The document outlines the historical development and regulatory framework of the Reserve Bank of India (RBI), established in 1935 following a banking crisis that led to extensive reforms. It describes the RBI's monetary policy tools, such as cash reserve ratio and repo rates, aimed at controlling inflation and managing money supply, as well as its regulatory powers over commercial banks. Additionally, it highlights the RBI's initiatives for financial inclusion and consumer protection as part of its broader economic objectives.

1. Guided By
Presented By
DR. PREMA RAJAN

3. RBI ESTABLISHMENT
1913 Commercial banks were required to register under the Companies Act, but monitoring
was lax. No CRR, SLR, BASEL Norms.
Royal Commission on Indian Currency
(Hilton Young Commission)
Lord Reading.
(Indian viceroy)
Recommends setting
up a central bank
named 'Reserve
Bank of India’.
1926: Appoints

4. FRIDAY, OCTOBER, 1929

5. leads to collapse of 450+ banks in India.
So British Indian Govt becomes serious about setting up RBI.
1934: Reserve Bank of India Act was enacted. (Scheduled banks required to keep CRR with RBI)
RBI becomes operational from 1st April, 1935
C.D. Deshmukh
first Indian Governor of
RBI
Osborne Smith.
1st Governor of RBI

6. BEFORE 1948 : Government ownership was ~4.4% only.
RBI transfer of ownership act 1948
All private investors’ shares transferred to Govt of India
under the RBI transfer of ownership act 1948.
Therefore, RBI governor answerable to Parliament, has
to pay dividend to Govt from its profits
Banking Regulation Act 1949
I will increase your power
Banking Regulation Act
1949 empowered the RBI to
- Give license to companies to open
banks,
- Give permission banks to open new
branches.
- Prescribe auditing norms, liquidity
norms for Banks such as SLR.
- Protect interest of depositors. Force
elimination / merger of weak banks.
etc

7. Non-Official Directors Official Directors
 2 Government officials
 10 directors nominated by Government.
 4 directors from RBI’s local boards @West, East, North, South
 RBI Governor
 4 Dy. Governors
Successful candidates’ names sent to Appointments
Committee of the Cabinet headed by the Prime
Minister for final approval.
2016-2018 2018-2021 2021-2024
2013-2016
COMPOSITION OF RBI
They’re selected by Financial sector regulatory
appointment search committee (FSRASC)
headed by the Cabinet Secretary (IAS)

8. •Financial Inclusion
•Consumer
Protection
•Data Publication
•International Coop.
•Banks
•NBFCs
•AIFI
•Digital Payment
• Government
• Banks
•Money supply
•Inflation
•Foreign
Exchange
Controller
of
Banker to
Misc
Regulator
of

11.  Monetary Policy is a macroeconomic policy , designed by Central bank of a country, to manage money supply & interest
rates. It helps shaping variables such as
• Inflation
• Consumption
• Savings
• Investment
 So, stable & moderate inflation is good for the economy. So, RBI
tries to keep inflation with 2-6% Consumer Price Index (CPI: All
India) using its bi-monthly monetary policy made by its 6-
member statutory Monetary Policy Committee.
• capital formation
• economic growth
• job creation
• social justice
Milton Friedman: This American economist’s research on monetary policy made this subject more
popular, he also won a Nobel in Economics in this regard (1976).
 Philip Curve: Inflation ↑ = unemployment ↓ (and vice versa).
MONETARY POLICY

12. GDP
Savings Investmen
t
Unemployment Inflation Inclusive Growth& More
MONETARY POLICY FISCAL POLICY
CRR, SLR, REPO Rate, Bank Rate
MSF, OMO, PSL, ect
Taxation, Subsidy, Public
Expenditure, Disinvestment, PPP
etc..
Helps
in
Fiscal Policy is the set of Govt. decisions regarding taxation, expenditure, subsidies and other financial operations. Using
fiscal policy, Govt influences the savings, investment and consumption in an economy, to accomplish certain national
goals such as income redistribution, socio-economic welfare, economic development and inclusive growth.

13. QUANTITATIVE TOOLS
CRR, SLR
REPO & REVERSE
REPO
MSF
Bank rate
SDF
OMO
QUALITATIVE TOOLS
1)Moral Suasion
1)Direct Action
Margin Requirements /
Loan to Value (LTV)
1)Selective Credit
Control
1)PRIORITY SECTOR
LENDING (PSL)
RBI MONETARY POLICY TOOLS

14. DEFLATION GOVERNMENT SECURITY
INFLATION

15. Government Reserve Bank
Road Construction Project
1000
Cr
1000 Cr
1000 Cr
8% interest per year
Buy back after 10 years
Repay after 10 years
with 8% interest

16. DEPOSITS
Mandated under RBI Act, 1934 Banking Regulation Act, 1949
Cash Reserve
Ratio
Statutory Liquid
Ratio

17. Reverse Repo Rate
Repo Rate
I don’t have much
deposit to give loan to
my client. So Please
give Repo loan .
I need 6.50% Interest
(Repo Rate) & I need
Non SLR quota G-
Sec as collateral
RBI
I have Surplus fund &
people are not taking
loan. So please keep
this money and pay me
interest and give G-Sec
as collateral
I pay 3.35%
interest (Reverse
Repo rate)

18. Bank rate
• But, since the introduction of the Repo rate in the 2000s, the Bank rate has become a dormant tool =not
frequently used by RBI for lending or by banks for borrowing). The bank rate is the rate of interest which is
charged by a central bank while lending loans to a commercial bank.
Standing deposit facility (SDF)
• 2013: Urjit Patel Committee on Monetary policy proposed standing deposit facility (SDF)
• SDF = Clients park/deposit their extra money in RBI. RBI pays them interest. RBI doesn’t give any
collateral (unlike in REVERSE REPO).
• Benefit of SDF: To combat inflation → RBI can suck extra money supply via SDF window. RBI will not
have to pledge G-Sec as collateral to clients
• MSF is the Interest rate at which RBI lends short- term loans to Scheduled Commercial Banks (SCB) & Regional
Rural Banks (RRB) with their SLR-quota G-Sec as collaterals. MSF higher than Repo Rate. MSF = Repo% + 0.25%
Marginal Standing Facility

19. Open Market Operations (OMO):
RBI buys and sells Union & State Govts’ securities to control money supply.
LIQUIDITY
ABSORBED
LIQUIDITY
INJECTED
DURING INFLATION
Buy G-Sec
Money supply ⏫
Money supply ⏬
Sell G-Sec
DURING DEFLATION

20. 5 ₹
50 ₹
150 ₹
Make Loan Expensive
Demand Money with people
Price
Inflation
Controlled
TOOLS
CRR
SLR
REPO
OMO :
Sell G-Sec

21. Moral Suasion
- Moral suasion meaning applying “Persuasion” without applying punitive measures. RBI governor tries this tactic
via conferences, informal meetings, letters, seminars, Publicity etc
- E.g. RBI-Governor asking banks to transmit repo-rate cuts, open new branches in rural areas, spread financial
literacy, give loans to farmers beyond PSL quota etc.
- E.g. RBI Governor requesting CM or Finance Minister to control fiscal deficit & subsidy leakage to enhance the
efficacy of RBI’s monetary policy.
- Publicity: RBI governor could give, media statement, speech during university convocation, memorial lectures… By
doing so, he can create an effective public opinion which also pressurizes the banks to stop their thuggery.
media statement
“Look I reduced repo rate
but banks are not
passing the benefit to
customers…and xyz”.
University Convocation
“Banks should also give
more loan to MSME
sectors in rural area ”.

22. Direct Action
- RBI can punish banks (and even non-banks) for not complying with its directives under RBI Act, Banking Regulation
Act, Payment and Settlement Systems Act, Prevention of Money Laundering Act (PMLA), Foreign Exchange
Management Act (FEMA).
- 2019: RBI ordered the banks to have a “Clawback” provision in their CEO & Top executives’ salaries. E.g. If the CEO
did any scam/fraud, he’ll have to return his previously paid salary / bonus, even if he had retired/left the job
afterwards

23. Margin Requirements / Loan to Value (LTV)
RBI can mandate Loan to Value (LTV) for a gold-loan, home loan, auto loan or
business loan etc. so a Bank/NBFC can’t lend more than x% of the value of the
collaterals. RBI can change this x% to boost / curb demand
In a negative / restrictive direction In a positive direction
- Credit Rationing System: English (in 18th century) and USSR (till 1990s)–
their central bank will not give more than “X” amount as loan to individual
banks. an individual can’t get more than prescribed amount of loans for
each category (housing, education, business).
- 1960s: Credit Authorization Scheme (CAS) in India: all commercial banks
had to obtain prior approval of the RBI before loaning ₹ 1 crore/> to a
single borrower. 1970s: RBI imposed quantitative ceiling on non-food loans
to boost green revolution, food inflation.
- But such measures failed due to lax monitoring and loopholes
- Consumer credit control e.g. During
deflation / recession, RBI can relax
the down payment / EMI installment
norms for durables like Vehicles, TV,
Fridge etc. to boost consumption and
demand.
- Priority Sector Lending <see below
Selective Credit Control

24. PRIORITY SECTOR LENDING (PSL)
Banks must give 40% of their loans to various sectors such as agriculture, MSME , exporters, weaker Sections (SC, ST,
Women, PH, Minorities), Student-Education loans (upto Rs.10lakh), Social Infrastructure (schools,drinking water,
sanitation facilities, health care, Renewable Energy Projects etc.
NDTL
(Total Deposits)
CRR
SLR
Loanable
Deposits
PSL
Others