FRF-CH2-RBI-Functions & Credit Control - R.

Kasliwal 1
12 Sept, 2014
 The Reserve Bank of India was established on
April 1, 1935 in accordance with the provisions
of the Reserve Bank of India Act, 1934.
 Though originally privately owned, since
nationalisation in 1949, the Reserve Bank is fully
owned by the Government of India.

 The Preamble of the Reserve Bank of India

describes the basic functions of the Reserve
Bank as:
"...to regulate the issue of Bank Notes and
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.“
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 2
 Monetary Authority:
 Commercial bank creates credit according to the demand in the economy. But
if this credit creation is unchecked or unregulated then it leads the economy
into inflationary cycles.
 Formulates, implements and monitors the monetary policy.
 Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.

 Regulator and supervisor of the financial system:

 Prescribes broad parameters of banking operations within which the country's
banking and financial system functions.
 Commercial banks, urban cooperative banks (UCBs), some financial
institutions and non-banking finance companies (NBFCs).
 Issue license for setting up new banks, to open new branches, to decide
minimum reserves, to inspect functioning of commercial banks in India and
abroad, and to guide and direct the commercial banks in India.
 Maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 3
 Manager of Foreign Exchange
 Manages the Foreign Exchange Management Act, 1999.
 In order to maintain stability in the external value of rupee, it has to prepare
domestic policies in that direction.
 Custodian of Forex
 To facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
 Issuer of currency:
 Issues and exchanges or destroys currency and coins not fit for circulation.
 To give the public adequate quantity of supplies of currency notes and coins and
in good quality.
 Banker to banks:
 Maintains banking accounts of all scheduled banks.
 It has obligatory powers to guide, help and direct other commercial banks in the
country.
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 4
 Banker to the Government:
 It performs merchant banking function for the central and the state
governments; also acts as their banker.

 Promotion & Developmental role

 Some of the institutions established by the RBI include: Deposit Insurance and
Credit Guarantee Corporation (1962), Unit Trust of India (1964), Industrial
Development Bank of India (1964), National Bank for Agriculture and Rural
Development (1982), Discount and Finance House of India (1988), National
Housing Bank (1989), Securities and Trading Corporation of India (1994),
 Performs a wide range of promotional functions to support national objectives,
while specifically focussing on financial inclusion.
 Directed credit for lending to priority sector and weaker sections
 Financial inclusion: Lead Bank Scheme.
 Sector specific refinance.
 Strengthening and supporting small local banks
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 5
 Bank Rate: The rate at which RBI allows finance to
commercial banks. It is the rate at which the RBI is
ready to buy or rediscount bills of exchange or
other commercial papers. It also signals the
medium-term stance of monetary policy.

 Open Market operations (OMO): Outright

sales/purchases of government securities, in
addition to LAF, as a tool to determine the level of
liquidity over the medium term.

FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 6

 Cash Reserve Ratio (CRR): The share of net
demand and time liabilities that banks must
maintain as cash balance in their specified current
account maintained with RBI

 Statutory Liquidity Ratio (SLR): The share of net

demand and time liabilities that banks must
maintain in safe and liquid assets, such as cash
(book value), gold (current market value) and
balances in unencumbered approved securities.

FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 7

 Liquidity Adjustment Facility (LAF): Consists of daily
infusion or absorption of liquidity on a repurchase
basis, through repo (liquidity injection) and reverse
repo (liquidity absorption) auction operations, using
government securities as collateral.

 Repo/Reverse Repo Rate: These rates under the

Liquidity Adjustment Facility (LAF) determine the
corridor for short-term money market interest rates.
In turn, this is expected to trigger movement in
other segments of the financial market and the
real economy.
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 8
 Marginal Standing Facility (MSF): was instituted under
which scheduled commercial banks can borrow over
night at their discretion up to one per cent of their
respective NDTL at 100 basis points above the repo
rate to provide a safety valve against unanticipated
liquidity shocks
 Market Stabilisation Scheme (MSS): This instrument for
monetary management was introduced in 2004.
Liquidity of a more enduring nature arising from large
capital flows is absorbed through sale of short-dated
government securities and treasury bills. The mobilised
cash is held in a separate government account with
the Reserve Bank.
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 9
 Margin Requirements
 Consumer Credit Regulation
 Credit Planning & Control by Direction
 Rationing of Credit
 Moral Persuasion and Publicity
 Credit Authorization Scheme
 Direct credit Limit Allocation
 Minimum Lending Rate
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 10
 Bank of Issue
 Agent, advisor & Banker to Government
 Expansion of banking systems &
 Bankers' Bank and Lender of the Last
architecture.
Resort
 Provides refinance for export promotion:
 Controller of Credit
EXIM Bank & ECGC.
 Controller of money market
 Expansion of the facilities for the
 Custodian of foreign exchange reserves agricultural & rural credit through
 Acts as the clearing house of the country NABARD.
 Maintaining the external value of  Extension of the facilities for the small
domestic currency scale industries: SIDBI
 Controller of forex  Helping the Co-operative sectors.
 Ensures the internal value of the  Innovating the new banking business
currency transactions
 Collects, analysis & Publishes the  Granting license to Banks.
Economic statistical data  Inspecting and making enquiry
 Fight against economic crisis and  Periodical review of the work of the
ensures stability of commercial banks.
Economy.
 Giving directives to commercial banks.
 Promotion of banking habit
 Control the NBFC’s
 Ensuring the health of financial system
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal
through on-site and off-site verification.
12 Sept, 2014 11
Policy Rates:
 Bank Rate : 9.0%
 Repo Rate : 8.0%
 Reverse Repo Rate : 7.0%
 Marginal Standing Facility Rate : 9.0%
Reserve Rates:
 CRR : 4%
 SLR : 22%
Lending/Deposit Rates:
 Base Rate : 10.00% - 10.25%
 Savings Deposit Rate : 4.00% * * relates to five major banks
 Term Deposit Rate : 8.00% - 9.05%
Government Security Market:
 6.90 GS 2019 :8.0907%-8.0907%
 91 day T-bills : 8.6038%*
 182 day T-bills : 8.705%*
 364 day T-bills : 8.6603 %* *cut-off at the last auction
Money Market:
 Call Rates : 6.00% - 8.05% * * as on previous day
FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 12 Sept, 2014 12