The Reserve Bank of India (RBI), established on April 1, 1935, functions as the central bank of India, overseeing monetary stability and managing the country's credit system. It operates under a central board of directors and is responsible for issuing currency, regulating commercial banks, and implementing monetary policy to ensure economic stability and growth. With various traditional and promotional functions, the RBI plays a critical role in supporting the financial system, managing agriculture and industrial finance, and maintaining foreign exchange reserves.

1. Reserve Bank of India
ABHIJEET V DESHMUKH
www.abhijeetdeshmukh.com

2. Central Bank
“It is a bank of banker”
-- Samuelson
“Bank which has monopoly over note issue”
-- Vera Smith
“Central bank is the government’s bank”
-- Sayers

3. History & Preamble
 In 1921, three presidency banks (Madras, Bombay and Bengal) were amalgamated
to form the Imperial Bank of India. It was primarily a commercial bank but it
discharged certain central banking functions specifically as the banker to the
government.
 It was set up on the recommendations of the HILTON YOUNG COMMISSION
 It was started as Share-Holders Bank with a paid up capital of 5 Crs
 It was established on 1st of April 1935, in accordance with the provisions of the
Reserve Bank of India Act, 1934.
 The Central Office of the Reserve Bank was initially established in Calcutta but was
permanently moved to Mumbai in 1937. The Central Office is where the Governor
sits and where policies are formulated.
 Initially it was privately owned but it was the 1st bank to be Nationalized in 1949
and is now fully owned by the Government of India

4. History & Preamble
 It has 19 regional offices, most of them in state capitals
 The First governor was Sir Osborne A. Smith (1st April 1935 to 30th June 1937)
 The First Indian Governor was “Sir Chintaman D. Deshmukh”(11th August 1943 to
30th June 1949)
Preamble
 The preamble of the Reserve Bank of India describe the basic functions of the
Reserve Bank a
“…to regulate the issue of Bank Notes and keeping of reserve with a view to
securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage”

5. Organization Structure
Governor (1)
Deputy Governor (4)
Executive Directors (11)
Principal Chief General Manager
Chief General Managers
General Managers
Deputy General Managers
Asstt. General Managers
Managers
Asstt Managers
Support staff

6. Organization
Central Board - The Reserve Bank affairs are governed by a central board of directors. The
board is appointed by the Government of India in keeping with the Reserve Bank of India
Act. Appointed/nominated for a period of four years
 Official Directors
 Full-time : Governor and not more than four Deputy Governors
 Non-Official Directors
 Nominated by Government: Ten Directors from various fields and two government Officials
 Others: four Directors - One each from four local boards
Local Boards - One each for the four regions of the country in Mumbai, Calcutta, Chennai and New
Delhi
 Membership: Consist of five members each Appointed by the Central Government For a term of four
years
 Functions : To advise the Central Board on local matters and to represent territorial and economic
interests of local cooperative and indigenous banks; to perform such other functions as delegated by
Central Board from time to time.

7. Objectives
 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 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.

8. RBI vs Commercial Banks
Commercial Bank RBI
prime goal is profit maximization objective is economic development with stability.
directly involved with the public i.e. depositors and
borrowers
directly related to the commercial banks of the
country
Multiple in Number in the country Only One in the country
has many branches spread throughout the country and
even aboard
Has 19 regional offices, most of them in state capitals
and 9 Sub-offices but no branches
can collect savings from the general public in the form of
various types of deposits and lend most of them to
investors with a view of making profit. They are thus
‘financial intermediaries’ between savers and investors
not allowed to accept deposits from the public.
The commercial banks are subjected to rules and
regulations prescribed by RBI from time to time.
RBI supervises and controls the activities of
commercial banks in the overall interest of the
country at large
The commercial banks do not work in such advisory
capacity.
RBI is the banker to the government and also a
financial advisor

9. Functions
 Traditional Functions
 Issuer of currency notes
 Banker and Debt Manager To Government
 Banker to Banks
 Credit control
 Monetary Authority
 Manager of Foreign Exchange
 Promotional Functions
 Supervisory Functions

10. Traditional Functions
Issuer of Currency Notes
 The RBI has monopoly of issuing currency notes except one rupee note and coins of smaller
denomination. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500, and 1,000.
 It issues these notes against the security of gold bar, foreign securities, exchange bills and
promissory notes and Government of India bonds.
 The RBI has powers not only to issue and withdraw but even to exchange these currency
notes for other denominations.
 RBI has special issue department.
 Bank notes are printed at four notes presses at Nasik, Dewas, Mysore and Salboni.
 This is done to give the public adequate quantity of supplies of currency notes..

11. Traditional Functions
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.

12. Traditional Functions
Banker’s Bank
 Every commercial bank has to maintain a part of their reserves with the RBI. 4%
of their total deposits (both demand and time deposits) as cash reserves. Besides
this every bank is required to maintain 21.5% of its total deposits as SLR and
must submit weekly statements of their transactions to 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’.

13. Traditional Functions
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.

14. Instrument of Credit Control
 Quantitative or General Methods
 Qualitative or Selective Methods
Qualitative
• Selective Credit Control
• Rationing of Credit
• Moral Persuasion
• Direct Action
Quantitative
• Change in Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio(SLR)
• Repo and Reverse Repo Ratio

15. Traditional Functions
Monetary Authority
 Formulates, implements and monitors the monetary policy
 Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors
Manager of Foreign Exchange
 Manages the Foreign Exchange Management Act, 1999.
 Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India

16. 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.

17. Promotional Functions
 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.

18. 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.

19. Fully owned Subsidiaries
 National Housing bank (NHB)
 Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
 Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

20. RBI Publication of the Reports
RBI Bulletin bulletin.rbi.org.in/
RBI Annual Report annualreport.rbi.org.in/
Weekly Statistical Supplement wss.rbi.org.in
Monetary and Credit Policy cpolicy.rbi.org.in
RBI Notifications notifics.rbi.org.in
RBI Press Release pr.rbi.org.in
RBI Speeches speeches.rbi.org.in
Monetary and credit Information Review mcir.rbi.org.in
Report on Trend and Progress of Banking bankreport.rbi.org.in

21. Monetary Policy in India
ABHIJEET V DESHMUKH

22.  The Monetary Authority, typically the central bank of a country, is vested with
the responsibility of conducting monetary policy.
 Monetary policy refers to the use of instruments under the control of the
central bank to regulate the availability, cost and use of money and credit.
 Monetary Policy helps manage the amount of money floating in the economy
and ensures that all sectors are on the growth path.
 Monetary policy is the actions of a central bank, currency board or other
regulatory committee that determine the size and rate of growth of the money
supply, which in turn affects interest rates.
 Monetary policy is maintained through actions such as modifying the interest
rate, buying or selling government bonds, and changing the amount of money
banks are required to keep as reserves.
The Monetary Policy - Definition

23. The Monetary Policy Process
 The Reserve Bank’s Monetary Policy Department (MPD) assists the Governor in
formulating the monetary policy.
 Views of all key stakeholders in the economy, advice of the Technical Advisory
Committee (TAC), and analytical work of the Reserve Bank contribute to the
conduct of Monetary Policy.
 The Financial Markets Committee (FMC) meets daily to review the consistency
between policy rate, money market rates, and liquidity conditions.

24. Goals of Monetary Policy
 Primarily Price Stability, while keeping in mind the objective of growth.
 As per Dr. Urjit Patel Committee Report, the Reserve Bank has formally announced a “glide
path” for disinflation that sets an objective of below 8 per cent CPI inflation by January 2015
and below 6 per cent CPI inflation by January 2016.
 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, i.e., (a) below 6 per cent by January 2016, and (b) 4 per cent (+/-) 2 per cent
for the financial year 2016-17 and all subsequent years.
 Price stability is a necessary (if not sufficient) precondition to sustainable growth and financial
stability.
 Financial stability is important for smooth transmission of monetary policy & therefore,
regulatory and financial market policies, including macro-prudential policies, are often
announced along with monetary policy under Part-B of monetary policy statements

25. 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 market to alter the interest rates
in the financial system, which in turn influence aggregate demand - a key
determinant of inflation and growth.
 Once the repo rate is announced, the operating framework on a day to day basis
is implemented through proactive liquidity management, which aims at
anchoring the operating target – the weighted average call rate (WACR) – around
the repo rate.

26. Instruments of Monetary Policy
There are several direct and indirect instruments that are used in the implementation of
monetary policy.
 Cash Reserve Ratio (CRR): The share of net demand and time liabilities (deposits) that
banks must maintain as cash balance with the Reserve Bank.
 Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities (deposits)
that banks must maintain in safe and liquid assets, such as, government securities, cash
and gold. Changes in SLR often influence the availability of resources in the banking
system for lending to the private sector.
 Refinance facilities: Sector-specific refinance facilities aim at achieving sector specific
objectives through provision of liquidity at a cost linked to the policy repo rate. The
Reserve Bank has, however, been progressively de-emphasising / discouraging sector
specific policies as they interfere with the transmission mechanism.

27. Instruments of Monetary Policy
 Term Repos: Since October 2013, the Reserve Bank has introduced term repos
(of different tenors, such as, 7/14/28 days), to inject liquidity over a period that is
longer than overnight. The aim of term repo is to help develop inter-bank
money market, which in turn can set market based benchmarks for pricing of
loans and deposits, and through that improve transmission of monetary policy.
 Marginal Standing Facility (MSF): A facility under which scheduled commercial
banks can borrow additional amount of overnight money from the Reserve Bank
by dipping into their SLR portfolio up to a limit (currently two per cent of their
net demand and time liabilities deposits) at a penal rate of interest (currently 100
basis points above the repo rate). This provides a safety valve against
unanticipated liquidity shocks to the banking system. MSF rate and reverse repo
rate determine the corridor for the daily movement in short term money market
interest rates.

28. Instruments of Monetary Policy
 Liquidity Adjustment Facility (LAF): Consists of overnight and term repo/reverse
repo auctions. Progressively, the Reserve Bank has increased the proportion of
liquidity injected in the LAF through term-repos.
 Open Market Operations (OMOs): These include both, outright purchase/sale of
government securities (for injection/absorption of liquidity)
 Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers. This rate has been aligned to the MSF
rate and, therefore, changes automatically as and when the MSF rate changes
alongside policy repo rate changes.
 Market Stabilization Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large
capital inflows is absorbed through sale of short-dated government securities and
treasury bills. The mobilized cash is held in a separate government account with the
Reserve Bank. The instrument thus has features of both, SLR and CRR.

29. Looking Ahead
 With the agreement on Monetary Policy Framework between the Government
and the Reserve Bank of India dated February 20, 2015, the Reserve Bank has
formally adopted a flexible inflation targeting (FIT) framework.
 As announced in the Union Budget for 2015-16, decision making by an
empowered Monetary Policy Committee (MPC) would require amendment of the
Reserve Bank of India Act, which the Government intends to do in 2015-16.
 The recommendations of the Dr. Urjit Patel Committee Report on all related
aspects of monetary policy are being examined and progressively implemented.
 In implementing the framework, strengthening the transmission of policy
changes to the ultimate objectives while dealing with uncertainties in terms of
unanticipated global and domestic shocks will remain a major challenge.

30. Open & Transparent Monetary Policy-Making
Transparency in monetary policy that makes it more predictable and effective requires
communication to avoid undue apprehensions about monetary policy.
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 from possible noisy market expectations. In Includes
 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
 Starting with the first bi-monthly statement of monetary policy in April 2014, the Reserve
Bank has changed the 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).

31. Contractionary / Expansionary Monetary Policy

32. Contractionary Monetary Policy
A type of policy that is used as a macroeconomic tool by the country's central bank or finance
ministry to slow down an economy. Contractionary policies are enacted by a government to reduce
the money supply and ultimately the spending in a country.
When both spending and the availability of money are high, prices start to rise - this is known
as inflation. When a country is experiencing higher-than-anticipated inflation, the government might
step in with a contractionary policy to try to slow down the economy. Their goal is to reduce
spending by making it less attractive to acquire loans or by taking currency out of circulation, and
thus reduce inflation. The effectiveness of these policies vary.
 Increasing the interest / Repo rate at which the RBI lends will also increase the rates at which banks lend.
When rates are higher, it is more expensive for individuals to obtain loans; this reduces spending.
 Banks are required to keep a reserve of cash to meet withdrawal demands. If the reserve
requirements are increased, there is less money for banks to lend out. Thus there is a lower money
supply.
 Central banks can borrow money from institutions or individuals in the form of Gsec. If the interest paid
on these securities is increased, more investors will buy them. This will take money out of circulation.
Central banks can also reduce the amount of money they lend out or call in existing debts to reduce
the money supply.

33. Expansionary Monetary Policy
 A macroeconomic policy that seeks to expand the money supply to encourage economic
growth or combat inflation (price increases). One form of expansionary policy is fiscal policy,
which comes in the form of tax cuts, rebates and increased government spending.
Expansionary policies can also come from central banks, which focus on increasing the money
supply in the economy.
The RBI employs expansionary policies whenever it lowers the benchmark Repo Rate or when
it buys Government Securities in the open market, thereby injecting capital/liquidity directly
into the economy.
 Expansionary Policy is a useful tool for managing low-growth periods in the business cycle,
but it also comes with risks.
 First and foremost, economists must know when to expand the money supply to avoid causing side
effects like high inflation.
 There is also a time lag between when a policy move is made (whether expansionary or
contractionary) and when it works its way through the economy. This makes up-to-the-minute
analysis nearly impossible, even for the most seasoned economists.
 And finally, prudent central bankers and legislators must know when to halt money supply growth or
even reverse course and switch to a contractionary policy.

34. Thank You