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CPT Section C General Economics Chapter 8 Unit 3

The Reserve Bank of India.

CA Shweta Poojari

Functions of RBI
Role of RBI
Indian monetary policy
Instruments of Credit controls
Multiple Choice Questions

The Reserve Bank of India is the central bank of

the country and it performs all the central banking
Reserve Bank of India was setup on 1st April 1935
as the shareholders bank.

RBI was nationalized on 1st January 1949.

The Executive head of the Bank is called the Governor, who is assisted by
Deputy Governors and other executive officers.

The General superintendence and direction has been entrusted to the Central
Board of Directors, consisting of the Governor, Dty. Governors, one Govt.
Official from the Ministry of Finance and Directors nominated by the Govt. of
India representing the Local Boards and various elements of the economy.

Besides the Central board there are 4 Local Boards with headquarters in
Mumbai, Kolkata, Chennai and New Delhi.

Supervision and control over Commercial Banks,

relating to licensing and establishments, branch
expansion, liquidity of their assets, management
and methods of working, amalgamation,
reconstruction and liquidation.

Issue of Currency
Banker to the Government
Bankers Bank
Custodian of foreign exchange reserves
Controller of credit
Lender of last resort
Central clearance, settlement and transfer of money

Promotional functions

Collection and publication of data


The RBI is the sole authority for the issue of currency

in India other than one rupee notes and subsidiary
coins, the magnitude of which is relatively small. The
RBI is also called Bank of issue

The One Rupee notes and coins are issued by the

Central Govt. , The Ministry of Finance.

As a Banker to the Govt. RBI performs the foll. Functions.

a. It accepts money , makes payment and also carries out their

exchange and remittances for the Govt.
b. It manages public debts, advices the government on the
quantum, timing and terms of new loans.
c. It also sells treasury bills to maintain liquidity in the economy.
d. Fiscal agent and advisor to the Govt.

The RBI has extensive power to control and supervise

commercial banking system under the RBI Act, 1934
and the Banking Regulation Act, 1949.
The banks are required to maintain a minimum of cash
reserve ratio (CRR) with RBI.
The RBI provides financial assistance to scheduled
banks and state co operative banks.

The RBI is the custodian of monetary reserve in India and RBI also is
the custodian of national reserve of international currency.

It has to ensure that normal short term fluctuations do not affect the
exchange rate.

Credit control is generally considered to be the principal

function of central bank. By making frequent changes in
monetary policy, it ensures that the monetary system in the
economy functions according to the nations needs and goals.

The RBI uses almost all Quantitative and Qualitative methods

of credit controls.

RBI is the official Lender of the last resort.

Lender of last resort means central bank

coming to the rescue of other banks in
times of financial crises.

Central bank has special position for conducting

clearinghouse operations, Inter-bank transfer of
funds and settlement of accounts.

i.e. settling the mutual Owings of banks

RBI also performs variety of Developmental and

Promotional functions.

It is responsible for promoting banking habits among

people, mobilizing savings, development of the
banking system, and provision of finance for
agriculture, Foreign trade and small scale industries

It has also been entrusted with the

task of collection and compilation of
statistical information relating to
banking and financial sector of the

The other Misc. Functions of RBI are:

The RBI is responsible for overall monetary policy in

India like monetary stability, Stability of domestic
price levels, Maintenance of the International value of
the nations currency etc.

1.The RBI is apex monetary institution of the highest authority in India.

It plays an important role in strengthening, developing and diversifying
the countrys economic and financial structure.
2. It is responsible for the maintenance of economic stability and
assisting the growth of the economy.
3. It is Indias prominent public financial institution given the
responsibility for controlling the countrys monetary policy.
4. It acts as an advisor to the government in its economic and financial

5. It is responsible for the development of an adequate

and sound- banking system in the country.
6. RBI has to keep inflationary trends under control and to
see that the main priority sectors like agriculture , exports
and small scale industry get credit at cheap rates.
7. It also has to protect the market for government
securities and channelize credit in desired direction.



It is profit-seeking institution

Its objective is not to make profit

Its profits mainly from loans and


Its profits are mainly from Government

securities, advances to government
and commercial banks

Banks Mobilize savings and

channelize them into investments.

Central Banks role is to ensure that

the other banks Properly conduct their
business in national interest.

Functions of commercial banks are


Functions of central banks are unique

Monetary policy is the one employed by the state through its
central bank, to control the supply of money as an instrument of
achieving the objectives of general economic policy.


a. To regulate monetary growth and maintain price stability

b. To ensure adequate expansion in credit
c. To assist economic growth
d. To encourage the flow of credit into priority and neglected
e. To strengthen the banking system

Quantitative or General Measures

Qualitative or selective Measures

Bank Rate Policy

Margin Requirements

Open market operations

Consumer credit regulation

Variable reserve requirements

Issue of directive

(i) cash reserve ratio

(ii) Statutory liquidity ratio
Rationing of credit
Moral suasion
Direct action

General measures of
credit control

The bank rate is the official interest rate at which the

central bank rediscounts the approved bills held by a
commercial bank. If the central bank wishes to control
credit and inflation, it will increase the bank rate

At present the Bank Rate is 9%.

OMO imply deliberate and direct sales and purchases of

securities and bills in the open market by central bank to control
the volume of the credit. If it wishes to control credit inflation,
then central bank sells securities in the open market.

If central bank wishes expansion of credit at the time of

deflation, then it purchases the securities.

The central bank also uses method of variable reserve requirement to

control credit. There are two types of reserves, which the commercial
banks are generally required to maintain.

Cash reserve ratio [ C.R.R]

refers to that portion of total deposits, which a commercial bank has to keep with RBI
in the form of cash reserves.

Statutory liquidity ratio [ S.L.R]

refers to that portion of total deposits, which a commercial bank has to keep with
itself in the form of liquid assets.

During Inflation, to Control Inflation and

Discourage investment, it is advisable to;
Increase the Bank Rate
Sale of Securities in the open market
Increase the CRR and SLR

During Deflation, to Control Deflation and

Encourage investment, it is advisable to;
Decrease the Bank Rate
Buying of Securities in the open market
Decrease the CRR and SLR

Qualitative or

1.Margin Requirements:

A margin requirement is difference between securities

offered and amount lent against those securities by the
banks. Increase in margin reduces the borrowing capacity
and decrease in margin increase the borrowing capacity.

2. Consumer credit regulation

Laying down rules regarding down payments and maximum

maturities of installment credit for the purchase of specified
consumer durable goods. Raising the required down payment
limits and shortening of maximum period tend to reduce the
demand for such loan and thereby check consumer credit.

3. Issue of directive:

The central bank also uses directives in form

of oral, written statement, appeals or warnings
to various commercial bank for credit control.

4.Rationing of credit:

Rationing of credit is a selective method adopted by

central bank for controlling and regulating the
purpose for which credit is granted by commercial

5. Moral suasion:

Moral suasion is a psychological means and purely informal

and milder form of selective credit control. In moral suasion
central bank persuades and morally requires to the commercial
banks to co-operative with the general monetary policy of credit

6. Direct action:

The central bank may take direct action against the

erring commercial banks or it may charge a penal
rate of interest over and above the bank rate, for the
credit demanded beyond the prescribed limit.


a.Providing cheap rediscounting

facilities to commercial banks
b.Providing liberalised
rediscounting facilities to
commercial banks
c.Giving subsidies to new banks

d.All of the above


a. RBI Act, 1934

b. Banking Regulation Act,
c. Both RBI Act 1934 and
Banking Regulation Act 1949
d. Banking Regulation Act,


a. It can bring about compulsory

amalgamation of weak banks
b. It can claim for compulsory
c. It can expedite winding up of
proceedings to safeguard the interest of
d. All of the above


a. Uniformity in note issue

b. Stability in currency
Answer.: D

c. Control of credit

d. All of the above

a. Create
b. Controls
c. Restricts
d. None of the above

Answer.: B
Creation of credit is
done by commercial

a. Dear
b. Cheap
c. Restricted
d. Green

Answer.: B
Explanation.: People will
borrow more and
spend/Invest more.

a. Bank rate policy

b. Cash reserve ratio
c. Statutory liquidity ratio
d. All of the above


a. Control inflation
b. Discourage hoarding of commodities
c. Encourage flow of credit into neglected sector
d. All of the above
Ans.: D Expln: (Please refer Slide No.:21)

a. Credit
b. Financial
c. Monetary
d. fiscal


a. RBI advances necessary credit

against eligible securities.
b. Commercial banks give fund to
c. RBI advances money to public
whenever there is any emergency.
d. All the above.


a. Rate at which commercial

banks lend money
b. Rate at which RBI lends
to commercial Banks.
c. Rate of interest paid by
the banks to its depositers.
d. None of the Above.

Answer: B
Bank rate is the rate at
which the Central Bank
gives loans or
rediscounts the bills of
exchange to the
commercial banks.

a. 9%
b. 10%
c. 4.5%
d. 23%

Answer: A
Note : the bank rate
is as updated up to
Sept. 2012.

a. 4.5%
b. 7.5%
c. 15%
d. 23%

Note : the CRR is as
updated up to Sept.

a. 4.5%
b. 7.5%
c. 15%
d. 23%

Note : the SLR is as
updated up to Sept.

a. RBI is a Profit making institution

acting in the interest of the Govt.
b. Every country has only one central
bank which is managed by Govt.
c. RBI does not perform any ordinary
commercial banking functions.
d. RBI has adopted Minimum
Reserve System of Note Issue.

RBI is not a profit
making Institution and
it acts in the public