Establishment:

The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act,
1934.
The Central Office of the Reserve Bank was initially established
in Calcutta but was permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and where policies are
formulated.
Though originally privately owned, since nationalization in
1949, the Reserve Bank is fully owned by the Government of India.








Management:
The act provided for the setting up of a Central Board of
Directors to be entrusted with the general superintendence and
direction of the affairs and business of the bank (S.7). The board was
to consist of 16 directors-a Governor and Deputy Governor to be
appointed by the Governor General in Council after consideration of
the recommendations made by the Board in that behalf, four
Directors to be nominated by the Governor General in Council, eight
Directors to be elected on the behalf of the shareholders on the
various registers on the basis of a specified number for each resister
and one Government official to be nominated by the Governor
General in Council (S.8).A board of 24 members, including 5 Directors
elected by commercial and agricultural interests. The Board should
be as small as practicable and that the majority of the Directors
should derive their mandate from the shareholders. The committee
did not consider it necessary that provision should be made for the
representation of commercial bodies as such.




Share capital:
The Bank was to have, at its commencement, a share capital
of Rs.5 crores, the shares of Rs.100 each being fully paid up [S.4 (1)].
Provisions were made for its increase or decrease, by the Banks
shareholders, on the recommendation of the Central Board, with the
previous sanction of the Governor General in Council and with the
approval of the central Legislature (S.5).
There were in some quarters the feelings that the Reserve
Bank did not need any capital at all as it was itself going to be the
manufacturer of money. It was, of course, necessary to guard
against its being loaded with an excess of capital. As the Hilton Young
Commission put it, a central bank need not, and should not, be
provided with any very great amount of capital for both the reasons
that the bank might be lured into unsound business activities in order
to earn sufficient profits and it would be more difficult to reduce the
share capital than to raise it later if found necessary.
This figure was incorporated in the 1927, 1928, and 1933 Bill.
The proposal of a member (Mr. Vidya Sagar Pandya) to raise the
capital to Rs. 7.5 criers did not find favour with the Legislature. The
capital has remained unchanged at Rs.5 crores to this day.

Norms:
Banks are now required to assign capital for market risk. A risk
weight of 2.5% for market risk has been introduced on
investments in Government and other approved securities with
effect from the year ending 31
st
march 2000. For investments in
securities outside SLR, a risk weight of 2.5% for market risk has
been introduced with effect from the year ending 31
st
march,
2001.
The percentage of banks portfolio of government and approved
securities, which is required to be marked to market, has
progressively been increased. For the year ending 31
st
march,
2000, banks were required to mark to market 75% of their
investments. In order to align the Indian accounting standards
with the international best practises and taking into
consideration the evolving international developments, the
norms for classification and valuation of investments have been
modified with effect from September 30, 2000. The entire
investment portfolio of banks is required to be classified under
three categories, viz., Held to Maturity, Available for Sale and
Held for Trading. While the securities Held for Trading and
Available for Sale should be marked to market periodically, the
securities Held to Maturity, which should be exceed 25% of
total investments are carried at acquisition cost unless it is more
than the face value, in which case, the premium should be
amortized over a period of time.
In case of Government guaranteed advances, where the
guarantee has been invoked and the concerned State
Government has remained in defaults as on March 31, 2000, a
risk weight of 20% on such advances, has been introduced. State
Governments who continue to be in default in respect of such
invoked guarantees even after March 31, 2001, a risk weight of
100% is being assigned.
Risk weight of 100% has been introduced for foreign exchange
open position limits with effect from March 31, 1999.
The minimum capital to risk asset ratio (CRAR) for banks has
been enhanced to 9% with effect from the year ending March
31, 2000.
Banks are permitted to access the capital market. Till today, 12
banks have already accessed capital market.
Banks have been advised that an asset will be classified as
doubtful if it has remained in the substandard category for 18
months instead of 24 months as at present, by March 31, 2001.
Banks have been permitted to achieve these norms for
additional provisioning in phases, as under:
As on 31.3.2001:
Provisioning of not less than 50% on the assets which have
become doubtful on account of the new norm.
As on 31.3.2002:
Balance of the provisions not made during the previous year,
in addition to the provisions needed as on 31.3.2002.
In the Monetary and Credit Policy announced in April 2001, the
banks have been advised to chalk out an appropriate transition
path for smoothly moving over to 90 days norm. As a facilitating
measure, banks should move over to charging of interest at
monthly rests by April 1, 2002. Banks should commence in
making additional provisions for such loans, starting from the
year ending March 31, 2002, which would strengthen their
balance sheets and ensure smooth transaction to the 90 days
norm by March 31, 2004.
Prudential norms in respect of advances guaranteed by State
Governments where guarantee has been invoked and has
remained in default for more than two quarters has been
introduced in respect of advances sanctioned against State
Government guarantee with effect from April 1, 2000. Banks
have been advised to make provisions for advances guaranteed
by State Governments which stood invoked as on March 31,
2000, in phases, during the financial years ending March 31,
2000 to march 31, 2003 with a minimum of 25% each year.
The RBI has reiterated that banks and financial institutions
should adhere to the prudential norms on asset classification,
provisioning, etc. and avoid the practise of evergreening.
This is the long-term objective with RBI wants to pursue.
Towards this direction, a number of measures have been taken
to arrest the growth of NAPs: banks have been advised to tone
up their credit risk management system; put in place a loan
review mechanism to ensure that advances, particularly large
advances are monitored on an on-going basis so that signals of
weakness are detected and corrective action taken early;
enhance credit appraisal skills of their staff, etc. In order to
ensure recovery of the stock of NAPs, guidelines for one-time
settlement have been issued in July, 2000.
Banks have been advised to take effective steps for reduction of
NAPs and also put in place risk management systems and
practises to prevent re-emergence of fresh NP As.
The proposal to set-up an Asset Reconstruction Company (ARC)
on a pilot basis to take over the NAPs of the three weak public
sector banks has been announced in the Union Budget for 1999-
2000. The modalities for setting up the ARC are being examined.
Banks are permitted to issue bonds for augmenting their Tier II
capital. Guarantee of the Government for these bonds is not
considered necessary.
The recommendation of the committee that we should move
towards international practices in regard to income recognition
is accepted in principle. However, tightening of the prudential
norms should be made keeping in view the existing legal
framework, production and payment cycles, business practices,
the predominant share of agriculture in the country generally
involve a period of not less than from 4 to 6 months. A large
number of SSIs also have difficulties in timely realization of their
bills drawn on the suppliers. These have to be taken into account
while contemplating any change in the norm.
To start with, a general provision on standard assets of a
minimum of 0.25% from the year ended March 31, 2000,
introduced.





Functions:
Bankers bank and lender of last resort:
The reserve bank of India acts as the bankers bank. According to
the provisions of the banking companies act of 1949 every
scheduled bank was required to maintain with the Reserve Bank
a cash balance equivalent to 5 percent of its demand liabilities
and 2 percent of its time liabilities in India.
The minimum cash requirements can be changed by the Reserve
Bank of India.
Since commercial banks can always expert the Reserve Bank of
India to come to their help in times of banking crisis the reserve
bank becomes not only the bankers bank but also the lender of
last resort.
Controller of credit:
The Reserve Bank of India is the controller of credit i.e. it has the
power to influence the volume of credit created by banks in
India.
Every bank will have to get the permission of the Reserve Bank
before it can open a new branch.
Each scheduled bank must send a weekly return to the Reserve
Bank, showing in detail, its assets and liabilities. This power of
the bank to call for information is also intended to give it
effective control of the credit system.
The Reserve Bank has also the power to inspect the accounts of
any Commercial Bank.
As Supreme Banking Authority in the country, the Reserve Bank
of India, therefore, has the following powers:
It holds the cash reserves of all the schedule banks.
It controls the credit operations of the banks through
quantitative and qualitative controls.
It controls the banking system through the system of
licensing, inspection and calling for information.
It acts as the lender of last resort by providing rediscount
facilities to scheduled banks.
Custodian of foreign reserves:
The Reserve Bank of India has the responsibility to maintain the
official rate of exchange.
Besides maintaining the rate of exchange of the rupee, the
Reserve Bank has to act as the custodian of Indias reserve of
international currencies.
The vast Sterling balances were acquired and managed by banks.
Further, the RBI has the responsibility of administering the
exchange controls of the country.
Supervisory functions:
The Reserve Bank Act, 1934, and the Banking Regulation Act,
1949 haven given the RBI wide powers of supervision and
control over commercial and cooperative banks, relating to
licensing and establishments, branch expansion, liquidity of their
assets, management and methods of working, amalgamation,
reconstruction and liquidation.
The RBI is authorized to carry out periodical inspections of the
banks and to call for returns and necessary information from
them.
The supervisory functions of the RBI have helped a great deal in
improving the standard of banking in India to develop on sound
lines and to improve the methods of their operation.



Promotional functions:
With economic growth assuming a new urgency since
Independence, the range of the Reserve Banks functions has
steadily widened.
The bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as
outside the normal scope of central banking.
The bank has developed the co-operative credit movement to
encourage savings, to eliminate money lenders from the villages
and to route its short-term credit to agriculture.
The RBI has set-up the agricultural Refinance and Development
Corporation to provide long-term finance to farmers.

Reforms:
During the reform period, the policy environment enhanced
competition and provided greater opportunity for exercise of what
may be called genuine corporate element in each bank to replace the
elements of coordinated actions of all entities as a joint family to
fulfil predetermined Plan priorities. The measures taken so far can be
summarized as follows:
Looking at the greater competition in banking system the 1
st

measure was taken by permitting private sector banks and
licensing of branches of foreign banks and entry of new foreign
banks.
The 2
nd
measure was taken for the flexibility in banking system
to manage pricing and quantity of resources.
The 3
rd
measure was taken to replace the individual guideline
with general guidelines on credit decision.
The 4
th
measure was taken to cope up with the changing
environment. Banks are free to take their own decision on credit
decision, capital adequacy norms, asset classification, etc,
The 5
th
measure was taken for appropriate legal, technological
and regulatory framework for the development of financial
markets. Transparency has been brought in the primary and
secondary operations.

RBI Monetary Management:
RBI uses its monetary policy for controlling inflationary or
deflationary situations in the economy by using one or more of the
following tools of monetary control. These are discussed below:
1. Cash Reserve Ratio (CRR):
It refers to cash to be kept as a reserve by all banks with RBI at a
certain percentage of their demand and time liabilities. Demand
liabilities is referred as deposit payable on demand by depositors and
time liabilities is referred as deposit payable on maturity. At present
CRR is 5%.
2. Statutory liquidity ratio(SLR):
It refers to supplementary liquid reserve requirements of banks, in
addition to CRR. SLR is maintained by all the banks in the form of
cash in hand, current account balance with SBI and other public
sector commercial banks, unencumbered. SLR has 3 objectives:
To restrict on expansion of banks credit.
To increase investment in government securities and
To ensure the solvency of banks.
At present SLR is 25%.
3. Bank rate:
Bank rate is a standard rate at which RBI is prepared to buy or
rediscount bills of exchange or other eligible papers from banks. RBI
uses bank rate to affect the cost and availability of refinance and to
change the loanable resources of banks and other financial
institutions. RBI can affect the interest rate by changing the rate
whenever the situation of economy warrants it. At present bank rate
is 6%.
4. Open market operation:
This refers to the sale or purchase of government securities by RBI in
the open market to increase or decrease the liquidity banking system
and thereby affect the loanable funds with banks. RBI can also alter
the interest rate structure through its pricing policy for open market
sale/purchase.
5. Selective credit control:
RBI objectives in issuing SCC directives are to prevent speculative
holdings of commodities and the resultant of rise in prices. RBI
guidelines on SCC are:-
Bank should not allow customers dealing in SCC commodities
any facilities that would directly or indirectly defect the
purpose of SCC directives.
The credit limit against each commodity in SCC directives
should be segregated.





In Times Recession:
The RBI adopted soft monetary policy since the start of the global
recession and reduced the short term lending rate (repo rate) by
4.25%, short term borrowing rate (reverse repo rate) by 2.75%, and
cash reserve ratio (CRR) by 4% over the last one year. A wide spread
expectation in the market is that the RBI will keep its monetary policy
stance unchanged in the fourth coming quarterly policy review at the
end of October 2009. Here are some factors that analysts will be
watching for cues on which direction the RBI will take with regard to
the monetary policy in next few quarters:-
1. Fiscal deficit:
The central government projected a large fiscal deficit in October
2009. The centre is expected to borrow about rupees 4.5 lacs crores
from the money market from the current fiscal. Last year, the centre
borrowed rupees 3.1 lacs crores. This is one of the main factors that
will work in favour of keeping the monetary policy soft in the short
medium terms so that the overall liquidity conditions remains in a
comfortable zone.
2. Global economic condition:
The current soft policy regime was started to protect the domestic
economy from the recession. The global economic conditions have
improved in the last quarters. However, there are pockets of concern
still and hence analysts believe the RBI will not change the policy
stance till the economic recovery is on a strong footing. However,
once the RBI is sure that the economic recovery is secure, it will start
tightening the monetary policy as there would be inflationary
pressures in the economy.
3. Credit off-take:
The credit off take has emailed quite subdued during the last few
quarters and has not picked up as expected. Usually, a pick-up in the
credit off take sends signals to the central bank that the economy
could be overheating, thus promoting it to tighten the monetary
policy (interest rate ratio as well as reserve rate ratio). A lower credit
off take prompts it to keep the interest rate in the short term.
4. Inflation:
The inflation rate is another factor that influences the monetary
policy stance. A high inflation rate gives the indication of higher
liquidity chasing lesser resources in the economy, and hence, calls for
tightening in the monetary policy. There has been negative inflation
based on the WPI(wholesale price index) for the last three months.
The main reason for the negative inflation is the higher base effect
from last year (mainly due to higher fuel and metal prices during the
corresponding period last year). The situation in the economy was
not like a negative inflation rate then deflation. The inflation rate has
come into positive territory since the last couple of weeks due to the
reduced base effect of last year. Analysts believe it will rise quickly
and reach higher level by the end of this fiscal.
5. Need for timely action:
The RBI is expected to continue its soft monetary policy in the
coming quarterly review. However, analysts believe the RBI will give
indication of changing its stances in the medium term as some
significant factors like economic recovery, high liquidity and inflation
has started picking up. Timely action would be required to be
maintaining the overall balance in the economy and prevent the
situation from getting out of control.




MEASURES TAKEN BY RBI TO COPE UP WITH GLOBAL
RECESSION.
In order to cope up with global recession all the country are doing
this all most every month and India which was not really into
recession is trying to take all the measures to keep away from it, but
its kind of deeper than expected, out of the various cuts that RBI has
did this is latest:
Repo rate cut:
To reduce the repo rate under the liquidity adjustment facility (LAF)
by 100 basis points from 6.5% to 5.5% with immediate effect.


Reverse repo rate:
To reduce the rate under the LAF by 100 basis points from 5.0% to
4.0% with immediate effect.
Cash reserve ratio(CRR):
To reduce the CRR of scheduled banks by 50 basis points from 5.5%
to 5.0% from the fortnight beginning January 17, 2009. The CRR cut is
not immediate at least its happening is this the only factor that will
put some money in banks hand which in turn can be used by banks
for various purpose so this cut will release 20000 crores. We can
expect more rate cuts in lending loans from various banks.














Project submitted by:



Sheetal............................................................................58
Kiran................................................................................5819
Barkha.............................................................................5820
Varsha.............................................................................5821
Rimpy..............................................................................5850

Index
1. Establishment of RBI
2. Management of RBI
3. Share Capital of RBI
4. Functions of RBI
5. Norms of RBI
6. Reforms of RBI
7. Monetary Policy of RBI
8. In Times of Recession

RBI in Times of
Recession