Reserve Bank of India (RBI)

Introduction

It is the Central Bank of India Established in
1934 under the RESERVE BANK OF INDIA
ACT 1934. Its head quarters is in Mumbai
(Maharashtra). Its present governor is
Raghuram Rajan. It has 26 offices in which
four are regional offices located in
metropolitan cities.
Brief History
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
INR 5 crores. Initially it was located in
Kolkata. It moved to Mumbai in 1937. Initially
it was privately owned. The govt. had a
nominal value of shares of INR 2,20,000. later
on in 1949, the bank was nationalised and is
fully owned by the Govt. of India.

Preamble
The Preamble of the Reserve Bank of India
describes the basic objectives of the Reserve
Bank as "...to regulate the issue of Bank
Notes and keeping of reserves with a view to
securing monetary stability in India and
generally to operate the currency and credit
system of the country to its advantage."

Organization of The RBI
The Reserve Bank's affairs are governed by a central
board of directors and four local boards of directors.
The central board performs the functions of general
superintendence and direction of the banks affairs.
Central board: Appointed/nominated by the GOI for
a time period of four years. It includes the following;
Official directors
Non-official directors
Committee of Central board
Board for Financial Supervision(BFS)

Organization of The RBI
Board for Payment and Settlement system(BPSS)
Sub - Committees of the Central Board
Local board: There are four local boards, one each for
the four regions of the country situated in Mumbai,
New Delhi, Chennai and Kolkata. The membership of
each local board consists of five members appointed
by the central govt. for a period of four years. The
functions of the local board include:
to advise central board on local matters
to perform such other functions as may be
delegated by the central board from time to time.

Departments
The RBI has 26 departments focusing on policy issues in RBIs functional
areas etc. lets briefly know the functions of each department.
1.Customer Service Department:
In order to enhance the quality of customer service and strengthen
the grievance redressal mechanism, the RBI constituted a new
department namely CSD.
2. Department of Currency Management:
This department performs the core statutory function of note and coin
issue and currency management.
3. Urban Banks Department:
This department carries out the function of regulation and supervision
of UCBs.
4. Rajbhasha Department:
Translating annual reports, news letters, bulletins etc.
Imparting training to officers/employees in Hindi language, Use of
Hindi on computers, and English-Hindi translation.



Departments
5. Rural Planning and Credit Department:
RPCD is primarily concerned with formulating policies relating to rural
credit and monitors timely and adequate flow of credit to the rural
population for agricultural activities etc.
6. Foreign Exchange Department:
It is concerned with facilitating external trade and developing foreign
exchange markets of India.
7. Human Resources Development Department:
Recruitment
Performance and Potential Appraisal
Placement etc.
8. Financial Markets Department:
This department wad established with the objective of integrating the
banking sector to the financial markets and help the bank to conduct
monetary operations viz. OMOs,LAF etc.








Departments
9. Financial Stability Unit:
Development of a time series of a core set of financial indicators.
Conduct of systemic stress tests to assess resilience.
Preparation of financial stability reports.

10. Inspection Department (Internal):

11. Department of Banking Supervision:

This department is entrusted with the authority of regulating and
supervising the Indian Banking System including FIs.
12. Department of Non-Banking Supervision (DNBS):
Mainly concerned with supervising the NBFCs.



Departments
13. Department of Banking Operations and Development:
The Department is entrusted with the responsibility of regulation
of commercial banks under the provisions contained in Banking
Regulation Act, 1949 and the Reserve Bank of India Act, 1934 and
other related statutes and development of banking policies.
14. Department of Information Technology:
Computerizing the operation in RBI
Monitoring the progress of IT in banks.
15. Legal Department:
16. Monetary Policy Department:
17. Internal Debt Management Department:
Managing public debt of the GOI/state govts.
Management of PDs system and development of govt.
securities market.





Departments
18. Department of External Investments and Operations:
Invest of foreign exchange reserves of the RBI.
19. Department of Economic & Policy Research:
Concerned with studying the issues both domestic and
international affecting the Indian economy.
20. Department of Statistics and Information Management:
Collection, processing and dissemination of data on banking,
corporate and external sectors.
21. Department of Payment and Settlement Systems:
22. Secretary's Department:
Secretarial work involving meetings of central board and its
committees etc.
Secretarial work relating to deputy governors committee
meetings.
23. External Relations and Customer Service.
Annual, quarterly, monthly and weekly reports etc.








Departments
23. Department of Communication:
24. Department of Expenditure and Budgetary
Control:
25. Department of Administration and Personnel
Management:
26. Department of Banking Operation and
Development:
27. Department of Govt and Bank accounts.

Subsidiaries
The Reserve Bank of India has fully-owned four subsidiaries
which include
National Housing Bank(NHB).
Deposit Insurance and Credit Guarantee Corporation of
India(DICGC).
Bharatiya Reserve Bank Note Mudran Private
Limited(BRBNMPL).
National Bank for Agriculture and Rural Development
(NABARD).
The Reserve Bank of India has recently divested its stake in
State Bank of India to the Government of India. RBI has also
set up some trainning institutions.


Legal Framework
There are various acts which govern the functioning of RBI, specific
functions, banking operations and individual institutions owned by
RBI.
1. Umbrella Acts:
The reserve Bank of India Act, 1934, governs the RBI functions
The Banking regulation Act, 1949, governs the financial sector.
2. Acts Governing Specific Functions.
like The Securities Contract(Regulation) Act, 1956, regulates govt
securities market, FEMA Act, 1999 etc.
3. Acts Governing Banking Operations.
like Negotiable Instruments Act, 1881 etc.
4. Acts Governing Individual Institutions.
like State Bank of India Act, 1954, The Industrial Development Bank
of India Act, the National Housing Bank Act etc.

Functions of RBI
Functions of RBI include Monetary Authority Regulator & Supervisor of Financial
System, and Manager of Foreign Exchange Issuer of Currency Developmental
Role.
Formulates Monetary Policy.
Monetary policy-making is the central function of the Reserve Bank. The broad
objectives of monetary policy in India are (a) maintaining price stability and (b)
ensuring adequate flow of credit to productive sectors to assist growth by
influencing the cost and availability of money and credit. It uses qualitative and
quantitative measures to implement the monetary policy.
Quantitative Measures :
Quantitative Measures BANK RATE also called discount rate.It also includes repo
rate. OPEN MARKET OPERATIONS buying and selling of government securities.
VARIABLE RESERVE RATIO it includes CRR and SLR.





Qualitative measures :
Qualitative measures Margin Requirements Moral
Suasion Rationing of Credit
Regulates & Supervises the Financial
System:
Objective: To Maintain Public confidence in the
system, protect depositors interest & provide cost
effective banking services to the public. What RBI
does.. Prescribes broad parameters of banking
operations within which the country's banking and
financial system functions. The Reserve Bank of India
performs this function under the guidance of the
Board for Financial Supervision (BFS).


Banker to the Government:
The RBI as the central bank manages the public debt of the
central and the state govts and also acts as the banker to them
under the provisions of the RBI Act 1934. RBI Act provides that
the central govt shall entrust the RBI with all its money,
remittance, exchange, and banking transactions in India and the
management of public debt and shall also deposit all its cash
balances with the RBI free of interest.
It also includes:
provides a range of banking services acceptance of money
on govt A/Cs, payment/withdrawal of funds etc.,
provides safe custody facilities; manages special funds like
the consolidated sinking fund, the calamity relief fund, issues and
manages bonds etc.
provides ways and means advances to both the central and
the state govts.
introduced the primary dealer system in 1996 for the
development of govt securities market etc.
Manager of Exchange Control:
The function of the RBI is to develop and regulate
the Forex market. The banks role is to facilitate
external trade and payment and promote orderly
development and maintenance of foreign market in
India. The RBI regulate forex transactions under the
provisions of FEMA Act, 1999.
The RBI periodically enters into the forex
transactions to prevent undue fluctuations in the
exchange rate and to ensure orderly market
conditions.
In pursuit of developing the forex market RBI
allowed Authorized Dealers(ADs) to borrow abroad
and also allowed FIIs to invest up to 49% of the paid-
up capital of Indian companies with the approval of
the shareholders by a special resolution.
Note Issuing Agency:
The RBI has been entrusted with the role of issuing the notes and
managing the currency by the preamble of the RBI Act, 1934. RBI issues
notes in the denomination of INR 2, 5, 10, 50, 100, 500, and INR 1000.
The GOI issues one rupee coins and one rupee notes but they are put
into circulation only through the RBI. Currency management involves
efforts to achieve self-sufficiency in the production of currency notes
and coins with a judicious denomination mix etc.
These functions i.e. note issue and currency management are
discharged in 18 regional Issue Offices/sub-offices and a wide network of
currency chests maintained by banks and govt treasuries spread across
the country.
Bank notes are printed at four notes presses, of which the currency
Notes Press, Nasik, and Bank Note Press, Dewas, are owned by the
central govt and the presses at Mysore and Salboni are owned by the
Bharatiya Reserve Bank Note Mudran Limited, a wholly-owned
subsidiary of the RBI.

Banker to the Banks:
The Banks medium-term objective is to bring down the CRR to
four per cent of the banks Net Demand and Time
Liabilities(NDTL). The scheduled banks maintain balances in their
current account with the RBI mainly for maintaining the CRR and
as working funds for clearing adjustments.
The RBI also provides a variety of financial facilities and
accommodations to scheduled banks. It takes care of temporary
liquidity gaps in the banking system through refinancing
schemes(i.e. refinancing of bills). It also acts as a lender of last
resort to the banks to foster financial stability.
Developmental role:
The RBI performs various developmental and promotional activities to support
national objectives.
The RBI has helped to set up a number of development financial institutions
such as the Industrial Development Bank of India(IDBI), the National Bank for
Agriculture and Rural Development (NABARD), the Industrial Reconstruction
Bank of India(IRBI), the National Housing Bank(NHB) and various other
institutes. It also has helped in the development of UTI, Discount and Finance
House of India(DFHI) and the Securities Trading Corporation of India(STCI) to
promote and develop financial markets.
Another important developmental role that RBI carries out is that it has made
priority sector lending mandatory for both public and private sector banks.
RBI in its pursuit of developmental functions so far as banking sector is
concerned established a committee under the chairmanship of Mr. Narasimham
to suggest the future direction of banking sector. It suggested various reforms in
two phases one in 1991 and another in 1998. The recommendations include
deregulation of interest rate structure, deregulation of the entry norms for
private sector banks and foreign banks, bringing NBFCs under the ambit of
regulatory framework, capital adequacies.
Role of RBI in inflation
control
Inflation arises when the demand increases and there is a
shortage of supply There are two policies in the hands of
the RBI.

Monetary Policy: It includes the interest rates. When the
bank increases the interest rates than there is reduction in
the borrowers and people try to save more as the rate of
interest has increased.

Fiscal Policy: It is related to direct taxes and government
spending. When direct taxes increased and government
spending increased than the disposable Income of the
people reduces and hence the demand reduces.



Quantitative Measures

Quantitative Measures BANK RATE also called Discount
Rate.
It also includes Repo Rate.
Open Market Operations buying and selling of government
securities.
Variable Reserve Ratio it includes C.R.R and S.L.R
Qualitative Measures
1. Direct Action
2. Moral persuasion
3. Legislation
4. Publicity
BANK RATE

Its the interest rate that is charged by a countrys central
bank on loans and advances to control money supply in the
economy and the banking sector.

This is typically done on a quarterly basis to control inflation
and stabilize the countrys exchange rates.

A fluctuation in bank rates Triggers a Ripple-Effect as it
impacts every sector of a countrys economy.

A change in bank rates affects customers as it influences
Prime Interest Rates for personal loans.

The present bank rate is 9%

REPO RATE

Whenever the banks have any shortage of funds they can
borrow it from the central bank. Repo rate is the rate at which
our banks borrow currency from the central bank.

A reduction in the repo rate will help banks to get Money at a
cheaper rate.

When the repo rate increases borrowing from the central
bank becomes more expensive.

In order to increse the liquidity in the market, the central
bank does it.

The present repo rate is 8%
REVERSE REPO RATE


Its the rate at which the banks park surplus funds with reserve
bank.

While the Repo rate is the rate at which the banks borrow from
the central bank.

It is mostly done , when there is surplus liquidity in the market
by the central bank.

The present reverse repo rate is 7%
CRR (Cash Reserve Ratio)

Cash Reserve Ratio (CRR) is the amount of
Cash(liquid cash like gold)that the banks have to
keep with RBI.

This Ratio is basically to secure solvency of the
bank and to drain out the excessive money from
the banks.

The present CRR rate is 4.75%.

SLR ( Statutory Liquidity Ratio)

SLR rate is determined and maintained by the RBI (Reserve
Bank of India) in order to control the expansion of bank
credit.
It is the amount a commercial bank needs to maintain in
the form of cash, or gold or govt. approved securities
(Bonds) before providing credit to its customers.

The present SLR rate is 23%.
QUALITATIVE MEASURES
1. Direct Action: The central bank may take direct action
against commercial banks that violate the rules, orders or
advice of the central bank. This punishment is very severe of a
commercial bank.

2. Moral persuasion: It is another method by which central
bank may get credit supply expanded or contracted. By moral
pressure it may prohibit or dissuade commercial banks to deal
in speculative business.
3. Legislation:
The central bank may also adopt necessary legislation for
expanding or contracting credit money in the market.


4. Publicity:
The central bank may resort to massive advertising campaign
in the news papers, magazines and journals depicting the
poor economic conditions of the country suggesting
commercial banks and other financial institutions to control
credit either by expansion or by contraction.


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