Reserve Bank of India

BY EISSA HAMZEH
Introduction

The Reserve Bank of India (RBI) is India's centr

al banking institution, which controls the monetary p
olicy of the Indian rupee. It commenced its operation
s on 1 April 1935 during the British Rule in accordan
ce with the provisions of the Reserve Bank of India A
ct,1934
The RBI plays an important part in the Development
Strategy of the Government of India. It is a member
bank of the Asian Clearing Union.
Cont

A Central Bank is an independent apex monetary aut

hority which regulates banks and provides important
financial services like storing of foreign exchange res
erves, control of inflation, monetary policy report.
Main Functions

Financial Supervision: The primary objective of

BFS is to undertake consolidated supervision of the fi
nancial sector comprising commercial banks, financi
al institutions and non-banking finance companies.
BFS through the Audit Sub-Committee also aims at up
grading the quality of the statutory audit and interna
l audit functions in banks and financial institutions.
Cont..

Regulator and supervisor of the financial syst

em: The institution is also the regulator and supervi
sor of the financial system and prescribes broad para
meters of banking operations within which the count
ry's banking and financial system functions. Its objec
tives are to maintain public confidence in the system,
protect depositors' interest and provide cost-effective
banking services to the public.
Cont..

Managerial of exchange control: to facilitate exte

rnal trade and payment and promote orderly develop
ment and maintenance of foreign exchange market in
India
Issue of currency: The bank issues and exchanges c
urrency notes and coins and destroys the same when t
hey are not fit for circulation. The objectives are to iss
ue bank notes and give public adequate supply of the s
ame, to maintain the currency and credit system of the
country to utilize it in its best advantage, and to maint
ain the reserves.
Cont..

Banker's bank: RBI also works as a central bank where comm

ercial banks are account holders and can deposit money. RBI m
aintains banking accounts of all scheduled banks. Commercial b
anks create credit. It is the duty of the RBI to control the credit t
hrough the CRR, bank rate and open market operations. As ban
ker's bank, the RBI facilitates the clearing of cheques between t
he commercial banks and helps the inter-bank transfer of funds
. It can grant financial accommodation to schedule banks. It act
s as the lender of the last resort by providing emergency advanc
es to the banks. It supervises the functioning of the commercial
banks and takes action against it if the need arises. The RBI also
advices the banks on various matters for example Corporate Soc
ial Responsibility
Policy rates and reserve ratios

Repo rate: for a short-term. When the repo rate incr

eases, 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, i
f it wants to make it cheaper for banks to borrow mon
ey it reduces the repo rate. If the repo rate is increase
d, banks can't carry out their business at a profit wher
eas the very opposite happens when the repo rate is c
ut down. Generally, repo rates are cut down whenever
the country needs to progress in banking and econom
y
Cont..

Reverse Repo Rate (RRR): Reverse Repo rate is t

he short term borrowing rate at which RBI borrows
money from 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, banks prefer to lend their mon
ey to RBI which is always safe instead of lending it ot
hers (people, companies etc.) which is always risky.
Cont

Statutory liquidity ratio (SLR):part from the CR

R, banks are required to maintain liquid assets in the
form of gold, cash and approved securities. Higher li
quidity ratio forces commercial banks to maintain a l
arger proportion of their resources in liquid form an
d thus reduces their capacity to grant loans and adva
nces, thus it is an anti-inflationary impact. A higher l
iquidity ratio diverts the bank funds from loans and
advances to investment in government and approved
securities.