RBI RBI the central Bank of the country is the

center of the Indian financial and montary system.

Started functioning from 1st April 1935. Private shareholders institution till 1949. Thereafter it became State owned

institution under the Reserve Bank (Transfer of Public ownership) of India Act, 1948.

Functions of RBI1. TO MAINTAIN MONETARY STABILITY SO

THAT THE BUSINESS AND ECONOMIC LIFE CAN DELIVER WELFARE GAINS OF PROPERLY FUNCTIONING MIXED ECONOMY 2. TO MAINTAIN FINANCIAL STABILITY AND ENSURE SOUND FINANCIAL INSTITUTIONS SO THAT MONETARY STABILITY CAN BE SAFELY PURSUED AND ECONOMIC UNITS CAN CONDUCT THEIR BUSINESSES WITH CONFIDENCE .

3. TO MAINTAIN STABLE PAYMENTS SYSTEM SO THAT FINANCIAL TRANSACTIONS CAN BE SAFELY AND EFFECIENTLY EXECUTED.

4. TO PROMOTE THE DEVELOPMENT OF FINANCIAL INFRASTRUCTURE OF MARKETS AND SYSTEMS, AND TO ENABLE IT TO OPERATE EFFECIENTLY I.E. TO PLAY A LEADING ROLE IN DEVELOPING A SOUND FINANCIAL SYSTEM SO THAT IT CAN DISCHARGE ITS REGULATORY FUNCTION EFFECIENTLY.

5. TO ENSURE THAT CREDIT ALLOCATION

BY THE FINANCIAL SYSTEM BROADLY REFLECTS THE NATIONAL ECONOMIC PRIORITIES AND SOCIETAL CONCERNS.

6. TO REGULATE THE OVERALL VOLUME OF MONEY AND CREDIT IN THE ECONOMY WITH A VIEW TO ENSURE REASONABLE DEGREE OF PRICE STABILITY.

ROLE OF RBI1. NOTE ISSUING AUTHORITY: ISSUES CURRENCY NOTES OTHER THAN

ONE RUPEE NOTE AND COINS. WITHDRAW CURRENCY EXCHANGE CURRENCY ISSUE DEPT. LOOKS AFTER THE AFFAIRS

OF CURRENCY CAN ISSUE NOTES AGAINST THE

SECURITY OF GOLD COINS AND GOLD BULLION, FOREIGN SECURITES, RUPEE COIN, GOVT. OF INDIA SECURITIES ETC.

2. GOVERNMENT BANKER:BANKER TO CENTRAL AND STATE

GOVERNMENT.PROVIDES BANKING SERVICES SUCH AS

ACCEPTANCE OF DEPOSIT, WITHDRAWL OF FUNDS BY CHEQUES, MAKING PAYMENT AND RECEIPTS, AND COLLECTION OF PAYMENTS ON BEHALF OF GOVT., TRANSFER OF FUNDS AND MANAGEMENT OF PUBLIC DEBT.

BANK RECEIVES GOVT. DEPOSIT FREE OF INTEREST.

3. SUPERVISING AUTHORITY: SUPERVISE AND CONTROL COMMERCIAL

AND CO OPERATIVE BANKS. THE POWERS OF RBI ARE: a. ISSUE LISCENCE FOR NEW BANKS. b. ISSUE LISCENCE FOR NEW BRANCHES. c. PRESCRIBE MINIMUM FEQUIREMENTS

REGARDING PAID UP CAPITAL, RESERVES, CASH RESERVE AND LIQUID ASSETS.

d. INSPECTS WORKING OF BANKS IN INDIA AND ABROAD. e. CONDUCT AD HOC INVESTIGATIONS

FROM TIME TO TIME REGARDING IRREGULARITIES, COMPLAINTS AND FRAUDS IN RESPECT OF BANKS.

f. CONTROL METHODS OF OPERATIONS. g. CONTROL APPOINTMENTS, RE

APPOINTMENT, TERMINATION OF CHAIRMAN & CEOs OF PRIVATE BANKS.

h. APPROVE OR FORCE AMALGAMATIONS.

4. EXCHANGE CONTROL AUTHORITY: ADMINISTER FOREIGN EXCHANGE

CONTROL.CHOOSE THE EXCHANGE RATE SYSTEM TO MANAGE EXCHANGE RESERVE.TO INTERACT OR NEGOTIATE WITH

MONETARY AUTHORITIES.EXCHANGE CONTROL IN TERMS OF

FERA AND FEMA.

5. PROMOTER OF FINANCIAL SYSTEM: MONEY MARKET AGRICULTURAL SECTOR. INDUSTRIAL FINANCE. CREDIT DELIVERY FORMULATING PRUDENTIAL NORMS. REGULATOR OF MONEY AND CREDIT.

Techiniques of Monetary Control:1. Open Market Operations (OMO)2. Bank rate & discretionary control of refinance3. Direct regulation of interest rates4. Cash Reserve ratio (CRR)5. Statutory Liquidity ratio (SLR)6. Direct credit allocation & credit rationing7. Selective credit control8. Credit authorisation scheme9. Fixation of Inventory & credit norms10. Credit planning

What is the Monetary Policy? The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy. These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy. Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it.

When is the Monetary Policy announced?

Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year. However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take place later in

How is the Monetary Policy different from the Fiscal Policy?

Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth.

The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.

The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand. On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes. The annual Union Budget showcases the government's Fiscal Policy.

What are the objectives of the Monetary Policy?

The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.

There are four main 'channels' which the RBI looks at:

1. Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates).

2. Interest rate channel. 3. Exchange rate channel (linked to the

currency). 4. Asset price.

How does the Monetary Policy impact the individual?

A reduction in interest rates would force banks to lower their lending rates and borrowing rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate of interest. On the other hand, if there were to be an increase in interest rates, banks would immediately increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs of corporates and as a result, their bottomlines (profits), the monetary policy is very important to them also.

Since the financial sector reforms commenced, the RBI has moved towards a market-determined interest rate scenario. This means that banks are free to decide on interest rates on term deposits and loans. Being the central bank, however, the RBI would have a say and determine direction on interest rates as it is an important tool to control inflation. The bank rate is a tool used by RBI for this purpose as it refinances banks at the this rate. In other words, the bank rate is the rate at which banks borrow from the RBI.

What do the terms CRR and SLR mean?

CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation

Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.

What impact does a cut in CRR have on interest rates?

From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have to maintain with it. The CRR is fixed as a percentage of total deposits. As more money chases the same number of borrowers, interest rates come down.

Some Monetary Policy terms: Bank Rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.

Money Supply (M3) This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public. The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts.

The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee. The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.