2014-15

FINAL
DRAFT
ECONOMICS
RBI AND EVALUATION OF MONETARY
POLICY
Submitted to:

Submitted by:

Dr. Mitali Tiwari

Shobhit Mani Gopal

Assistant Professor (economics)

roll no.:129 (3 rdsem)

Dr.Ram Manohar Lohiya National Law University,Lucknow

sec-B

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RBI AND
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Acknowledgement .. (3)
Research problem ....... (4)
Objective .... (4)
Research Methodology ... (4)
Introduction ............................................ (4)
Structure, Management and Function (5)
Departments of RBI ....... (5)
Functions of RBI (7)
Statutory Liquidity Ratio (SLR) . (9)
Cash Reserve Ratio (CRR) ..... (10)
Important terms used ....(10)
Monetary Policy ......... (12)
Current Monetary Policy ..(13)
Short note on Indian financial code . (14)
Conclusion ....(15)
References (16)

ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide (Dr.
Mitali Tiwari Assistant Professor) for his exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis. The blessing, help and guidance given by
him time to time shall carry me a long way in the journey of life on which I am about to
embark.
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I would like to express my gratitude towards my parents & members of Dr. Ram Manohar
Lohiya National Law University for their kind co-operation and encouragement which help
me in completion of this project.

I would like to express my special gratitude and thanks to all those people who gave me
attention and their invaluable time.

My thanks and appreciations also go to my friend and classmates in developing the synopsis
and people who have willingly helped me out with their abilities.

RESEARCH PROBLEMS:
The research problem over here is the study of the R.B.I and its monetary policies for raising
awareness about the functions of R.B.I and its current monetary policy. This would be achieved by
reading various newspapers, articles etc.

OBJECTIVE:

Objective of this study is to analyse the role of R.B.I.

Study its current monetary policy.
How it works to achieve specific economic objectives.
What are RBIs functions?

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Study the recent Indian Financial Code 2015

Discussions on issues that are relevant to this topic.

RESEARCH METHODOLOGY:
Doctrinal methodology: It is concerned with analysis of available literature sources on the topic and
it has been developed and applied .Various sources such as books, articles, journals and newspaper
have helped me for my research.

INTRODUCTION:
The Reserve Bank of India is the nation's central bank, began to operate on April 01, 1935. The
objective behind establishing it was to ensure monetary stability and operating the currency and
credit system of the country. Its functions are monetary management, foreign exchange and reserves
management, government debt management, financial regulation and supervision, apart from
currency management and acting as banker to the banks and to the Government.
The Reserve Bank has also played active developmental role, particularly for the agriculture and
rural sectors.

STRUCTURE, MANAGEMENT AND FUNCTION:

The Central Board has primary authority for the oversight of the Reserve Bank. It delegates specific
functions through its committees and sub-committees.
Central Board: Includes the Governor, Deputy Governors and a few Directors (of relevant local
boards).
Committee of Central Board: Oversees the current business of the central bank and typically meets
every week, on Wednesdays. The agenda focusses on current operations, including approval of the
weekly statement of accounts related to the Issue and Banking Departments.
Board for Financial Supervision: Regulates and supervises commercial banks, Non-Banking
Finance Companies (NBFCs), development finance institutions, urban co-operative banks and
primary dealers.
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Board for Payment and Settlement Systems: Regulates and supervises the payment and settlement
systems.
Sub-committees of the Central Board: Includes those on Inspection and Audit; Staff; and Building.
Focus of each subcommittee is on specific areas of operations.
Local Boards: In Chennai, Kolkata, Mumbai and New Delhi, representing the countrys four
regions. Local board members, appointed by the Central Government for four-year terms, represent
regional and economic interests and the interests of co-operative and indigenous banks.

Departments of RBI:
These focus on policy issues in the Reserve Banks functional areas and internal operations.
Market:

Internal Debt Management Department

Department of External Investments and Operations
Monetary Policy Department
Financial Markets Department

Regulation, Supervision and Financial Stability:

Department of Banking Supervision

Department of Banking Operations and Development
Department of Non-Banking Supervision
Urban Banks Department
Rural Planning and Credit Department
Foreign Exchange Department
Financial Stability Unit

Research:

Department of Economic and Policy Research

Department of Statistics and Information Management

Services:

Department of Government and Bank Accounts

Department of Currency Management
Department of Payment and Settlement System
Customer Service Department

Support:

Premises Department
Secretarys Department
Rajbhasha Department

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Inspection Department
Legal Department Human Resource Management Department
Department of Communication
Department of Information Technology
Department of Expenditure and Budgetary Control

Reserve Bank of India besides being named as bank does not fall in the category of commercial
banks because it does not do the business of banking as defined in the Banking Regulation Act i.e.
accepting deposits and lend money to people as done by commercial banks. It also controls the
changes in the stock of market because firstly, such changes exert a powerful influence on prices,
secondly, greatly influence output and distribution of income and wealth, which in turn influence
employment and lastly it helps in balancing income and wealth distribution.

FUNCTIONS OF RBI:

Reserve Bank of India as a central monetary authority of India, like in any other Central Bank of any
country, is empowered to guide, monitor, regulate, control and promote the past, present and future
of the financial system of the country. It is performing such functions since 1935 after its inception as
empowered by the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.
The basic functions of the Reserve Bank of India as given in the Preamble of the Reserve Bank of
India Act, 1934 are to regulate the issue of Bank notes and the 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.
As a Central Bank of the country, the RBI performs a wide range of functions. Among various
functions important are:

Acts as the currency authority

Controls money supply and credit
Manages foreign exchange
Serves as a banker to the government
Builds up and strengthens the countrys financial infrastructure

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Acts as the banker of commercial banks

Supervises banks
Reserve Bank of India performs various functions to manage the monetary system of the country.
These functions include:
1. Reserve Bank of India under the RBI Act, Section 22 is solely responsible for the issuance of
currency notes excluding rupee one note which issued by Finance Secretary of the
Government of India. RBI regulates the issuance of the notes in India mainly to bring
confidence among people of genuineness, quality and credibility of money issued besides
bringing in uniformity in issuance of notes. Due to single authority there is effective control
on flow of credit in and out of the market.
2. RBI acts as banker to commercial banks.
3. RBI conducts banking and financial operations of the Government of India and advises on
various financial and economic issues. While handling the Government business, RBI
maintains government accounts, advises on monetary matters including financial aspects,
besides carrying out Government business as and when required.
4. It provides financial accommodation to cooperative banking sector for financing special
sectors of the economy like agriculture etc.
5. Bank performs the function of controller of exchange value of rupee vs. US dollar.
6. As a guide and controller of banking and financial sector, RBI appoints CEOs of Banks and
put its members of the Boards of the Bank to ensure proper Governance and sound banking
practices.
7. As a developmental function, RBI promotes various specialized institutions. It has promoted
IDBI (Industrial Development Bank of India), NBARD (National Bank for Agriculture &
Rural Development), Small Industrial Development Bank of India (SIDBI), Deposit
Insurance & Credit Guarantee Trust for Small and Medium Enterprises (DI & CGTSME) /
Export Credit Guarantee Corporation of India (ECGC) etc.
8. RBI issues monetary policy twice a year to provide guidance to flow of credit and safety
measures to the banking and financial sector. It issues busy season policy in October every
year and slack season policy in May-June. This sets the tone for the money market as well as
financial activities.
9. For good governance, RBI resorts to moral suasion on banking and financial sector.
10. It disseminates financial data on banking, economy and other aspects of monetary aspects.
11. RBI is sole authority to handle overall monetary and credit policy in the country.
12. To regulate the flow of credit in the economy RBI also resorts to selling and purchasing of
short term or even long term securities.
13. RBI provides ways and means credit facility to the Government of India and State
Governments in order to overcome tight money position between payment and receipt of the
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client. The period of such ways and means credit is maximum 90 days (3 months). Such
power to lend money to governments is given under section 17 (5) of Reserve Bank of India
Act, 1934.
14. RBI also acts as a lender of the last resort, which means meeting the genuine financial
requirements of commercial banks.
15. Management of raising of finance by the Government and issuance of new loans/advances on
behalf of the Government of India / State Government is handled by the Public Debt Office
of the Reserve Bank of India.
16. It regulates the credit flow in the market by using credit control instruments like bank rate,
open market operations and power to vary reserve ratios like cash reserve ratio (CRR) and
statutory liquidity ratio (SLR). These two ratios are most important tools for maintaining
liquidity in the financial system, particularly banking system.
17. Bank Rate, CRR and SLR are some of the quantitative steps that RBI can take from time to
time to control flow of money and to control inflation.

Statutory Liquidity Ratio (SLR):

Reserve Bank of India exercises direct control over the liquidity of the banking

system.
RBI is the only authority to effect changes in the liquidity position of banks based on
demand and time liabilities.

As per Section 5 (f) of the Banking Regulation Act, 1949 demand liabilities means
those liabilities that are to be met on demand.

Banks are also required to maintain a portion of their deposit liabilities in the form of
liquid assets i.e. bonds etc. This is called Statutory Liquidity Ratio.

Liquid assets to be maintained are in the form of cash, gold and unencumbered
approved securities as per section 24 of the Banking Regulation Act, 1949.

As and when RBI increases the SLR, reduces the funds supply in the market, thus
reducing the lendable resources with commercial banks. Vice versa when SLR is
reduced it will increase the funds with banks for onward lending.

Cash Reserve Ratio (CRR):

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Banks are required to deposit with reserve bank of India an amount equal to the
percentage of deposits with respective bank in the ratio prescribed by RBI from time

to time. This is called Cash Reserve Ratio (CRR).

This is mainly done to provide stability to the economy. In simple words CRR is the
proportion of funds banks have to deposit with the Reserve Bank of India. It change
from time to time is part of economic policy to control inflation etc. Any change in
CRR percentage means either increased availability of funds with the banks or

reduced funds available in the market.

Unchanged CRR means no additional funds available for banks to lend.

Important terms used:

Bank Rate:
It means the rate of interest at which RBI buys or rediscounts the bills of exchange including
commercial papers etc. as permissible under RBI Act, 1934. As per the need of the hour, RBI raises
the Bank Rate in order to squeeze the credit expansion whereas it reduces the Bank Rate when it
needs to allow more flow of credit in the economy.

Repo Rate:
Repo Rate is the rate at which banks borrow from the Reserve Bank of India (RBI). When the repo
rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more
expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it
cheaper for banks to borrow money it reduces the repo rate.

Reverse Repo Rate:

Reverse repo rate means the rate of interest at Which RBI borrows from the banks. The Reserve bank
uses this tool when it feels there is too much money floating in the banking system. An increase in
the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result,

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banks prefer to lend their money to RBI which is always safe instead of lending it others (people,
companies etc) which is always risky.

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas
Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks.
Reverse Repo Rate is linked to Repo Rate with a difference of 1% between them

Marginal Standing Facility:

The Reserve Bank of India in its monetary policy for 2011-12 introduced the marginal standing
facility under which banks could borrow funds from RBI when there is a considerable shortfall of
liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches
more effectively. Under this facility, banks can borrow up to 1% of their net demand.

Statutory Liquidity Ratio:

This is the percentage of deposits that banks must mandatorily hold in the form of government bonds. SLR bonds
are liquid assets that can be sold at a short notice to meet any unexpected demand from depositors.

Liquidity Adjustment Facility:

Under this facility, banks borrow from the central bank by pledging government securities. Repo
rate and Reverse repo rate are part of it.

Basis Points:
It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50
basis points , then it means that interest rate has been increase by 50%.

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MONETARY POLICY:
The term monetary stands for money. Thus in simplified terms, monetary policy is a policy which
influences money supply in the economy.
It is the credit control measures adopted by the central bank of a country. Johnson defines monetary
policy as policy employing central banks control of the supply of money as an instrument for
achieving the objectives of general economic policy.
G.K. Shaw defines it any conscious action undertaken by the monetary authorities to change the
quality, availability or costof money.

Monetary policy is one of the ways that the government attempts to control the economy. If the
money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is
slowed too much, then economic growth may also slow.
The goal is to achieve specific economic objectives, such as low and stable inflation and promoting
growth.

Objectives of Monetary Policy:

1.
2.
3.
4.
5.
6.
7.

Ensures price stability

Controls expansion of bank credit
Promotion and development of fixed investments
Controls inventory build ups by some individuals
Export promotion
Ensures proper food procurement operations.
Uniform credit distribution among various sectors of the economy and society

Techniques Used by RBI to Manage and Control Monetary System:

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1. Open market Operations

2. Bank Rate Mechanism
3. Discretionary control of refinance and rediscounting
4. Interest Rate (Repo rate and reverse repo rate) control
5. CRR and SLR mechanism
6. Credit rationing
7. Credit reporting
8. Selective Credit Control when need arises
9. Credit reporting system to RBI
10. Inventory and credit norms
11. Moral suasion

CURRENT MONETARY POLICY:

In its Third Bi-monthly journal of monetary policy, the Reserve Bank of India (RBI) maintained its
interest rates unchanged. Earlier, June 2, 2015, in its second bimonthly review of the monetary
policy, the RBI cut its repo rate by 25 basis points to 7.25 percent after lowering by the same amount
in January and March. But this time, the RBI has not made changes in policy rates. The reserve ratio
is 7.25 percent, the reverse ratio is 6.25 percent and cash reserve ratio (CRR) and statutory liquidity
ratio (SLR) to 4 per cent and 21.5 per percent, respectively.
RBI stated that it was appropriate for central bank to maintain its key policy rate on the notion that
inflation in June was transitory, as well as to monitor the possible action by the US Federal Reserve
and outcomes of the monsoon. The RBI will likely ease its monetary policy further with the aim of
supporting credit growth in an environment of low inflation.
On 3rd August, the India Meteorological Department (IMD) maintained its prediction that the country
will receive 12.0% less rainfall (which is technically characterized as a drought) when compared
with long-term averages for this years monsoon season. This suggests to me that inflation risks
remain to the upside, particularly as favourable base effects start to decrease from September. That
said, I believe the Indian government to continue to enact reforms in the agricultural sector while
also taking actions to ensure a steady supply of food in the domestic market, which should help to
cap any significant upside inflationary pressures on food items, and could potentially offset any
unfavourable base effects.
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The following changes have been taken in this policy:

Repo Rate: Unchanged at 7.25 % .

Reverse Repo Rate under the LAF: Stands adjusted 6.25%
Cash Reserve Ratio (CRR): Kept unchanged at 4.0 %
Marginal standing facility (MSF) rate: Stands 8.25%
Bank Rate: 8.25%

Short note on Indian Financial Code:

The Financial Sector Legislative Reforms Commission (FSLRC) was set up on March 24, 2011, for
re-writing the Code to regulate the financial sector and introduce principles for financial regulation
and the constitution, objectives, powers and interaction of financial agencies. Its aim was also to
bring about coherence and efficacy in the financial regulatory framework.
In 2013, the commission, headed by Justice BN Srikrishna, submitted its report in two volumes,
which included 'Analysis and Recommedation' and 'Draft Law'. The revised draft in twenty parts will
strive to regulate financial agencies.
Under this Act, the Financial Sector Appellate Tribunal was established to exercise the jurisdiction,
powers and authority conferred upon it.
According to the Act, the general direction and management of the financial agencies will be vested
in the respective boards -- the Financial Authority Board for the Financial Authority, the Reserve
Bank Board for the Reserve Bank, the Redress Agency Board, with respect to the Redress Agency,
the Corporation Board for the Corporation; the Council Board for the Council and the Debt Agency
Board, with respect to the Debt Agency.
The Code deals with the establishment of financial agencies, establishment and structure of the
tribunal, allocation and regulation of financial services.
A part of it discusses the functioning of financial agencies, such as boards of financial agencies,
strength and composition of boards; decision making, advisory councils, accountability mechanisms
and funding for financial agencies.
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It also mentions the disposal of applications, information and inspections, investigations and offences
as executive functions of financial agencies. These financial agencies also have quasi-judicial
functions -- administrative law, show cause notices and orders, enforcement actions, procedure for
enforcement actions and penalties.
Moreover, the Code also clarifies financial consumer protection, prudential regulation, contracts,
trading and market abuse, capital controls, resolution of financial service providers, financial
stability and development council, development (provisions for review), public debt management
agency, offences, functions, powers and duties of tribunal, miscellaneous, and schedules.

CONCLUSION:
The Reserve Bank for India was constituted to regulate the issue of Bank notes and the 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. Implicit in these words are the core purposes of the
RBI: to foster monetary and financial stability conducive to sustainable economic growth, and to
ensure the development of an efficient and inclusive financial system.

REFERENCES:

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http://en.wikipedia.org/wiki/Reserve_Bank_of_India
http://www.rbi.org.in/Scripts/Annualpolicy.aspx
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIB140520012.pdf
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf