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Functions of central bank in india

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Functions of central bank in india

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Functions of central bank in india

  1. 1. Functions Of Central Bank in India: •Introduction •Function of RBI •Limitations •Repo rate and Reverse Repo Rate Presented by Vaghela Nayan Asst. Prof. SDJ International College
  2. 2. Introduction  It is the central bank of India.  The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.  It was originally constituted with a capital of Rs.5 crores. The entire share capital was contributed privately with the exception of the nominal value of Rs 2.2 lakh subscribed by the central bank.  After independence, the reserve bank of India was nationalized.
  3. 3. Management Structure of Reserve Bank Of India
  4. 4. 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.
  5. 5.  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 of the world and international financial institutions.  For centralization of cash reserves of commercial banks.  To maintain balance between the demand and supply of currency.
  6. 6. Functions of the Central Bank in India: 1. Traditional Functions: A. Issuer of currency notes B. Banker and Debt Manager To Government C. Banker to Banks D. Credit control 2. Promotional Functions: 3. Supervisory Functions:
  7. 7. Issuer of currency notes  The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller 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 powers not only to issue and withdraw but even to exchange these currency notes for other denominations.  It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds.
  8. 8. Banker and Debt Manager To Government  The RBI being the apex monitory body has to work as an agent of the central and state governments.  It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government.  It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government.  It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch.
  9. 9. Banker to Banks  The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country.  Every commercial bank has to maintain a part of their reserves with the RBI. The RBI controls the credit created by commercial banks by varying the proportion of reserves.  It facilitates the clearing & rediscounting of promissory notes, bills of exchange and cheques and also helps in inter bank transfer of funds.  Similarly in need or in urgency these banks approach the RBI for funds. Thus it is called as the lender of the last resort.
  10. 10. Credit control  The RBI controls the credit creation by commercial banks. For this, the RBI uses both quantitative and qualitative methods.  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
  11. 11. Promotional Functions:  Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country.  Development of the Financial System : The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition 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 diverse sectors of the economy.  Development of Agriculture : In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector.
  12. 12.  Provision of Industrial Finance : In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc for the adequate and timely availability of credit to small, medium and large industry is very significant.  Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics..This data proves to be quite useful for researchers and policy makers.  Publication of the Reports : This RBI collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report This information is made available to the public also at cheaper rates.  Promotion of Banking Habits : As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network.
  13. 13. Supervisory Functions  The reserve bank also performs many supervisory functions. It has authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below.  Granting license to banks : The RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches.  Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities.  Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs.
  14. 14. Limitations of the working of RBI 1. Lack of a well organized and well integrated money market. 2. Stability in the internal and external value of the rupee has not been maintained. 3. The Reserve Bank of India is not as yet a Completely Autonomous Institution. 4. The unorganized money market of India is still out of the control of RBI
  15. 15. Repo Rate and Reverse Repo Rate:  Repo rate: ◦ Repo rate is the rate at which the Reserve Bank of India lends the banks for a very short period. ◦ The central bank can make necessary changes in the repo rate according to the present economic situation. ◦ It can also be used as a tool of credit control by RBI.  Reverse Repo Rate: ◦ It is the rate at which Reserve Bank of India borrows from the banks. ◦ Generally there is 1% gap between the Repo rate and Reverse Repo rate.(Reverse repo rate is always lower than repo rate)
  16. 16. Thank you
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Functions of central bank in india

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