A PROJECT REPORT ON

MONETARY FUNCTIONS OF RBI

SUBMITTED BY
ALOUKIK S. SHETE
ROLL NO: 50
M.COM (BANKING & FINANCE)
SEMESTER I
(2013-2014)

SUBMITTED TO
UNIVERSITY OF MUMBAI
ACADEMIC YEAR
(2013-2014)
S.K.SOMAIYA COLLEGE OF ARTS, COMMERCE &
SCIENCE
VIDYANAGAR, VIDYAVIHAR
MUMBAI-400077.

DECLARATION BY THE STUDENT

I, SHETE ALOUKIK SUNIL. Student of M.com part-I Roll

Number 50 hereby declare that the project for the paper
Economics of Global Trade & Finance titled,
MONETARY FUNCTIONS OF RBI submitted by me for
semester-I during the academic year 2013-14, is based on
actual work carried out by me under the guidance and
supervision of .
I further state that this work is original and not submitted
anywhere else for any examination.
(ALOUKIK SHETE)
Signature of Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and

evaluated the project on MONETARY FUNCTIONS OF RBI
submitted by SHETE ALOUKIK SUNIL student of M.com
part-I.
This project is original to the best of our knowledge and has
been accepted for Internal Assessment.

Internal Examiner

External Examiner

Principal

ACKNOWLEDGEMENT
First of all, I would like to take this opportunity to thank
the Mumbai University for having projects as a part of the
M.com- Part- 1 curriculum.
I want express my sincere gratitude to PROF. DR.C.V. HARI
NARAYANAN for assigning the responsibility to prepare
MONETARY FUNCTIONS OF RBI.
I would also like to say that subject was learning,
interesting, and exhaustive.
I would like to thank my parents, friends and
teachers who have helped and encouraged me throughout the
working of the project.

(ALOUKIK S.SHETE)

_______________ RESERVE BANK OF INDIA _______________

www.rbi.org.in

OBJECTIVE OF THE STUDY

To know the various functions of RBI.
To know how RBI has tackled and overcome the problems of Indian economy in
its difficult period.
To know the effects of RBIs decisions on Indian Banking Sector .
To know why RBI regarded as exceptionally best institution in India.

CONTENTS

TOPIC

NO

PAGE
NO

1.

Abbreviations

2.
3.
4.

Preamble
Introduction
Objectives of RBI

2
3
4

5.

Denomination of Coins and Currency

6.

Recent Changes in RBI's Monetary policy

7.

Monetary Functions

13

8.

RBI Mid-Quarter Monetary Policy : Highlights

30

9.

Conclusion

33

Bibliography

34

10.

LIST OF ABBREVIATIONS

RBI

Reserve Bank of India

DICGC

Deposit Insurance and Credit Guarantee Corporation

NHB

National Housing Bank

BRBNMPL

Bharatiya Reserve Bank Note Mudran Private Limited

NABARD

National Bank for Agriculture and Rural Development

SBI

State Bank of India

OMO

Open Market Operation

CRR

Cash Reserve Ratio

SLR

Statutory Liquidity Ratio

IMF

International Monetary Fund

IFCI

Industrial Finance Corporation of India

SFCs

State Finance Corporations

UTI

Unit Trust of India

IDBI

Industrial Development Bank of India

SACP

Special Agricultural Credit Plan

MSS

Market Stabilisation Scheme

Page | 1

PREAMBLE

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

stability

in

with
India

a view
and

to

securing

generally

to

monetary

operate the

currency and credit system of the country to its

advantage."

Page | 2

INTRODUCTION

The Reserve Bank of India (RBI) is India's central banking institution,

which controls the monetary policy of the Indian rupee. It was established on 1
April 1935 during the British Raj in accordance with the provisions of the
Reserve Bank of India Act, 1934. The share capital was divided into shares of
100 each fully paid which was entirely owned by private shareholders in the
beginning. Following India's independence in 1947, the RBI was nationalised in
the year 1949.
The RBI plays an important part in the development strategy of the Government
of India. It is a member bank of the Asian Clearing Union. The general
superintendence and direction of the RBI is entrusted with the 20-member-strong
Central Board of Directorsthe Governor, four Deputy Governors, one Finance
Ministry representative, ten Government-nominated Directors to represent
important elements from India's economy, and four Directors to represent Local
Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of
these Local Boards consists of five members who represent regional interests, as
well as the interests of co-operative and indigenous banks.

Page | 3

OBJECTIVES OF ESTABLISHMENT OF RBI

The main objectives of establishment of RBI as the Central Bank of India were
as follows :
1.
2.
3.
4.
5.
6.
7.
8.

to manage the monetary and credit system of the country

to stabilize internal and external value of rupee
for balance and systematic development of banking in the country
for the development of organized money market in the country.
for proper arrangement of agricultural finance.
for proper arrangement of industrial finance.
for proper arrangement of public debts.
To establish monetary relations with other countries of the world and

international financial institutions.

9. For centralization of cash reserves of commercial banks.
10. To maintain balance between the demand and supply of currency.
According to the Reserve Bank of India Act, the aim of RBI is, to regulate
the issue of bank notes and keeping of reserve with a view to secure system of
the country to its advantage.

Page | 4

DENOMINATIONS OF COINS AND

NOTES IN CIRCULATION

Coin Denomination
Coins in India are available in denominations of 10 paisa, 20 paisa, 25
paisa, 50 paisa, one rupee, two rupees, five rupees and ten rupees. Coins up
to 50 paisa are called small coins and coins of Rupee one and above are
called Rupee coins. As per the provisions of Coinage Act, 1906, coins
can be issued up to the denomination of Rs.1000.
Coins in circulation: 50 paise, 1, 2, 5 and 10 Rupee

Currency Unit and Denomination

The Indian Currency is called the Indian Rupee (abbreviated as Re. in
singular and Rs. in plural), and its sub-denomination the Paisa (plural
Paise). At present, notes in India are issued in the denomination of Rs.5,
Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1,000. The printing of Re.1 and
Rs.2 denominations has been discontinued.
However, notes in these denominations issued earlier are still valid and in
circulation. The Reserve Bank is also authorised to issue notes in the
Page | 5

denominations of five thousand rupees and ten thousand rupees or any

other denomination, but not exceeding ten thousand rupees, that tCentral
Government may specify. Thus, in terms of current provisions of RBI Act
1934, notes in denominations higher than ten thousand rupees cannot be
issued.
Notes in circulation: Rs. 5, 10, 20, 50,100, 500 and 1000

Page | 6

 Bank notes are legal tender at any place in India for payment without limit.
As per Indian Coinage Act- Rupee coin (1 and above) can be used to pay
for any sum.
Paise 50 coin can be used to pay /settle any sum not exceeding Ten Rupees.
Special Type of Notes
A special Star series of notes in three denominations of rupees ten, twenty
and fifty have been issued since August 2006 to replace defectively
printed notes at the printing presses. The Star series banknotes are exactly
like the existing Mahatma Gandhi Series banknotes, but have an
additional character
In the number panel in the space between the prefix and the number.
The packets containing these banknotes will not, therefore, have
sequential serial numbers, but contain 100 banknotes, as usual. This facility
has been further extended to Rs. 100 notes with effect from June 2009.
The bands on such packets indicate the presence of such notes.
Exchange of Notes
Basically there are two categories of notes which are exchanged between
banks and the Reserve Bank soiled notes and mutilated notes. While
soiled notes are notes which have become dirty and limp due to excessive
use or a two-piece note, mutilated note means a note of which a portion
is missing or which is composed of more than two pieces. While soiled
notes can be tendered and exchanged at all bank branches, mutilated

Page | 7

notes are exchanged at designated bank branches and such notes can be
exchanged for value through an adjudication process which is governed
by Reserve Bank of India (Note Refund) Rules, 2009. Under current

provisions, either full or no value for notes of denomination up to Rs.20 is

paid, while notes of Rs.50 and above would get full, half, or no value,
depending on the area of the single largest undivided portion of the note.
Special adjudication procedures exist at the Reserve Bank Issue offices
for notes which have turned extremely brittle or badly burnt, charred or
inseparably stuck together and, therefore, cannot withstand normal
handling.

Page | 8

RECENT CHANGES IN RBIS MONETARY POLICY

RBIs monetary management has undergone some major changes since

1991. Before 1991, the RBIs monetary policy was closely linked with the
financing of fiscal deficit. Now, the focus is more on promoting economic
growth and maintaining price stability.
1) Multiple indicator approach:
In 1980s and up to 1990s, the RBI used the monetary targeting
approach to its monetary policy. Monetary targeting refers to a monetary policy
strategy aimed at maintaining price stability by focusing on the changes in
growth of money supply (M3). It was believed that a continuous rise in money
supply caused inflation. After reforms in 1991, this approach became difficult to
follow. Financial liberalization brought more innovative financial products.
Earlier, RBI could monitor money supply as banks were the only financial
intermediaries. As non- banking sources of finance grew, monitoring money
supply and controlling inflation became difficult. Hence, RBI adopted the
Multiple Indicators Approach in which it looks at a variety of economic
indicators and monitors their impact on inflation and economic growth. This
approach was formally adopted in April 1998. As a part of this approach,
variables such as money, credit, output, trade, capital flows and fiscal position, as
well as rates of return in different markets, inflation rate and exchange rate, are
analyzed.

Page | 9

2) Expectation as a channel of monetary transmission:

Monetary policy transmission refers to the channel through which a
change in monetary policy affects the economy. Traditionally, four key channels
of monetary policy transmission are identified, interest rate, credit
availability, asset prices and exchange rate channels. The interest rate channel is
the most dominant has an immediate impact on interest rate and through it on
prices, demand, consumption and growth. In the recent period, a fifth channel,
expectations, has also emerged. Future expectations about asset prices, general
price and income level influence the four traditional channels and is therefore,
taken into consideration by RBI in evaluating monetary policy transmission.

3) Introduction of liquidity adjustment facility (LAF):

LAF is a tool used in monetary policy that allows banks to borrow
money through repurchase agreements. LAF was introduced by RBI during June
2000, in phases. The funds under LAF are used by the banks to meet their dayto-day mismatches in liquidity. Under the scheme, reverse repo auctions (for
absorption of liquidity) and repo auctions (for injection of liquidity) are
conducted. LAF has emerged as the most important factor in RBIs short term
monetary management.

4) Selective methods being phased out:

With greater market orientation of monetary policy and rapid
progress taking place in the financial markets, the selective methods of credit

Page | 10

control are being slowly phased out. The quantitative methods are becoming
more and more significant.

5) Delinking monetary policy from budget deficit:

In 1994, an agreement has been reached between the central government
and the RBI to phase out the use of ad hoc treasury bills. These bills were being
used by the government to borrow form to finance fiscal deficit. With the
phasing out the bills, RBI would no longer lend to the government to meet fiscal
deficit.

6) Deregulation of administered interest rate system:

The lending rates of banks used to be determined by the RBI earlier.
Since 1990s this system has been changed and the lending rates are no longer
regulated by the RBI but are determined by commercial banks on the basis of
market forces.

7) Reduction in reserve requirements:

CRR and SLR have been progressively lowered during the postreform period. This has done as a part of financial sector reforms on the
recommendations of the Narasimham committee report. As a result, more bank
funds have been released for lending purpose. This promoted growth of the
economy and improved profitability of banks.

8) Provision of micro finance:

Page | 11

The RBI has introduced the scheme of micro finance for the rural poor
by linking the banking system with Self Help Groups.RBI, along with
NABARD, has been promoting various other microfinance institutions.

9) External sector:
The monetary policy is now oriented towards the process of globalization
of Indias financial markets. It has become sensitive to changes in the rest of the
world as India is increasingly attracting large amount of foreign capital. RBI uses
sterilization and LAF to absorb the excess liquidity that comes in with huge
inflow of foreign capital. This is done to provide stability in the financial
markets.

Page | 12

MONETARY FUNCTIONS

Bank of Issue
Under Section 22 of the RBI Act, the Bank has the sole right to issue bank notes
of all denominations. The distribution of one rupee notes and coins and small
coins all over the country is undertaken by the RBI as agent of the Government.
The RBI has a separate Issue Department which is entrusted with the issue of
currency notes. The assets and liabilities of the Issue Department are kept
separate from those of the Banking Department. Originally, the assets of the
Issue Department were to consist of not less than two-fifths of gold coin, gold
bullion or sterling securities provided the amount of gold was not less than Rs.
40 Cores in value. The remaining three-fifths of the assets might be held in rupee
coins, Government of India rupee securities, eligible bills of exchange and
promissory notes payable in India. Due to the exigencies of the Second World
War and the post-war period, these provisions were considerably modified. Since
1957, the RBI is required to maintain gold and foreign exchange reserves of Ra.

Page | 13

200 Crores, of which at least Rs. 115 Crores should be in gold. The system as it
exists today is known as the minimum reserve system.

Banker to Government
The second important function of the RBI is to act as Government banker, agent
and adviser. The RBI is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir.
Banker to the Central Government
Under the administrative arrangements, the Central Government is
required to maintain a minimum cash balance with the Reserve Bank.
Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore on
Fridays, as also at the end of March and July.
Under a scheme introduced in 1976, every ministry and department of the
Central Government has been allotted a specific public sector bank for
handling its transactions. Hence, the Reserve Bank does not handle
governments day-to-day transactions as before, except where it has been
nominated as banker to a particular ministry or department.
In 2004, a Market Stabilisation Scheme (MSS) was introduced for issuing
of treasury bills and dated securities over and above the normal market
borrowing programme of the Central Government for absorbing excess
liquidity. The Reserve Bank maintains a separate MSS cash balance of the
Government, which is not part of the Consolidated Fund of India.
Page | 14

As banker to the Government, the Reserve Bank works out the overall
fund position and sends daily advice showing the balances in its books,
Ways and Means Advances granted to the government and investments
made from the surplus fund. The daily advices are followed up with
monthly statements.

Banker to the State Governments

All the State Governments are required to maintain a minimum balance
with the Reserve Bank, which varies from state to state depending on the
relative size of the state budget and economic activity. To tide over
temporary mismatches in the cash
flow of receipts and payments, the Reserve Bank provides Ways and
Means Advances to the State Governments. The WMA scheme for the
State Governments has provision for Special and Normal WMA. The
Special WMA is extended against the collateral of the government
securities held by the State Government. After the exhaustion of the
special WMA limit, the State Government is provided a normal WMA.
The normal WMA limits are based on three-year average of actual
revenue and capital expenditure of the state. The withdrawal above the
WMA limit is considered an overdraft. A State Government account can
be in overdraft for a maximum 14 consecutive working days with a limit
of 36 days in a quarter. The rate of interest on WMA is linked to the Repo
Page | 15

Rate. Surplus balances of State Governments are invested in Government

of India 14-day Intermediate Treasury bills in accordance with the
instructions of the State Government.

Bankers' Bank
The RBI acts as the bankers bank. According to the provisions of the Banking
Companies Act, 1949, every scheduled bank was required to maintain with the
RBI a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its
time liabilities in India. By an amendment of 1962, the distinction between
demand and time liabilities was abolished and banks have been asked to keep
cash reserves equal to 3 per cent of their aggregate deposit liabilities. The
minimum cash requirements can be changed by the RBI.
As Banker to Banks, the Reserve Bank focuses on:
Enabling smooth, swift and seamless clearing and settlement of inter-bank
obligations.
Providing an efficient means of funds transfer for banks.
Enabling banks to maintain their accounts with the Reserve Bank for statutory
reserve requirements and maintenance of transaction balances.
Acting as a lender of lasresort

Page | 16

 Lender of Last Resort

As a Banker to Banks, the Reserve Bank also acts as the lender of last
resort. It can come to the rescue of a bank that is solvent but faces temporary
liquidity problems by supplying it with much needed liquidity when no
one else is willing to extend credit to that bank. The Reserve Bank extends
this facility to protect the interest of the depositors of the bank and to prevent
possible failure of a bank, which in turn may also affect other banks and
institutions and can have an adverse impact on financial stability and thus
on the economy.

Controller of Credit
Credit control is a very important function of RBI as the Central Bank of India.
For smooth functioning of the economy RBI control credit through quantitative and
qualitative methods. Thus, the RBI exercise control over the credit granted by the
commercial bank. Details of this have been discussed as a separate handing. The
RBI is the most appropriate body to control the creation of credit in view if its
functions as the bank of note issue and the custodian of cash reserves of the member
banks. Unwarranted fluctuations in the volume of credit by causing wide
fluctuations in the value of money cause great social & economic unrest in the
country. Thus, RBI controls credit in such a manner, so as to bring Economic
Development with stability. It means, Bank will accelerate economic growth on
Page | 17

one side and on other side it will control inflationary trends in the economy. It leads
to increase in real national income of the country and desirable stability in the
economy.
Objectives of credit control :

To obtain stability in the internal price level.

To attain stability in exchange rate.
To stabilize money market of a country.
To eliminate business cycles-inflation and depression-by controlling supply of

credit.
To maximize income, employment and output in a country
To meet the financial requirements of an economy not only during normal times but
also during emergency or war.
To help the economic growth of a country within specified period of time. This
objective has become particularly necessary for the less developed countries of
present day world.

Methods and Instruments of Credit Control :

There are many methods of credit control. These methods can be broadly divided
into two categories:
I.
II.

Quantitative or General Methods.

Qualitative or Selective Methods.
The Quantitative methods of credit control aim at influencing the quantity or total
volume of credit in an economy during a particular period of time. The Qualitative
Page | 18

methods of credit control aim at influencing the quality of use of credit with respect
to a particular area or field of activity.
Quantitative System of credit control includes following instruments :
1)
2)
3)
4)
5)

Bank Rate
Open Market Operation (OMO)
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Repo and Reverse repo rate
Qualitative system consist of the following instruments :

1)
2)
3)
4)

Margin Requirement
Rationing of Credit
Moral Persuasion
Direct Action

5) Control through Directives

QUANTITATIVE SYSTEM :
These methods are called traditional methods because they have been in use for
decades. Through these methods, the credit creation is controlled by changing the
cash reserves of commercial banks.
The methods of Bank Rate Policy, open market operations and variation of Cash
Reserve Ratios, etc., are designed to effect the lendable resources of commercial
banks either directly affecting their reserve base or by making the cost of funds
cheaper or dearer to them. The important methods of this nature are explained herein
below:
Page | 19

1) Bank Rate
Bank Rate is the rate

at which RBI lends

money to other banks

or

institutions. The bank

rate

signals

the

central

term

outlook

on

banks

long-

financial

interest rates. If the

bank rate moves up,

long-term interest rates

also tend to move up,

and vice-versa.
Banks make a profit

by borrowing at a

lower rate and lending

the same funds at a

higher rate of interest. If the RBI hikes the bank rate, the interest that a bank pays
for borrowing money increases. It, in turn, hikes its own lending rates to ensure it
continues to make a profit.

(Chart showing effect of increase in Bank Rate)

2) Open Market Operation (OMO)

Page | 20

 OMO refers to buying and selling of government securities by central bank in

open market in order to regulate and control volume of credit in economy. When
RBI sells securities in OM, then the cash reserve of commercial banks will decrease
because they will purchase these securities. Thus, credit creating base of commercial
banks is reduced and credit contracts. Thus,
When RBI wants to contract credit, it will start selling securities in market and
When RBI wants to expand credit, it will start purchasing or buying back these
securitie.

3) Cash Reserve Ratio (CRR)

CRR i.e. cash reserve ratio, refers to a portion of deposits (as cash) which banks
have to maintain with the RBI. This serves two purposes. It ensures that a portion of
bank deposits is totally risk-free and secondly it enables that RBI control liquidity in
the system, and thereby, inflation by tying their hands in lending money.

4) Statutory Liquidity Ratio (SLR)

Besides the CRR, banks are required to invest a portion of their deposits in
government securities as a part of their statutory liquidity ratio (SLR) requirements.
What SLR does is again restrict the banks leverage in pumping more money into
the economy.
The main object of SLR is,
To assure solvency of Commercial banks by compelling them to hold low risk assets
up to the stipulated extent.
Page | 21

 To create or support a market for government securities in the economy which do

not have a developed capital market and
To allocate resources to government for augmenting the resources of the Public
Sector.
Banks like Regional Rural Banks may hold entire SLR requirements in the form of
cash with the sponsor banks

Difference between SLR and CRR

Both CRR and SLR are instruments in the hands of RBI to regulate money supply
in the hands of banks that they can pump in economy
SLR restricts the banks leverage in pumping more money into the economy. On
the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks
have to maintain with the Central Bank to reduce liquidity in banking system. Thus
CRR controls liquidity in banking system while SLR regulates credit growth in the
country.
The other difference is that to meet SLR, banks can use cash, gold or approved
securities whereas with CRR it has to be only cash. CRR is maintained in cash form
with central bank, whereas SLR is money deposited in govt. securities. CRR is used
to control inflation.
Page | 22

5) Repo Rate
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap
between the demand they are facing for money (loans) and how much they have on
hand to lend.If the RBI wants to make it more expensive for the banks to borrow
money, it increases the repo rate; similarly, if it wants to make it cheaper for banks
to borrow money, it reduces the repo rate.
Types of repo and related products
There are three types of repo maturities: overnight, term, and open repo.
Overnight refers to a one-day maturity transaction.
Term refers to a repo with a specified end date.
Open simply has no end date.
Although repos are typically short-term, it is not unusual to see repos with a
maturity as long as two years.
Repo transactions occur in three forms: specified delivery, tri-party, and held in
custody (wherein the "selling" party holds the security during the term of the repo).
The third form (hold-in-custody) is quite rare, particularly in developing markets,
primarily due to the risk that the seller will become insolvent prior to maturation of
the repo and the buyer will be unable to recover the securities that were posted as
collateral to secure the transaction. The first formspecified deliveryrequires the
delivery of a pre specified bond at the onset, and at maturity of the contractual
period. Tri-party essentially is a basket form of transaction, and allows for a wider
Page | 23

range of instruments in the basket or pool. In a tri-party repo transaction a third

party clearing agent or bank is interposed between the "seller" and the buyer. The
third party maintains control of the securities that are the subject of the agreement
and processes the payments from the "seller" to the "buyer."
6) Reverse Repo Rate
This is the exact opposite of repo rate. The rate at which RBI borrows money from
the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI
uses this tool when it feels there is too much money floating in the banking system
If the reverse repo rate is increased, it means the RBI will borrow money from the
bank and offer them a lucrative rate of interest. As a result, banks would prefer to
keep their money with the RBI (which is absolutely risk free) instead of lending it
out consequently, banks would have lesser funds to lend to their customers. This
helps stem the flow of excess money into the economy.

Page | 24

QUALITATIVE SYSTEM :

1) Margin Requirement
The difference between the market value of securities and the loan value i.e. the
amount borrowed against these securities known as Margin.
e.g.:- a person mortgages his property worth Rs. 1,00,000 against loan. The bank
will give loan of Rs. 80,000 only. The marginal requirement here is 20%.
In case the flow of credit has to be increased, the marginal requirement will be
lowered. RBI has been using this method since 1956.
2) Rationing of credit
Under this method there is a maximum limit to loans and advances that can be
made, which the commercial banks cannot exceed. RBI fixes ceiling for specific
categories. Such rationing is used for situations when credit flow is to be checked,
particularly for speculative activities. Minimum of Capital: Total Assets (ratio
between capital and total asset) can also be prescribed by Reserve Bank of India.

3) Moral Persuasion
Under this, RBI issues periodical letters to bank to exercise sector to follow credit
control norms. It is reminder to banking sector to follow credit control norms. In
fact, it is a psychological measure of controlling credit by doing heart to heart talk
with lending banker.
4) Direct Action
Page | 25

 Under the banking regulation Act, the central bank has the authority to take strict
action against any of the commercial banks that refuses to obey the directions given
by Reserve Bank of India. There can be a restriction on advancing of loans imposed
by Reserve Bank of India on such banks. e.g. - RBI had put up certain restrictions
on the working of the Metropolitan Co-operative Banks. Also the Bank of Karad
had to come to an end in 1992
The banks in default will be made to suffer by way of the following:
I. Levying penal interest rates on the defaulting banks.
II.

Cancelling the licences of such banks ( extreme step)

III.

Refusing to grant refinance facilities to such banks

IV.

Putting lending restrictions on the banks.

V.
VI.

Not permitting opening of new branches for the banks.

Not allowing participation in money market, etc.

5) Control through Directives

The Reserve Bank of India (Amendment) Act and the Banking Companies Act has
empowered the RBI to issue directives to a particular bank or to the banks in general
in regard to the following: The purpose for which advances may or may not be
made, the maximum amount of advances that can be granted to any individual, firm
Page | 26

or company; the margins to be maintained on secured loans, and the rate of interest
to be charged, etc.
For example,
a) Banks are not allowed to provide finance for speculative purposes in stock
market operations or to deal in real estate business.
b) No banks can make advances to a single borrower company beyond 25 per cent
of its paid-up capital and reserves.
c) Reserve Bank prescribes margin on advances made by banks against the
security of Commodities covered under selective credit control measures like
sugar.
d) Advances made under DRI scheme should be only at interest rate prescribed by
RBI, i.e., 4 per cent per annum.
The RBI has used this weapon for many times to bring down the prices of
agricultural commodities. The directives are issued by the RBI as supplement to the
traditional weapons of control like the bank rate policy, open market operations, etc.
Custodian of Foreign Reserves
The RBI has the responsibility to maintain the official rate of exchange. According
to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at
Page | 27

fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of
exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the
exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in
favour of or against the rupee. After India became a member of the International
Monetary Fund in 1946, the RBI has the responsibility of maintaining fixed
exchange rates with all other member countries of the International Monetary Fund
(IMF).
Besides maintaining the rate of exchange of the rupee, the RBI has to act as the
custodian of India's reserve of international currencies. The vast sterling balances
were acquired and managed by the Bank. Further, the RBI has the responsibility of
administering the exchange controls of the country.
Clearing House Functions
The RBI operates clearing houses to settle banking transactions. The RBI manages
14 major clearing houses of the country situated in different major cities. The State
Bank of India (SBI) and its associates look after clearing houses function in other
parts

of

the

country as an agent

of RBI.

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RBI MID-QUARTER MONETARY

POLICY : HIGHLIGHTS

Reserve Bank of India Governor Raghuram Rajan surprised markets in his

maiden policy review on Friday by raising interest rates to ward off rising
inflation while scaling back some emergency measures put in place to support
the rupee. Following are highlights from the monetary policy statement:
POLICY MEASURES
1.
2.
3.
4.
5.

Lowers marginal standing facility rate by 75 bps to 9.50 per cent

Raises repo rate (lending rate) by 25 bps to 7.50 per cent
Reverse repo rises to 6.50 per cent.
Cash reserve ratio (CRR) unchanged at 4.00 per cent
Partially relaxes minimum daily cash balance requirement to 95 per cent
of deposits from 99 per cent

POLICY STANCE
1. Bringing down inflation to more tolerable levels warrants raising the repo
rate by 25 basis points immediately
2. To contemplate easing cash tightening measures in a calibrated manner
3. Policy steps to mitigate exchange market pressures, create a conducive
environment for revitalisation of sustainable growth

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4. Steps intended to address inflationary pressures so as to provide a stable

nominal anchor for the economy
FORECASTS
1. Timing, direction of further actions on exceptional measures will be
contingent upon exchange market stability, and can be two-way
2. Further actions need not be announced only on policy dates
3. Focus now on internal determinants of rupee, fiscal deficit and domestic
inflation, after steps taken to contain current account gap
4. Growth is trailing below potential and the output gap is widening
5. Growth could pick up in the second half of the year
6. Despite good monsoons leading to some moderation in CPI inflation, no
room for complacency
7. In the absence of an appropriate policy response, WPI inflation will be
higher than initially projected over the rest of the year
8. Further change in the minimum daily maintenance of the CRR not
contemplated
9. Objective to normalise conduct and operations of monetary policy so as
to allow the repo rate to resume its role as operational policy rate.

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Bank Rate
: 9.50%
Repo Rate
: 7.50%
Reverse Repo Rate
: 6.50%
Marginal Standing Facility Rate : 9.50%
CRR
SLR

: 4%
: 23.0%

RBI Reference Rate

INR / 1 USD
INR / 1 Euro
INR / 100 Jap. YEN
INR / 1 Pound Sterling
INR / 1 Pound Sterling

: 61.8110
: 83.4200
: 62.6600
: 99.4972
: 99.4972

Base Rate
Savings Deposit Rate
* Term Deposit Rate

: 9.70% - 10.25%
: 4.00%
: 8.00% - 9.00%

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* relates to
five major banks CONCLUSION

RBI is the apex banking institution in India. RBI is an autonomous body promoted
by the government of India and is headquartered at Mumbai. It is non-profit making
institution which has a public ownership and management.RBI has a very privileged
position in the economy and it has a special relationship with commercial bank.
The RBI plays a key role in the management of the treasury foreign exchange
movements and is also the primary regulator for banking and non-banking financial
institutions. The RBI operates a number of government mints that produce currency
and coins. RBI also undertakes developmental and promotional functions such as
rural credit, special agricultural credit plans, Micro, small and medium
Enterprise development etc. The functions of the RBI also include the issue
of currency notes, Banker to the Government, Bankers bank, Lender of
Last Resort, Controller of Credit, Clearing House Functions.

BIBLIOGRAPHY

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 Books :
RBI - Brochure explaining RBI's Role and Functions in brief
Reserve Bank of India : Functions and Working

Website :
www.rbi.org.in
http://www.nrirealtynews.com/stories/apr07/check-inflation-control-measuresrbi.php
http://en.wikipedia.org/wiki/History_of_the_rupee
http://images.google.co.in/images
http://en.wikipedia.org/wiki/Economic_history_of_India#Republic_of_India
http://www.livemint.com/2008/06/10221118/Inflation-a-short-history.htm

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