7/17/2019 Rbi

1/52

CPT Section C General Economics Chapter 8 Unit 3The Reserve Bank of India.

CA Shweta Poojari

7/17/2019 Rbi

2/52

Introduction

Functions of RBI

Role of RBI

Indian monetary policy

Instruments of Credit controls

Multiple Choice Questions

7/17/2019 Rbi

3/52

The Reserve Bank of India is the central bank ofthe country and it performs all the central bankingfunctions.

Reserve Bank of India was setup on 1stApril 1935as the shareholders bank.

RBI was nationalized on 1stJanuary 1949.

7/17/2019 Rbi

4/52

The Executive head of the Bank is called the Governor, who is assisted byDeputy Governors and other executive officers.

The General superintendence and direction has been entrusted to the CentralBoard of Directors, consisting of the Governor, Dty. Governors, one Govt.Official from the Ministry of Finance and Directors nominated by the Govt. ofIndia representing the Local Boards and various elements of the economy.

Besides the Central board there are 4 Local Boards with headquarters inMumbai, Kolkata, Chennai and New Delhi.

7/17/2019 Rbi

5/52

Supervision and control over Commercial Banks,relating to licensing and establishments, branch

expansion, liquidity of their assets, management

and methods of working, amalgamation,

reconstruction and liquidation.

7/17/2019 Rbi

6/52

Issue of Currency

Banker to the Government

Bankers Bank

Custodian of foreign exchange reserves

Controller of credit

Lender of last resort

Central clearance, settlement and transfer of money

7/17/2019 Rbi

7/52

Promotional functions

Collection and publication of data

Others

7/17/2019 Rbi

8/52

The RBI is the sole authority for the issue of currencyin India other than one rupee notes and subsidiarycoins, the magnitude of which is relatively small. TheRBI is also called Bank of issue

The One Rupee notes and coins are issued by the

Central Govt. , The Ministry of Finance.

7/17/2019 Rbi

9/52

As a Banker to the Govt. RBI performs the foll. Functions.

a. It accepts money , makes payment and also carries out their

exchange and remittances for the Govt.

b. It manages public debts, advices the government on thequantum, timing and terms of new loans.

c. It also sells treasury bills to maintain liquidity in the economy.

d. Fiscal agent and advisor to the Govt.

7/17/2019 Rbi

10/52

The RBI has extensive power to control and supervisecommercial banking system under the RBI Act, 1934and the Banking Regulation Act, 1949.

The banks are required to maintain a minimum of cashreserve ratio (CRR) with RBI.

The RBI provides financial assistance to scheduledbanks and state co operative banks.

7/17/2019 Rbi

11/52

The RBI is the custodian of monetary reserve in India and RBI also isthe custodian of national reserve of international currency.

It has to ensure that normal short term fluctuations do not affect theexchange rate.

7/17/2019 Rbi

12/52

Credit control is generally considered to be the principalfunction of central bank. By making frequent changes inmonetary policy, it ensures that the monetary system in theeconomy functions according to the nations needs and goals.

The RBI uses almost all Quantitative and Qualitative methodsof credit controls.

7/17/2019 Rbi

13/52

RBI is the official Lender of the last resort.

Lender of last resort means central bankcoming to the rescue of other banks intimes of financial crises.

7/17/2019 Rbi

14/52

Central bank has special position for conductingclearinghouse operations, Inter-bank transfer offunds and settlement of accounts.

i.e. settling the mutual Owings of banks

7/17/2019 Rbi

15/52

RBI also performs variety of Developmental andPromotional functions.

It is responsible for promoting banking habits amongpeople, mobilizing savings, development of the

banking system, and provision of finance foragriculture, Foreign trade and small scale industries

7/17/2019 Rbi

16/52

It has also been entrusted with thetask of collection and compilation ofstatistical information relating tobanking and financial sector of theeconomy.

7/17/2019 Rbi

17/52

The other Misc. Functions of RBI are:

The RBI is responsible for overall monetary policy inIndia like monetary stability, Stability of domestic

price levels, Maintenance of the International value ofthe nations currency etc.

7/17/2019 Rbi

18/52

1.The RBI is apex monetary institution of the highest authority in India.It plays an important role in strengthening, developing and diversifyingthe countrys economic and financial structure.

2. It is responsible for the maintenance of economic stability andassisting the growth of the economy.

3. It is Indias prominent public financial institution given theresponsibility for controlling the countrys monetary policy.

4. It acts as an advisor to the government in its economic and financialpolicies.

7/17/2019 Rbi

19/52

5. It is responsible for the development of an adequateand sound- banking system in the country.

6. RBI has to keep inflationary trends under control and tosee that the main priority sectors like agriculture , exportsand small scale industry get credit at cheap rates.

7. It also has to protect the market for governmentsecurities and channelize credit in desired direction.

7/17/2019 Rbi

20/52

COMMERCIAL BANK CENTRAL BANK

It is profit-seeking institution Its objective is not to make profit

Its profits mainly from loans and

advances

Its profits are mainly from Government

securities, advances to government

and commercial banks

Banks Mobilize savings and

channelize them into investments.

Central Banks role is to ensure that

the other banks Properly conduct their

business in national interest.

Functions of commercial banks are

different

Functions of central banks are unique

7/17/2019 Rbi

21/52

Meaning:

Monetary policy is the one employed by the state through itscentral bank, to control the supply of money as an instrument ofachieving the objectives of general economic policy.

Objectives:

a. To regulate monetary growth and maintain price stability

b. To ensure adequate expansion in credit

c. To assist economic growth

d. To encourage the flow of credit into priority and neglectedsectors

e. To strengthen the banking system

7/17/2019 Rbi

22/52

Quanti tative or General Measures Qualitative or selective MeasuresBank Rate Policy Margin Requirements

Open market operations Consumer credit regulation

Variable reserve requirements Issue of directive

(i) cash reserve ratio(ii) Statutory liquidity ratio

Rationing of credit

Moral suasion

Direct action

7/17/2019 Rbi

23/52

General measures of

credit control

7/17/2019 Rbi

24/52

The bank rate is the official interest rate at which thecentral bank rediscounts the approved bills held by acommercial bank. If the central bank wishes to controlcredit and inflation, it will increase the bank rate

At present the Bank Rate is 9%.

7/17/2019 Rbi

25/52

OMO imply deliberate and direct sales and purchases ofsecurities and bills in the open market by central bank to controlthe volume of the credit. If it wishes to control credit inflation,then central bank sells securities in the open market.

If central bank wishes expansion of credit at the time ofdeflation, then it purchases the securities.

7/17/2019 Rbi

26/52

The central bank also uses method of variable reserve requirement tocontrol credit. There are two types of reserves, which the commercialbanks are generally required to maintain.

Cash reserve ratio [ C.R.R]

refers to that portion of total deposits, which a commercial bank has to keep with RBIin the form of cash reserves.

Statutory liquidity ratio [ S.L.R]

refers to that portion of total deposits, which a commercial bank has to keep withitself in the form of liquid assets.

7/17/2019 Rbi

27/52

During Inflation, to Control Inflation andDiscourage investment, it is advisable to;

Increase the Bank Rate

Sale of Securities in the open market Increase the CRR and SLR

7/17/2019 Rbi

28/52

During Deflation, to Control Deflation andEncourage investment, it is advisable to;

Decrease the Bank Rate

Buying of Securities in the open market Decrease the CRR and SLR

7/17/2019 Rbi

29/52

Qualitative or

SelectiveMeasures

7/17/2019 Rbi

30/52

1.Margin Requirements:

A margin requirement is difference between securitiesoffered and amount lent against those securi ties by thebanks. Increase in margin reduces the borrowing capacityand decrease in margin increase the borrowing capacity.

7/17/2019 Rbi

31/52

2. Consumer credit regulation

Laying down rules regarding down payments and maximummaturities of installment credit for the purchase of specifiedconsumer durable goods. Raising the required down payment

limits and shortening of maximum period tend to reduce thedemand for such loan and thereby check consumer credit.

7/17/2019 Rbi

32/52

3. Issue of directive:

The central bank also uses directives in formof oral, written statement, appeals or warnings

to various commercial bank for credit control.

7/17/2019 Rbi

33/52

4.Rationing of credit:

Rationing of credit is a selective method adopted bycentral bank for controlling and regulating the

purpose for which credit is granted by commercialbanks.

7/17/2019 Rbi

34/52

5. Moral suasion:

Moral suasion is a psychological means and purely informaland milder form of selective credit control. In moral suasioncentral bank persuades and morally requires to the commercial

banks to co-operative with the general monetary policy of creditcontrol.

7/17/2019 Rbi

35/52

6. Direct action:

The central bank may take direct action against theerring commercial banks or it may charge a penal

rate of interest over and above the bank rate, for thecredit demanded beyond the prescribed limit.

7/17/2019 Rbi

36/52

MCQs

7/17/2019 Rbi

37/52

a.Providing cheap rediscountingfacilities to commercial banks

b.Providing liberalised

rediscounting facilities tocommercial banks

c.Giving subsidies to new banks

d.All of the above

Answer:d

7/17/2019 Rbi

38/52

a. RBI Act, 1934

b. Banking Regulation Act,1949

c. Both RBI Act 1934 andBanking Regulation Act 1949

d. Banking Regulation Act,1960

Answer:C

7/17/2019 Rbi

39/52

a. It can bring about compulsoryamalgamation of weak banks

b. It can claim for compulsory

liquidation

c. It can expedite winding up ofproceedings to safeguard the interest ofdepositors

d. All of the above

Answer:d

7/17/2019 Rbi

40/52

a. Uniformity in note issue

b. Stability in currency

c. Control of credit

d. All of the above

Answer.: D

7/17/2019 Rbi

41/52

a. Create

b. Controls

c. Restricts

d. None of the above

Answer.: BExplanation.:Creation of credit isdone by commercialbanks.

7/17/2019 Rbi

42/52

a. Dear

b. Cheap

c. Restricted

d. Green

Answer.: B

Explanation.: People willborrow more andspend/Invest more.

7/17/2019 Rbi

43/52

a. Bank rate policy

b. Cash reserve ratio

c. Statutory liquidity ratio

d. All of the above

Answer:d

7/17/2019 Rbi

44/52

a. Control inflation

b. Discourage hoarding of commodities

c. Encourage flow of credit into neglected sector

d. All of the above

Ans.: D Expln: (Please refer Slide No.:21)

7/17/2019 Rbi

45/52

a. Credit

b. Financial

c. Monetary

d. fiscal

Answer;C

7/17/2019 Rbi

46/52

a. RBI advances necessary creditagainst eligible securities.

b. Commercial banks give fund toRBI

c. RBI advances money to publicwhenever there is any emergency.

d. All the above.

Answer:A

7/17/2019 Rbi

47/52

a. Rate at which commercialbanks lend money

b. Rate at which RBI lends

to commercial Banks.

c. Rate of interest paid bythe banks to its depositers.

d. None of the Above.

Answer: BBank rate is the rate atwhich the Central Bank

gives loans orrediscounts the bills ofexchange to the

commercial banks.

7/17/2019 Rbi

48/52

a. 9%

b. 10%

c. 4.5%

d. 23%

Answer: ANote : the bank rate

is as updated up toSept. 2012.

7/17/2019 Rbi

49/52

a. 4.5%

b. 7.5%

c. 15%

d. 23%

Answer:ANote : the CRR is asupdated up to Sept.

2012.

7/17/2019 Rbi

50/52

a. 4.5%

b. 7.5%

c. 15%

d. 23%

Answer:DNote : the SLR is asupdated up to Sept.

2012.

7/17/2019 Rbi

51/52

a. RBI is a Profit making institutionacting in the interest of the Govt.

b. Every country has only one central

bank which is managed by Govt.officials.

c. RBI does not perform any ordinarycommercial banking functions.

d. RBI has adopted MinimumReserve System of Note Issue.

Answer:A

RBI is not a profitmaking Institution and

it acts in the publicInterest.

7/17/2019 Rbi

52/52