[THESIS REPORT/TERM PAPER]

Role of RBI in Economic Development of India

Submitted in order to partial fulfillment of

the requirement for the completion of
B.Tech ( Computer Science and Engineering ) - Semester VI
ECONOMICS FOR ENGINEERS - ECO310
byAmit Duhan
Harman Maan
Tanmay Baranwal

RK2202B40
RK2202B41
RK2202B42

School of Computer Science and Engineering

under the guidance of
Asst. Prof. Javaid Dar
Department of Business Administration and Management
Lovely Professional University
Punjab India
DOA : 26th February, 2015
DOS : 31st March, 2015

LOVELY PROFESSIONAL UNIVERSITY

ACADEMIC TASK NO. 2
School of Computer Science Engineering
Name of the faculty member: Asst. Prof. Javaid Dar
Course Title: Economics for Engineers

Max. Marks: 30

Course Code: ECO310

Class: B.Tech.
Batch: 2012-16

Date of Allotment: 26.02.2015

Date of Submission: 31.03.2015

Objective
To enhance the conceptual understanding of students and enable them to correlate theoretical
concepts with real life issues by inputting teamwork in them
Topic
Students will be divided in groups of 3 students each and an assignment will be given to each
group. Thereafter, students are required to evaluate in team and give peer rating on the task
accomplished
Evaluation
1. Peer Rating
2. Report Evaluation on Various Criteria (Rubric System)given following
Final Score = (Peer Rating * Evaluation Score) / 10

S. No

Name of Student

Registration No

1.

Amit Duhan

11206031

2.

Harman Maan

11206725

3.

Tanmay Baranwal

11202766

Peer Rating (10)

Signature

Subject: Rubrics for written report of ECO310

Category

5 marks Exemplary

Purpose and
objective

Content

2-4 marks satisfactory

1 marks unsatisfactory

Formal structure
and presentation
of report

Conclusions /
Recommendations

Clarity and
conciseness:

Referencing

Note: Each of the parameter of evaluation will carry 5 marks. Total 30 marks are for written report.

Preamble
The Preamble of the Reserve Bank of India describes the basic functions 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."
OVERVIEW OF RBI
The Reserve Bank of India is the central bank of India, and was established on April
1, 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 Kolkata but was
permanently moved to Mumbai in 1937. Though originally privately owned, the RBI
has been fully owned by the Government of India since nationalization in 1949.
Duvvuri Subbarao who succeeded Yaga Venugopal Reddy on September 2, 2008 is
the current Governor of RBI.
The Reserve Bank of India was set up on the recommendations of the Hilton Young
Commission. The commission submitted its report in the year 1926, though the
bank was not set up for nine years.
The Preamble of the Reserve Bank of India describes the basic functions 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.
It has 22 regional offices, most of them in state capitals.
RBI was started with a paid up share capital of 5 crore.on established it took over
the function of management of currency from government of India and power of
credit control from imperial bank of India.

Nationalization of RBI:

With a view to have a cordinated regulation of Indian banking Indian Banking

Act was passed in march 1949. To make RBI more powerful the Govt. of
India nationalized RBI on January 1, 1949.
The general superintendence and direction of the Bank is entrusted to
Central Board of Directors of 20 members, the Governor and four Deputy
Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important
elements in the economic life of the country, and four nominated Directors by
the Central Government to represent the four local Boards with the
headquarters at Mumbai, Kolkata, Chennai and New Delhi.
Local Boards consist of five members each Central Government appointed
for a term of four years to represent territorial and economic interests and
the interests of co-operative and indigenous banks.

The Reserve Bank of India was nationalized with effect from 1st January, 1949 on
the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
All shares in the capital of the Bank were deemed transferred to the Central
Government on payment of a suitable compensation. The image is a newspaper
clipping giving the views of Governor CD Deshmukh, prior to nationalization

Organization and Management Body:

ROLE OF RESERVE BANK OF INDIA

Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to
issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department
which is entrusted with the issue of currency notes. The assets
and liabilities of the Issue Department are kept separate from those of the Banking
Department. Originally, the assets of the Issue Department were to consist of not
less than two-fifths of gold coin, gold bullion or sterling securities provided the
amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths
of the assets might be held in rupee coins, Government of India rupee securities,
eligible bills of exchange and promissory notes payable in India. Due to the
exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least
Rs. 115 crores should be in gold. The system as it exists today is known as the
minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as
Government banker, agent and adviser. The Reserve Bank is agent of Central
Government and of all State Governments in India excepting that of Jammu and
Kashmir. The Reserve Bank has the obligation to transact Government business,
via. to keep the cash balances as deposits free of interest, to receive and to make
pay me exchange remittances and other banking operations. The Reserve Bank of
India helps the Government - both the Union and the States to float new loans and
to manage public debt. The Bank makes ways and means advances to the
Governments for 90 days. It makes loans and advances to the States and local
authorities. It acts as adviser to the Government on all monetary and banking
matters.
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of
the Banking Companies Act of 1949, every scheduled bank was required to
maintain with the Reserve Bank a cash balance equivalent to 5% of its demand
liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the
distinction between demand and time liabilities was abolished and banks have been
asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve
Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of
eligible securities or get financial accommodation in times of need or stringency by
rediscounting bills of exchange. Since commercial banks can always expect the
Reserve Bank of India to come to their help in times of banking crisis the Reserve
Bank becomes not only the banker's bank but also the lender of the last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so through
changing the Bank rate or through open market operations. According to the
Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular
bank or the whole banking system not to lend to particular groups or persons on
the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian
money market. Every bank has to get a licence from the Reserve Bank of India to do
banking business within India, the licence can be cancelled by the Reserve Bank of
certain stipulated conditions are not fulfilled. Every bank will have to get the
permission of the Reserve Bank before it can open a new branch. Each scheduled
bank must send a weekly return to the Reserve Bank showing, in detail, its assets
and liabilities. This power of the Bank to call for information is also intended to give
it effective control of the credit system. The Reserve Bank has also the power to
inspect the accounts of any commercial bank.
As supereme banking authority in the country, the Reserve Bank of India, therefore,
has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitative
controls.
(c) It controls the banking system through the system of licensing, inspection and
calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was
required to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the
Bank was able to maintain the exchange rate fixed at lsh.6d. though there were
periods of extreme pressure in favour of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates with all other member countries
of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India's reserve of international currencies. The
vast sterling balances were acquired and managed by the Bank. Further, the RBI
has the responsibility of administering the exchange controls of the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain
non- monetary functions of the nature of supervision of banks and promotion of
sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation
Act, 1949 have given the RBI wide powers of supervision and control over
commercial and co-operative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of working,
amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out
periodical inspections of the banks and to call for returns and necessary
information from them. The nationalisation of 14 major Indian scheduled banks in
July 1969 has imposed new responsibilities on the RBI for directing the growth of
banking and credit policies towards more rapid development of the economy and
realisation of certain desired social objectives. The supervisory functions of the RBI
have helped a great deal in improving the standard of banking in India to develop on
sound lines and to improve the methods of their operation.
Promotional functions
With economic growth assuming a new urgency since Independence, the range of
the Reserve Bank's functions has steadily widened. The Bank now performs a
variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve Bank was
asked to promote banking habit, extend banking facilities to rural and semi-urban

areas, and establish and promote new specialised financing agencies. Accordingly,
the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the
Industrial Development Bank of India also in 1964, the Agricultural Refinance
Corporation of India in 1963 and the Industrial Reconstruction Corporation of India
in 1972. These institutions were set up directly or indirectly by the Reserve Bank
to promote saving habit and to mobilise savings, and to provide industrial finance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India set up
the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank's role in this field has become extremely important. The Bank
has developed the co-operative credit movement to encourage saving, to eliminate
moneylenders from the villages and to route its short term credit to agriculture.
The RBI has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are
related to control and regulation of money and credit, i.e., issue of currency,
control of bank credit, control of foreign exchange operations, banker to the
Government and to the money market. Monetary functions of the RBI are significant
as they control and regulate the volume of money and credit in the country.
Equally important, however, are the non-monetary functions of the RBI in the
context of India's economic backwardness. The supervisory function of the RBI may
be regarded as a non-monetary function (though many consider this a monetary
function). The promotion of sound banking in India is an important goal of the RBI,
the RBI has been given wide and drastic powers, under the Banking Regulation Act
of 1949 - these powers relate to licensing of banks, branch expansion, liquidity of
their assets, management and methods of working, inspection, amalgamation,
reconstruction and liquidation. Under the RBI's supervision and inspection, the
working of banks has greatly improved. Commercial banks have developed into
financially and operationally sound and viable units. The RBI's powers of
supervision have now been extended to non-banking financial intermediaries. Since
independence, particularly after its nationalization 1949, the RBI has followed the
promotional functions vigorously and has been responsible for strong financial
support to industrial and agricultural development in the country.

REGULATION OF BANKING SYSTEM

Objective:
The objectives of bank regulation, and the emphasis, varies between jurisdiction.
The most common objectives are:
1. Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to
protect depositors)
2. Systemic risk reduction -- to reduce the risk of disruption resulting from adverse
trading conditions for banks causing multiple or major bank failures
3. Avoid misuse of banks -- to reduce the risk of banks being used for criminal
purposes, e.g. laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation -- to direct credit to favored sectors
General principles of bank regulation
Banking regulations can vary widely across nations and jurisdictions. This section of
the article describes general principles of bank regulation throughout the world.
Minimum requirements
Requirements are imposed on banks in order to promote the objectives of the
regulator. The most important minimum requirement in banking regulation is
maintaining minimum capital ratios.
Supervisory review
Banks are required to be issued with a bank license by the regulator in order to
carry on business as a bank, and the regulator supervises licenced banks for
compliance with the requirements and responds to breaches of the requirements
through obtaining undertakings, giving directions, imposing penalties or revoking the
bank's licence.
Market discipline
The regulator requires banks to publicly disclose financial and other information,
and depositors and other creditors are able to use this information to assess the
level of risk and to make investment decisions. As a result of this, the bank is
subject to market discipline and the regulator can also use market pricing
information as an indicator of the bank's financial health.

Instruments and requirements of bank regulation

Capital requirement
The capital requirement sets a framework on how banks must handle their capital in
relation to their assets. Internationally, the Bank for International Settlements'
Basel Committee on Banking Supervision influences each country's capital
requirements. In 1988, the Committee decided to introduce a capital measurement
system commonly referred to as the Basel Capital Accords. The latest capital
adequacy framework is commonly known as Basel II. This updated framework is
intended to be more risk sensitive than the original one, but is also a lot more
complex.
Reserve requirement
The reserve requirement sets the minimum reserves each bank must hold to
demand deposits and banknotes. This type of regulation has lost the role it once
had, as the emphasis has moved toward capital adequacy, and in many countries
there is no minimum reserve ratio. The purpose of minimum reserve ratios is
liquidity rather than safety. An example of a country with a contemporary minimum
reserve ratio is Hong Kong, where banks are required to maintain 25% of their
liabilities that are due on demand or within 1 month as qualifying liquefiable assets.
Reserve requirements have also been used in the past to control the stock of
banknotes and/or bank deposits. Required reserves have at times been gold coin,
central bank banknotes or deposits, and foreign currency.
Corporate governance
Corporate governance requirements are intended to encourage the bank to be well
managed, and is an indirect way of achieving other objectives. Requirements may
include:
1. To be a body corporate (i.e. not an individual, a partnership, trust or other
unincorporated entity)
2. To be incorporated locally, and/or to be incorporated under as a particular type
of body corporate, rather than being incorporated in a foreign jurisdiction.
3. To have a minimum number of directors
4. To have an organizational structure that includes various offices and officers,
e.g. corporate secretary, treasurer/CFO, auditor etc. Also the officers for those
offices may need to be approved persons, or from an approved class of persons.

Financial reporting and disclosure requirements

1. Prepare annual financial statements according to a financial reporting standard,
have them audited, and to register or publish them
2. Prepare more frequent financial disclosures, e.g. Quarterly Disclosure
Statements
3. Have directors of the bank attest to the accuracy of such financial disclosures
4. Prepare and have registered prospectuses detailing the terms of securities it
issues (e.g. deposits), and the relevant facts that will enable investors to better
assess the level and type of financial risks in investing in those securities.
Credit rating requirement
Banks may be required to obtain and maintain a current credit rating from an
approved credit rating agency, and to disclose it to investors and prospective
investors. Also, banks may be required to maintain a minimum credit rating.
Large exposures restrictions
Banks may be restricted from having imprudently large exposures to individual
counter parties or groups of connected counter parties. This may be expressed as a
proportion of the bank's assets or equity, and different limits may apply depending
on the security held and/or the credit rating of the counter party.
Related party exposure restrictions
Banks may be restricted from incurring exposures to related parties such as the
bank's parent company or directors. Typically the restrictions may include:
Exposures to related parties must be in the normal course of business and on
normal terms and conditions
Exposures to related parties must be in the best interests of the bank
Exposures to related parties must be not more than limited amounts or
proportions of the bank's assets or equity

CREDIT CONTROL

One of the more pleasant aspects of the latest quarterly Monetary Policy Review
is the attempt by the Reserve Bank of India to be as predictable as possible, or at
least less disruptive than it has been before. The notion that some elements of a
tighter money policy would be announced was pretty much to be expected. While
raising repo rates by 25 basis points and leaving other indicators of liquidity
unchanged, the RBI Governor, Dr Y. V. Reddy, has tried to play both policeman and
purveyor of optimism, the former by raising marginally the cost of capital for banks
through the repo rate hike, and the latter by selectively pushing up the provisioning
norms for certain categories of borrowers hoping thereby to catch inflation by the
scruff and pull it back within the 5.5 per cent limit.
Lest the markets think the RBI is a killjoy, in its combat against inflation, the
Governor has raised the bar on growth expectations jettisoning his earlier forecast
and the prognosis of North Block for a 9 per cent GDP target for this waning
fiscal. He has tried therefore to be all things to all men, in the bargain creating a
dilemma that may not augur well for the economy in the medium to long term. The
basic problem is that the RBI cannot hope to both fight inflation and propel growth
to the levels it wants with the measures it has so far set in motion. Controls on
credit expansion for select categories with inflation potential capital markets and
commercial real-estate through higher provisioning may choke demand only if it is
sensitive to the cost of credit. But in a booming economy, higher costs can be
transmitted down the line; witness the rising housing loan rates. In many a highflying sector banks may, therefore, still find takers for expensive credit. Regardless
of the RBI's marginal increase in repo rates, the perception of a tighter money
regime will push up interest rates all around, thus contributing to the price rise
instead of combating it.
Given the nature of inflation, currently at a two-year high, the task of fighting it lies
with New Delhi. The Government must put together a gamut of measures to
remove the supply bottlenecks that are causing the price rise. The RBI admits that
the growth in agriculture has "not been sanguine" with the declining output in major
cereals pushing up prices. Focusing its Monetary Policy weapons on "credit quality"
and, therefore, the health of the banking system, the RBI has prudently left this
initiative to New Delhi.

OBJECTIVE OF CREDIT CONTROL

The central bank makes efforts to control the expansion or contraction of credit in
order to keep it at the required level with a view to achieving the following ends.
To save Gold Reserves: The central bank adopts various measures of credit control
to safe guard the gold reserves against internal and external drains.
To achieve stability in the Price level: Frequently changes in prices adversely affect
the economy. Inflationary and deflationary trends need to be prevented. This can
be achieved by adopting a judicious of credit control.
To achieve stability in the Foreign Exchange Rate: Another objective of credit
control is to achieve the stability of foreign exchange rate. If the foreign exchange
rate is stabilized, it indicates the stable economic conditions of the country.
To meet Business Needs: According to Burgess, one of the important objectives of
credit control is the Adjustment of the volume of credit to the volume of Business
credit is needed to meet the requirements of trade an industry. So by controlling
credit central bank can meet the requirements of business.
METHOD OF CREDIT CONTROL
There are two method of credit control: Quantitative method
1. Bank Rate Policy
2. Open Market Operations
3. Change in Reserve Ratios
4. Credit Rationing
Qualitative method
1. Direct Action
2. Moral persuasion
3. Legislation
4. Publicity

Quantitative method
Bank Rate Policy:
Bank rate is the rate of interest which is charged by the central bank on
rediscounting the first class bills of exchange and advancing loans against approved
securities. This facility is provided to other banks. It is also known as Discount Rate
Policy.
Open Market Operations:
The term Open Market Operations in the wider sense means purchase or sale by
a central bank of any kind of paper in which it deals, like government securities or
any other public securities or trade bills etc. in practice, however the term is
applied to purchase or sale of government securities, short-term as well as longterm, at the initiative of the central bank, as a deliberate credit policy.
Change in Reserve Ratios:
Every commercial bank is required to deposit with the central bank a certain part of
its total deposits. When the central bank wants to expand credit it decreases the
reserve ratio as required for the commercial banks. And when the central bank
wants to contract credit the reserve ratio requirement is increased.
Credit Rationing:
Credit rationing means restrictions placed by the central bank on demands for
accommodation made upon it during times of monetary stringency and declining
gold reserves. This method of controlling credit can be justified only as a
measure to meet exceptional emergencies because it is open to serious abuse.
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. If RBI decides to increase the
percent of this, the available amount with the banks comes down and if RBI reduce
the CRR then available amount with Banks increased and they are able to lend
more.RBI has reduced this ratio three times and reduced it from 9 % to 5.5% in last
one month or so.
Repo Rate:
Repo rate is the rate at which our banks borrow rupees from RBI. This
facility is for short term measure and to fill gaps between demand and supply of
money in a bank .when a bank is short of funds they they borrow from bank at repo
rate and if bank has a surplus fund then the deposit the funds with RBI and earn at

Reverse repo rate. So, reverse Repo rate is the rate which is paid by RBI to banks
on Deposit of funds with RBI.A reduction in the repo rate will help banks to get
money at a cheaper rate. When the repo rate increases borrowing from RBI
becomes more expensive. To borrow from RBi bank have to submit liquid bonds
/Govt Bonds as collateral security, so this facility is a short term gap filling facility
and bank does not use this facility to Lend more to their customers present rate is
7.5% and reverse repo rate is 6%.
SLR((Statutory Liquidity Ratio)
Statutory Liquid Ratio 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. SLR rate is determined and maintained by the RBI (Reserve
Bank of India) in order to control the expansion of bank credit.Generally this
mandatory ration is complied by investing in Govt bonds.present rate of SLR is 24
%.But Banks average is 27.5 % ,the reason behind it is that in deficit budgeting Govt
landing is more so they borrow money from banks by selling their bonds to
banks.so banks have invested more than required percentage and use these excess
bonds as collateral security ( over and above SLR )to avail short term Funds from
the RBI at Repo rate.
Qualitative method
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.
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.
Legislation:
The central bank may also adopt necessary legislation for expanding or contracting
credit money in the market.
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.

[REFERENCES]
BOOKS
[1.] M.Y. Khan Indian financial system
[2.] Sudhir shah-Indian economy
WEBSITES
[1.] http://www.rbi.org.in
[2.] http://en.wikipedia.org/wiki/Reserve_Bank_of_India