-Aug-10 16.25 12.25 6 5.25 6 6 24 15100
Effectof change inReporate onbank Prime LendingRate
As the reporate andreverse reporate have directimpacton bankprime lendingrate. Fromyear
2010 to 2012 the repo rate keepsonincreasingfrom6 to 8.5 the PLR of SBIand ICICIalsoincreasing
from12.25 to 14.75 and from16.25 to 18.75 respectively.Butasthe RBI cut downitsRepoRate by
50 pointsthe PLR of banks alsodownby25 points.
Impact of change in CRR and SLR on MoneySupply
As the CRR issame in 2010-11, 2011-12 i.e.6%, there is notso much change inmoneysupplyitisin
between15000-16000. But as it start to decrease in4th
quarterof 2011-12 moneysupplystart
increasingandcrossto 16000. Andin1st quarterof 2012-13, CRR become 4.75 and SLR become 23%
thenMoneysupplyis 17500 cr. inIndianEconomy.
Effecton Increase inMoneysupplyonInflation
As Moneysupplyincreasesinthe economy,there ismore moneyinthe marketwhichultimately
increase the purchasingpowerof people.Because of increaseinpurchasingpowerthe costof
productionincreasesandultimatelyInflationrate increases.
So moneysupplyin2012-13 increasesto17500 cr. The inflationrate become 10.05 from8.65.
So,the change inmonetarypolicyof RBI affectmanyotherratesand whichalsoaffectthe consumer
and these ratesare the instrumentof RBIto control the moneysupplyinthe economy.
REFERENCES
1. www.rbi.org.in
2. www.fincirc.wordpress.com
3. www.academia.edu
4. www.economictimes.indiatimes.com