NIVARAN

PRELIM 1
FINANCE
GUPTA EMPIRE

My projected five-year plan for Reserve Bank of India as a

Governor General to
A) To curb inflation
B) To reduce the value of the rupee against the dollar
Using the functions given is in the following ways:
A) Financial Supervision: Increase the repo rate by 0.25
percent.
Thus increasing from 6.5 percent to 6.75 percent.
Repo rate is the rate at which RBI lends its money to other
central banks. If we increase the repo rate by a small margin
of 0.25 percent, it will still discourage the banks from
borrowing money from RBI. As excess of money in the
market can lead to inflation. This can be explained through
the Quantity Theory of Money, MV=PT, where M= money
supply, V=Velocity of circulation, P= Price level, T=
Transactions or output.
a) When repo rates are increased, other banks have to return
more money to RBI. This leads to less amount of money
being available with banks to lend out to the market. As a
result, banks increase the loan interest rates, thus,
decreasing the amount of money in the market. Now, when
people have less money with them they spend less which

decreases demand of products and as a result prices go

down.
b) However, when money in the market decreases, money
available with industries diminishes and as a result
production decreases. The reduction in production leads to
soaring of prices of products which are in demand which
can lead to further inflation. Thus we will make sure we
can fulfil all the demands of the nation and thus also cause
reduction in inflation.
B) Bankers Bank: Control the loans given.
As RBI is a bankers bank and we give them loans to
distribute to the public. The basic reason why inflation exists
is because of banks giving loans to larger MNCs and not
giving to smaller and medium companies. This also arouses
another problem of huge non-performing assets. And thus the
following has to be done:
a) Instead of loans to larger MNCs, investments have to be
done by RBI. This will reap benefits of interest or dividend
in the coming future. Thus giving control to the investment
and thus making progressive development.
b) The non-performing assets are having a large collection by
the banks. And proper recovery of the loans and measures

shall be taken to recover the money back. If the loan is not

recovered back, then
A)The assets which are of commercial nature should be
handed over to business, and a certain percentage of
profit shall be recovered from them, or the company
shall be sold to them at a particular price depending
upon the value of the asset and the loan amount.
B) Future loans shall be given only with the assets which
are of commercial nature and not of personal effects.
Thus giving the RBI a beacon of survival that the loan
will be paid back.
c) To the smaller and medium scale companies, loan has to
be provided. The RBI can give or help the regional banks
with funds. And with moral suasion or regulations RBI has
to make it mandatory to provide loans to new industries
and small and medium scale companies through regional
banks and not just give loans to bigger MNCs.
C) Issue of currency: Strict control of currency
production:
Currency is being made in factories and the factories are
of printing. The printers print how much ever currency
they want behind their back and thus causing the
currency to have no value in real. Thus strict control on

production of currency is required. And lesser

currencies have to be produced, which will reduce the
value of rupee against dollar in the long run.
D) Managerial of Exchange Control:
a) Control of black money:
This is done through various methods, hawala
transactions where money is transferred abroad
without any real movement of funds being one of
them although, according to a finance ministry white
paper on black money released two years ago,
hawala transactions have actually dwindled over the
past decade.
"In recent years, after the 9/11 incident in the US,
due to intense scrutiny of banking transactions,
enhanced security checks at airports and ports and
relaxation of exchange controls, transfer of money
through hawala has reduced significantly," says the
report. "...increasing pressure on financial operators
and banks to report cash transactions has also helped
in curbing hawala transactions." However, there are
other methods to siphon black money out of the
country, two of which are manipulation of export
invoices and setting up of trusts abroad. Two incometax officials told ET Magazine that a large number of
the accounts of the 627 names based on data stolen

by an employee of HSBC, Geneva, would be of such

trusts. The modus operandi adopted here is as
follows: black money moves abroad through routes
like hawala. Then a trust is formed in, let's assume,
the Netherlands. The trustees in this case will be
Dutch nationals, but the beneficiaries will be
relatives of an Indian back home who put in the
initial corpus. "But we can initiate a probe only when
money gets reflected in the accounts of the
beneficiaries," explains one of the tax officials. As
the income tax department and the Enforcement
Directorate (ED) will now work under SIT, one can
expect more urgency in the mission to bring back
unaccounted money. Yet, genuine hurdles may come
in the way of that endeavour. The classic example of
such a hurdle is seen in the case of Pune-based stud
farm-owner Hasan Ali Khan, who was raided by the
I-T department seven years ago. Documents and data
in his laptop established that he had a Swiss bank
account with a whopping $8 billion (roughly Rs
48,000 crore) in deposits. Ali was sent to jail, but the
ED that probes money laundering cases found out
from the Swiss authorities that Ali's accounts had
been emptied.
b) Implementation of Lokpal:

The Lokpal bill has to be amended as it proposes to

control black money.
1. To establish a central government anticorruption institution called Lokpal, supported
by Lokayukta at the state level.
2. As is the case with the Supreme Court of India
and Cabinet Secretariat, the Lokpal will be
supervised by the Cabinet Secretary and the
Election Commission. As a result, it will be
completely independent of the government and
free

from

ministerial

influence

in

its

investigations.
3. Members will be appointed by judges, Indian
Administrative Service officers with a clean
record, private citizens and constitutional
authorities

through

transparent

and

participatory process.
4. A selection committee will invite short-listed
candidates for interviews, the video recordings
of which will thereafter be made public.
5. Every month on its website, the Lokayukta will
publish a list of cases dealt with, brief details of
each, their outcome and any action taken or
proposed. It will also publish lists of all cases
received by the Lokayukta during the previous

month, cases dealt with and those which are

pending.
6. Inquiry has to be completed within 60 days and
investigation to be completed within six
months. Lokpal shall order an investigation
only after hearing the public servant.
7. Losses to the government by a corrupt
individual will be recovered at the time of
conviction.
8. Government office-work required by a citizen
that is not completed within a prescribed time
period will result in Lokpal imposing financial
penalties on those responsible, which will then
be given as compensation to the complainant.
9. Complaints against any officer of Lokpal will
be investigated and completed within one
month and, if found to be substantive, will
result in the officer being dismissed within two
months.
10.
The existing anti-corruption agencies
[CVC], departmental vigilance and the anticorruption branch of the [CBI] will be merged
into Lokpal which will have complete power
authority to independently investigate and
prosecute any officer, judge or politician.

11.

Whistle-blowers who alert the agency to

potential corruption cases will also be provided

with protection.
Thus reducing the value of rupee against dollar
and also increasing the Gross Domestic
Product.
c) Control and Increase of Foreign Reserves: Issue
of Sovereign Gold Bonds:
The issue of gold bonds has been started in the year
2015. The quantity of gold for which the investor
pays is protected, since he receives the ongoing
market price at the time of redemption/ premature
redemption. The SGB offers a superior alternative to
holding gold in physical form. The risks and costs of
storage are eliminated. Investors are assured of the
market value of gold at the time of maturity and
periodical interest. SGB is free from issues like
making charges and purity in the case of gold in
jewellery form. The bonds are held in the books of
the RBI or in demat form eliminating risk of loss of
scrip etc. Thus Sovereign Gold Bonds have to be
issued successfully and the people have to go for it.
Thus reducing the current account deficit, and
reducing the value of rupee against the dollar.

E) Regulator and supervisor of the financial system:

A) Transfer of Reserves to the Government:
This process is mainly about Transferring the reserves of
Reserve Bank of India to the government, which means
giving the government money and purchasing their
treasury bills. Thus helping the government to build up
facilities and services for people, in the long run increasing
the Gross Domestic Product.
B) Raising long term deposits from Non Resident Indians:
Raising long term deposits from Non Resident Indians
means to issue of Reserve Bank of India Bonds to the Non
Resident Indians. This way we can curb inflation and
increase the foreign reserves of other currencies and thus
reduce the value of rupee against the dollar.
Reserve Bank of India bonds have higher interest rate and
no fluctuation in principal value, thus being beneficial for
the Non Resident Indians.