INTRODUCTION OF CENTRAL BANK OF INDIA (R.B.I.

) :- A Central bank is one which institutes the apex of the monetary and banking structure of a country and which performs, in the national economic interest, the following functions: The regulation of Curency in accordance with the requirements of business and the general public. The performance of general banking ans agency services for th State. The custody of cash reserve of the commercial banks. The custody and management of the nations reserves of international currency. The granting of accommodation, in the form of rediscounting or collateral advances to commercial bamks, bill brokers and dealers. The clearance arrangements among bank, and The control of the credit in accordance with the needs of business with aview to carrying out broad monetary policy adopted by the state.

HISTRY & BCKGROUND OF R.B. I :- The central bank of the country is the Reserve Bank of India . The Reserve Bank of India was set up on the basis of the recommendations of the HILTON YOUNG COMMISSION. The RBIs Act was passed in 1934, It was established in April 1935 with a

share capital of Rs. 5 crores. The share capital was divided into shares of Rs.100 each fully paid which was entirely owned by private shareholders in the beginning

The Reserve Bank of India was nationalized in year of 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 the 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.

ROLE OF THE RESERVE BANK OF INDIA :- The Reserve Bank of India is the Central Bank of India occupies a pivotal position in the Indian economy. Its role is summarized in the following points:

The RBI is the apex monetary instiution of the highest authority in India. Consequently, it plays an important role in strengthening, developing and diversifying the countrys economic and financial structure.

It is responsible for the maintenance of economic stability and assisting the growth of the economy. It is Indias eminent public financial institution given the responsibility for controlling the countrys monetary policy. It acts as an advisor to the government in its economic and financial policies, and it also represents the country in the international economic forums.

It also acts as a friend, philosopher and guide to commercial bank. In fact, it is responsible for the development of an adequate and sound banking system in the country and for the growth of organized money and capital markets. India being a developing country, the RBI has to keep inflationary trends under control and to see that main priority sector like agriculture, export and small scale industry get credit at cheap rates. It has also to protect the market for government securities and channelise credit in desired directions. FUNCTIONS OF RESERVE BANK OF INDIA:- The Reserve bank of India performs all the central banking factions. These are: I) ISSUE OF CURRENCY : The RBI is sole authority for the issue of currency in India other than one rupee coins and notes and subsidiary coins, the magnitude of which is relatively small.

II)

BANKER TO THE GOVERNMENT: As a baker to the government, the RBI performs the following functions

It transects all the general banking business of the central and state Governments. It accepts money on account of these government and makes payment on their behalf and carries out other banking operations such as their exchange and remittances .

It manages public debt and is responsible for issue of new Loans. For ensuring the successes of the loan orations in the gilt edged market and advises the government on the quantum, timing and terms of new loans.

It also sales Treasury Bills on behalf of central Government in order to wipe away excess liquidity in the economy.

The RBI also makes advances to the Central and state Government witch are repayable within 90days from the date of advance.

The RBI also acts as an adviser to the government not only on policies concerning banking and financial matters but also on a wider range of economic issue including those in the field of planning and resource mobilization.

III)

BANKERS BANK:- The RBI has been vested with extensive power to control and supervise commercial banking system

under the RBI act, The RBI provides financial assistance to scheduled banks and state co. op banks The RBI also conducts inspection of the commercial banks and calls for returns necessary information from banks. III) CUSTODIAN OF FOREIGN EXCHANGE RESERVES: The RBI is required to maintain the external value of the rupee. For this purpose it functions as the custodian of nations foreign exchange reserves. It has to ensure that normal short terms fluctuations in trade do not affect the exchange rate. When foreign exchange reserves are inadequate for meeting balance of payments problem, it borrows from the IMF.

IV)

CONTROLLER OF CREDIT: Credit plays an important role in the settlement of business transactions and affects the purchasing power of people. The RBI is responsible for over all credit and monetary policy of the economy.

V)

PROMOTIONAL FUCTIONS:

Apart from the traditional

functions of Central Bank, the RBI also performs a variety of developmental and promotional functions. It is responsible for promoting banking habits among people and mobilizing savings from every corner of the country. a VI) COLLECTION AND PUBLICATION OF DATA: It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy. CENTRAL BANK VS COMMERCIAL BANK Whereas other bank are largely profit seeking institutions, the central bank is not so. Although, it makes huge contribution to be general revenues, its objects is not to make profit. It dose not allow interest on deposits. Its profits are mainly through its dealings in Government securities which it holds in reserve against note issue and interest on

advances and loans which it grants to State Governments and other financial institutions, including commercial banks. Whereas other bank has largely public dealings, the Central Banks dealings are with Government, Central and Estate Banks and other financial institutions

ANNUAL POLICY OF THE R.B.I. FOR THE 2009 - 2010 His annual policy statement for 2009-10 is set in the context of a deep global economic slump and financial market turmoil. Governments and central banks around the world have responded to the crisis through both conventional and unconventional fiscal and monetary measures. And there is unprecedented co-ordinated policy action globally.

The Crisis and India

Like all emerging economies, India too has been impacted by the crisis, and much more than was expected earlier. GDP growth has moderated reflecting lower industrial production, negative exports, deceleration in services activities, dented corporate margins and

diminished business confidence. There are some comforting factors well-functioning financial markets, robust rural demand, lower headline inflation and comfortable foreign exchange reserves which buffered us from the worst impact of the crisis. The fiscal stimulus packages of the Government and monetary easing and regulatory action of the Reserve Bank have helped to arrest the moderation in growth and keep our financial markets functioning normally.

Monetary Policy Action

Consistent with the current assessment of macroeconomic and monetary conditions, the Reserve Bank has decided to:

Reduce the repo rate under the LAF by 25 basis points from 5.0% to 4.75% with immediate effect.

Reduce the reverse repo rate under the LAF by 25 basis points from 3.5% to 3.25% with immediate effect.

Keep the CRR unchanged at 5.0% of net demand and time liabilities (NDTL).

Reserve Banks Policy Thrust

The thrust of the Reserve Bank's policy stance since mid-September 2008 has been aimed at providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining continued credit flow to productive sectors. Taken together, the policy measures of the Reserve Bank have ensured that the Indian financial markets continue to function in an orderly manner. These measures have augmented actual/potential liquidity in the financial system by over Rs.420, 000 crore. This should assure financial markets that the Reserve Bank will continue to maintain comfortable liquidity.

Interest Rate Response from Banks

Banks have told us of the constraints they face in further downward adjustment of deposit and lending rates, and these are discussed in the policy statement. Some of the banks apprehensions are valid and some not. Within the policy rate adjustment already effected by the Reserve Bank, there is scope for banks to further reduce lending

rates so as to ensure credit flow for all productive economic activity. We hope and expect that banks will play their part in the economic adjustment process by passing on the benefits of lower interest rates to their customers.

Government Borrowing

Government borrowing increased substantially in 2008-09. As you will note from the numbers in the policy statement, net borrowing by the Central Government in 2008-09 was nearly three times that in 200708. As per estimates in the interim budget, net borrowing in the current year, 2009-10, will also be at this elevated level. Even as the increase in borrowing was large and abrupt in the fourth quarter of 2008-09, we managed that in a non-disruptive manner through a combination of measures such as unwinding of the MSS securities, open market operations and monetary easing. Admittedly, yields had increased. However, it is important to reckon with the counterfactual. But for the offsetting liquidity easing done by the Reserve Bank, yields would have increased even more. We will manage the borrowing in 2009-10 in a similarly non-disruptive manner. An effort in

this regard is the planned OMO purchases and MSS unwinding in the first half of 2009/10 that will add primary liquidity of about Rs.120,000 crore, the monetary impact of which is equivalent to CRR reduction by 3 percentage points.

Growth Outlook

let me now turn to the growth prospects. In the January 2009 policy review, we projected growth for 2008-09 of 7.0 per cent with a downward bias. The downside risks have since materialised, and GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5-6.7 per cent. Going forward, the fiscal and monetary stimulus measures initiated during 2008-09 coupled with lower commodity prices will cushion the downturn by stabilising domestic economic activity. On balance, with the assumption of a normal monsoon, for policy purpose real GDP growth for 2009-10 is placed at around 6.0 per cent.

Inflation Outlook

keeping in view the global trend in commodity prices and domestic demand-supply balance, we project WPI inflation at around 4.0 per cent by end-March 2010. Headline WPI inflation decelerated sharply after August 2008 reflecting the fall in global commodity prices. CPI inflation continues to be at near double-digit level but is expected to moderate in the coming months. WPI inflation, however, is expected to be in the negative territory in the early part of 2009-10 which is only of statistical significance and is not a reflection of demand contraction as is the case in advanced economies.

Money Supply

Money supply (M3) growth for 2009-10 is placed at 17.0 per cent. Consistent with this, the aggregate deposits of commercial banks are projected to grow by 18.0 per cent. The growth in adjusted non-food credit, including investment in bonds/debentures/ shares of public sector undertakings and private corporate sector and CPs, is placed

at 20.0 per cent. As always, these numbers are indicative projections and not targets.

Challenges on the way forward

there are several immediate challenges facing the economy. These include: (a) supporting the drivers of aggregate demand to enable the economy to return to its high growth path; (b) boosting the flow of credit to all productive sectors of the economy; (c) managing the large government borrowing programme in 2009-10 in a nondisruptive manner; (d) restoring the fiscal consolidation process; (e) ensuring an orderly withdrawal of the large liquidity injected in the system since September 2008 by the Reserve Bank to support the economy's productive requirements; and (f) the continued challenge of preserving the stability of our financial system drawing from the lesson of the global crisis.

Finally, the overarching challenge is to ensure an interest rate environment that supports revival of investment demand. Since October 2008, as the inflation rate has decelerated and the policy

rates have been cut, market interest rates have also come down. But the reduction in interest rates across the term structure and across markets has not been uniform. Let me therefore reiterate that there is scope for the overall interest rate structure to adjust downwards. Indeed, the further policy rate cuts effected as part of this policy should be a definitive signal for reducing lending rates.

Monetary Policy Stance

On the basis of this overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows:

Ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path.

Continuously monitor the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimize the impact of adverse developments and reinforce the impact of positive developments.

Maintain a monetary and interest rate regime supportive of price stability and financial stability taking into account the emerging lessons of the global financial crisis.

Developmental and Regulatory Issues

Let me now turn to development and regulatory issues. In tailoring these policies, we have been mindful of the lessons of the global financial crisis as they apply to India. The policy statement has a detailed listing and explanation. I will only highlight a few.

Our banking system remains inherently sound and the financial markets are functioning normally. In the wake of the global financial crisis, however, several initiatives have been taken in an unprecedented coordinated manner at the global level with a view to resolving the crisis and strengthening the international financial architecture. India has been a part of the various global initiatives. A comprehensive assessment of the Indian financial sector was undertaken by the Committee on Financial Sector Assessment (CFSA) which found Indias financial sector to be broadly sound and resilient, identified some concerns and made several

recommendations. The Reserve Bank proposes to set up a Task Force with regard to the G-20 Working Groups; Working Group to implement the recommendations of the CFSA; and Financial Stability Unit in the Reserve Bank.

Policy measures relating to interest rate include constitution of a Working Group to review the present BPLR system to make credit pricing more transparent; and payment of interest on savings bank accounts on a daily product basis with effect from April 1, 2010.

Measures relating to financial markets include:

Further liberalisation of the FCCBs buyback policy; Extension of the relaxation on the all-in-cost ceilings for ECBs up to December 31, 2009;

Extension of the special refinance facility and term repo facility and increased limit for export credit refinance for banks up to March 31, 2010;

Introduction of STRIPS to aid the development of a sovereign zero-coupon yield curve; and

Revise the issuance structure of floating rate bonds, among others.

Policy measures relating to credit delivery mechanism and banking services include:

Issuing guidelines to banks on rehabilitation of sick SMEs; Phased introduction of capital to risk-weighted asset ratio (CRAR) for regional rural banks (RRBs);

A non-disruptive roadmap to ensure that only banks with licence operate in the co-operative space by 2012; and

Setting up banking facilities at commercially unviable centres in the North-Eastern region.

The major prudential measures include allowing scheduled commercial banks (SCBs) to set up offsite ATMs without prior approval subject to reporting, lay down the norms for capital adequacy treatment of exposures of banks to central counterparties, prescribe a minimum lock-in-period and minimum retention criteria for securitising the loans, increase the maximum distance criterion for business correspondent for deeper penetration of banking services.

In view of the current global financial market turmoil, it has also been decided to continue, for the time being, with the current policy and procedures governing the presence of foreign banks in India. The review proposed as part of the 2005 policy on the subject will be taken up after due consultation with all stakeholders once there is greater clarity regarding the stability of the global financial system and a shared understanding on the regulatory and supervisory architecture around the world.

The measures relating to institutional developments include:

Permit eligible SCBs to issue all categories of pre-paid payment instruments;

Permit eligible non-bank entities, including NBFCs, to issue semi-closed instruments;

Permit extension of area of operation of Tier II urban cooperative banks (UCBs) in Grade I to the entire State of registration;

Guidelines to UCBs on internal controls, risk management systems, ALM and disclosure norms;

Apply capital charge for market risks in respect of large UCBs; and

Defer the implementation of CRAR for NBFCs-ND-SI by one year."

CONCLUSION & SUMMARY: At the apex of bankin and monetary structure is the Central Bank of the economy. The central bank performs the main functions of note issue, banker for the government, credit control, custodian of cash reserves, lender of the last resort ect., Indians Central Bank The Reserve Bank Of India performs all these fuctions. The instruments which it uses for controlling credit in the economy are both general (in the form of bank rate, open market operations, reserve rates) and selective (in the form of margin requirements, variable intrest tate, regulation of consumer credit and so on). Credit policy is amended from time to time to suit the needs of the economy.