Reserve Bank of India UNIT V In this

Reserve Bank of India UNIT V

In this unit you will study about • Reserve Bank of India, Objectives, Organisation, Functions and working, monetary policy credit control measures and their effectiveness.

Introduction • Reserve Bank of India is the regulator over the money market in India. As the central bank, it injects liquidity in the banking system, when it is deficient and contract the same in opposite situation. • The Reserve Bank of India is the Central Bank of the country. It has been established as a body corporate under the Reserve Bank of India Act, which came into effect from 1 April, 1935. • The Reserve Bank was started as shareholders bank with a paid-up capital of Rs. 5 Crore. On establishment it took over the function of management of currency from the Government of India and power of credit control from the Imperial Bank of India

Feature of Reserve Bank of India • RBI formulates implements and monitors the monetary policy. • RBI maintains public confidence in the system, protect depositor’s interest and provide cost-effective banking service to the public. • To facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. • To give the public adequate quantity of supplies of currency notes and coins in good quantity.

Objectives of Reserve Bank of India • • • To manage the monetary and credit system of the country O stabilise internal and external value of rupee. For balanced and systematic development of banking in the country For the development of organised money market in the country. For proper arrangement of agriculture finance For proper arrangement of Industrial finance For proper arrangements of public debts To establish monetary relations with other countries of the world and international financial institutions For centralisation of cash reserves of commercial banks To maintain balance between demand supply of currency.

Organisations of Reserve Bank of India Central Board Local Board

Central Board • The general superintendence and directions of the bank’s affairs is vested in the Central Board of Directors. The organisational structure of Central Bank of Directors. • It comprises of a Governor, not more than four Deputy Governors, and fifteen Directors. All these persons are appointed/ nominated by the Central Government. The Governor and Deputy Governors hold office for such periods not exceeding five years as may be fixed by the Central Government at the time of their appointed and are eligible for re-appointment.

Organisation Structure of RBI Governor Deputy Governor Executive Director Chief Manager Chief Accountant

Local Board • For each of the regional areas of the country, viz, Western, eastern, northern and southern, there is a local board consists of five members each appointed by the Central Government. The functions of the local boards are to advise the Central Board on such matters as may generally be referred to them and to perform such duties as the Central Board may delegate to them.

Role of Reserve Bank of India • Since its inception in 1935, the Reserve Bank of India has functioned with great success, not only as the apex financial institutions in the country but also as the promoter of the economic development. Promotion of Commercial Banking Promotion of Cooperative Credit Promotion of Export Credit to weaker sections Promotion of Rural Credit Regulation of Credit Developme nt of Bill Market Exchange Controls

Functions of Reserve Bank of India Central Banking Functions Supervisory Functions Promotional Functions

Central Banking Functions • • • Issue of Bank Notes Bankers to Government Banker’s Bank Lender of the last resort Custodian of Foreign Exchange Reserves Controller of Credit

Supervisory Functions • • • Provide Licence Coverage of Bank operations Liquidations of Weak banks Branch Expansion Issue Directions on credit control Training of Bank personnel Restrict loans an advances Collect and supply information Spreading banking habits

Promotional Functions • The Reserve Bank of India as a central bank of the country has assumed greater responsibilities as developmental and promotional agency as compared to a merely monetary authority. • It not only controls the credit and currency in the economy or maintains internal/ external value of the rupee for ensuring price stability but also acts as a promoter of financial institutions, required for meeting specific financial requirements of the developing economy.

Promotional steps taken by RBI • • • Established the Bill Market Scheme Development of specialised Financial Institutions Promote Regional Rural Banks Promote National Housing Bank Establishment of Export Import Bank of India Promotes Research

Working of various departments of Reserve Bank of India • Customer Service Department • Departments of Currency Management • Urban Banks Department • Rural Planning and Credit Department • • • Foreign Exchange Department Human resource Department Financial Markets Department Financial Stability Unit Inspection Department • Department of Banking supervision • Department of Non-Banking Supervision • Department of Banking Operations and Development • • Department of Information Technology Legal Department Internal Debt Management Department of External investments and operations • Department of Govt and Bank

RBI Regulatory Environment • Periodical inspections of banks has been the main instrument o supervision though recently there has been a move toward supplementary ‘on-site inspections’ with ‘off-site surveillance’. • The system of ‘Annual Financial Inspections’ was introduced in 1992. • A high powered Financial Supervision (BFS), comprising the Governor of RBI as Chairman, one of the Deputy Governors as Vice Chairman and four directors of the Central Board of RBI as members have constituted in 1994,

Achievement of Reserve Bank of India • It has very successfully regulated Credit to meet the requirements of trade, industry and agriculture. • As a partner to the govt it has been admirably managing the public debt. • It has developed and promoted sound banking practices in the country. This has inspired public confidence in the banking system. • The Reserve Bank has successfully promoted the institutionalisation of savings by: Promoting banking habits, Extending banking facilities all over the country, establishing specialised financial agencies.

Regulation of Money & Credit • Need to regulate the money and credit • Money Supply and inflation • Supply of money, interest rate, and investment

Factors affecting money and credit supply in India • • • Net Banking credit to the government Bank credit to the commercial Sector Foreign Exchange Assets Government currency liabilities to public Non-Monetary liabilities of the banking sector

Instruments for regulation of Money and credit Monetary Policy Fiscal Policy

Monetary Policy • It refers to instruments within control of central bank to influence the level of aggregate demand for goods and services or to influence the trends

Features of Monetary policy of the RBI • • • Active policy Controlled Money Supply Seasonal Variations Flexible Investment and saving oriented Wide Range of Methods of credit control

Objectives of Monetary Policy • • • Neutrality of Money Price Stabilisation Exchange Rate of Stability Full employement Economic growth

Instruments of Monetary Policy • • Quantitative Bank Rate Open Market Operations Variations in the reserve requirements • Repo Rate • Liquidity Adjustments facility • • • Qualitative Rationing of credit Margin requirements Variable interest rate Regulation of consumer credit licencing

Reforms in monetary policy during 1990 • • • Reduced reserve requirements Increased Micro Finance Fiscal monetary separation Changed interest rate structure Higher market orientation for banking

Effectiveness of monetary policy credit control • • Developmental Role Creation and expansion of financial institutions Effective central banking Developing banking habits Monetisation of economy Debt management Controlling inflationary pressure

Limitations of monetary policy • • Limited scope of monetary policy in economic development Limited role in controlling prices Poor banking habits Underdeveloped money market Existence of black money Conflicting objectives Non-monetised sector