India's Central Bank

FRF-CH2-RBI-Functions & Credit Control - R. Kasliwal 1

12 Sept, 2014

www.rbi.org.in
 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.“
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 Main Functions
 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
FRF-CH2-RBI-Functions Credit Controlto
- R.the public.
Kasliwal 12 Sept, 2014 3
 Main Functions
 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.
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 Main Functions
 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

 Credit Control Measures:
Quantitative Tools
 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.

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 Credit Control Measures:
Quantitative Tools
 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.

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 Credit Control Measures:
Quantitative Tools
 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
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Credit Control Kasliwal 12 Sept, 2014 8
 Credit Control Measures:
Quantitative Tools
 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
 Credit Control Measures:
Qualitative Tools
 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
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 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% As on Date:
 Repo Rate : 8.0% 12th Sept, 2014
 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
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