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CHAPTER: - 1
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ABSTRACT
Central banks have a special place in the economic system and, more so, in the lives of people
in it, in more ways than they could imagine. Through their multitude of functions, Central
banks manifest themselves in every sphere of economy, despite their presence not being overtly
felt. Though the impact of the functions of the central banks are all pervading, their nuances
are still little known and/or least understood. This changed sharply in the global economies
with the financial crisis of 2008/09 which brought into focus the mandates and the roles of
central banks globally. Since then, central banking has been a matter of discussions in both
academia and media and the evolvement of central banking as we understand it has slowly
changed.

In India too, though we were not affected that much by the global financial crisis, the role of
Reserve Bank of India (RBI) as a central bank has been under greater scrutiny than it was ever
in the recent past. The RBI itself has evolved in many ways in the past few years, responding
to both the expectations of the economy and the role assigned to it. The most significant change
has, of course, been in the mandate of price stability that has been given to the Bank and the
formation of the Monetary Policy Committee to implement it. The Bank has also changed its
framework of supervising banks, moving from a static model to a risk based supervisory model.
While these are the most prominent changes, they are by no means the only changes. Even the
organization of the Bank has evolved a lot keeping in sync with the requirements of the
changing economy and today the Bank is one of the unique institutions globally in the range
and quality of functions it discharges.

Central banks issue currency notes which are carried and used by people for meeting their daily
needs. The payment systems that are also used by public for their electronic transactions and
by banks for settling their customers' transactions are regulated by central banks. Central banks,
through their monetary policies, ensure that the internal and external value of the currency is
preserved so that the public are not very uncertain about the value of the currency they hold.
Banks, where people deposit their savings and take loans from, are regulated by central banks.
Some central banks also regulate the nonbank participants and financial markets to ensure
stability of the financial system.
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In addition to the above, central banks act as bankers to banks and Governments by maintaining
their accounts and carrying out transactions on their behalf. Traditionally, some of the central
banks have managed the sovereign debt and funded their government expenditures. Central
banks also perform developmental roles in nurturing financial markets and institutions, mostly
in the developing economies where hand holding by central banks is essential.

Reserve Bank of India, India's central bank is a full service organisation and, in addition to
most of the functions of a typical central bank, performs certain other unique functions. With
changing times and complexities of economy and markets, the Bank is still evolving, as some
of the functions it used to do are no more with it, while many more new responsibilities have
been entrusted upon it.
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LITERATURE REVIEW
Central banks, historically, have been viewed as trustworthy but conservative institutions
which were entrusted the roles of ensuring financial and price stability. The operations of the
central banks were of interest to economists and financial markets but remained largely out of
the purview of the rest of population. This changed sharply in the global economies with the
financial crisis of 2008/09 which brought into focus the mandates and the roles of central banks
globally. Since then, central banking has been a matter of discussions in both academia and
media and the evolvement of central banking as we understand it has slowly changed.

This literature is about the function of RBI and its impact on the economy of India. Different
functions RBI perform in order to regulate economy to best of its strength. RBI act as a shield
of Indian economy to protect it from any external and internal crisis. This literature is to show
that how RBI always come forward to protect in Indian economy during crisis so that we can
say “RBI as an effectives regulator of Indian economy”.

REVIEW OF LITERATURE

Vasant desai (2007): The Reserve Bank of India plays a very vital role. It is known as the
banker’s bank. The Reserve Bank of India is the head of all banks. All the money formulations
of commercial banks are done under the Reserve Bank of India. The RBI performs all the
typical functions of a good central bank as it is involved in planning the economy of the
country. The main function is that the RBI should control their credit. It is mandatory for the
Bank to maintain the external value of the rupee. Major function is that it should also control
the currency.

Taylor [1995] using a financial market prices framework reviewed the impact of monetary
policy transmission on real GDP and prices, and found the traditional interest rate channel to
be an important channel. Obstfeld and Rogoff [1995] emphasised the importance of exchange
rate channel and concluded that the conduct of monetary policy has international implications

Meltzer [1995] re-emphasised transmission through multiple asset prices, extending beyond
interest rates, exchange rate and equity prices.
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OBJECTIVE

This study is based on the performance of RBI on overall economic development of India. It
shows how RBI control economy and how it makes caution move to protect Indian economy
at the time of adversity by performing the function of watch dog over Indian economy.

Some of the points which are tried to be covered in this topic are: -
 To give information about RBI in general.
 To show its important functions.
 To show different act through which RBI took power to control.
 Different areas where RBI can exert its power of control.
 To show the impact of monetary policy of RBI during financial crises.
 To show how RBI react for cryptocurrencies.
 How RBI control the whole process of demonetisation.
 Shadow banking and its impact.
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RESEARCH METHODOLOGY
The Research is the process in which the researcher wishes to find out the end result for a given
problem and thus the solution helps in future course of action.

Area of study: This research is conducted to show if RBI is effective regulator for Indian
economy.

Type of study: It is mainly qualitative study with a touch of quantitative data which is historical
in nature. It is a study to find how effective RBI was during the time of crisis.

Source of study:
This paper is based on secondary data collected through: -
RBI website.
RBI workbook.
Leading newspapers.
ET wealth magazine.
Money control and other different websites.

Mainly research work is done on the major event happened in the past on Indian economy like
financial crisis, demonetization, introduction of cryptocurrencies in India and also about impact
of RBI monetary policy and shadow banking.
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CHAPTER: - 2
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INTRODUCTION
Banks have played a critical role in the economic development of some developed countries such
as Japan and Germany and most of the emerging economies including India. Banks today are
important not just from the point of view of economic growth, but also financial stability. In
emerging economies, banks are special for three important reasons. First, they take a leading role
in developing other financial intermediaries and markets. Second, due to the absence of well-
developed equity and bond markets, the corporate sector depends heavily on banks to meet its
financing needs. Finally, in emerging markets such as India, banks cater to the needs of a vast
number of savers from the household sector, who prefer assured income and liquidity and safety
of funds, because of their inadequate capacity to manage financial risks.

Forms of banking have changed over the years and evolved with the needs of the economy. The
transformation of the banking system has been brought about by deregulation, technological
innovation and globalization. While banks have been expanding into areas which were
traditionally out of bounds for them, non-bank intermediaries have begun to perform many of the
functions of banks. Banks thus compete not only among themselves, but also with nonbank
financial intermediaries, and over the years, this competition has only grown in intensity.
Globally, this has forced the banks to introduce innovative products, seek newer sources of income
and diversify into non-traditional activities.

Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are
now defunct.

The oldest bank in existence in India is the State Bank of India, which originated in the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of
the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras,
all three of which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The
East India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as
independent units and called it Presidency Banks. The three banks merged in 1925 to form the
Imperial Bank of India, which, upon India's independence, became the State Bank of India.
 9|Page

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s.The Comptoire
d’Escompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French colony followed.

HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking center.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in1848 because of
the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning
today, is the oldest Joint Stock bank in India. Punjab National Bank came into being in 1895.
Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank and Bank of Mysore were set up.

After Independence, the government of India started taking steps to encourage the spread of
banking in India. In order to serve the economy in general and the rural sector in particular, the
All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-
sponsored bank taking over the Imperial Bank of India and integration with it, the former state-
owned and state –associate bank. According, State Bank of India (SBI) was constituted in 1995.
Subsequently in 1995, the State Bank of India (subsidiary bank) Act was passed, enabling the SBI
to take over eight former state-associate banks as its subsidiaries.

To better align the banking system to the needs of planning and economic policy, it was considered
necessary to have social control over banks. In 1969, 14 of the major private sector banks were
nationalized. This was an important milestone in the in the history of Indian banking. This was
followed by the nationalisation of another 6 private banks in 1980.
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EVOLUTION OF CENTRAL BANK

The evolution of central banks can be traced back to the seventeenth century when Riksbank, the
Swedish Central Bank was set up in 1668. The Bank of England was founded in 1694. The Central
Bank of the United States, the Federal Reserve established in 1914, was relatively a late entrant
to the central banking arena. The Reserve Bank of India, India's central bank started operations in
1935. At the turn of the twentieth century there were only eighteen central banks. Today, most of
the countries have a central bank. Central banks are not regular banks. They are unique both in
their functions and their objectives. In the beginning, central banks were established with the
primary purpose of providing finance to the government to meet their war expenses and to manage
their debt. They were initially known as banks of issue with the term central banking coming into
existence only in the nineteenth century. They were founded as “special” commercial banks
and would evolve into public-sector institutions much later. The “special” nature of these banks
was based on government charters, which made them not only the main bankers to the government
but also provided them monopoly privileges to issue notes or currency. Central banks also held
accounts of other banks even as they engaged in normal commercial banking activities. Given
their “special” status and their size, they soon came to serve as banker to banks facilitating
transactions between banks as well as providing them banking services. The eighteenth and
nineteenth century witnessed several financial panics. Panics are a serious problem as failure of
one bank may lead to failure of others. Banks are susceptible to panics or “runs” as more
popularly known, due to the nature of their balance sheets. Their liabilities are short-term and
liquid (banks' major liabilities are demand deposits, which means depositors can ask their money
back anytime they want and therefore immediately payable) and the assets are long-term and
illiquid (in the sense that it is not easy to sell them and convert into cash quickly). Banks engage
in this so-called maturity or liquidity transformation to allocate society's available pool of
resources effectively between savers and borrowers. The failure of banks and its potential adverse
impact on the real economy was and is a serious concern for all policymakers. In 1873, Walter
Bagehot, an editor of the Economist magazine, published a book titled “Lombard Street” where
he clearly articulated that to avoid panics, central banks should assume the role of “lender of last
resort”. The doctrine, which came to be known as Bagehot's dictum states that a central bank, in
periods of panics or crisis, should lend freely, against quality collateral and at a penal rate of
interest. The idea being, a bank that is facing a “run” by its depositors or other lenders can tide
over temporary liquidity problem in the stress period, by borrowing from the central bank against
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collateral. It can pay off the depositors and buy some time before things calm down. Given bank
runs are self-fulfilling prophecies, if the banks can navigate this period without becoming
insolvent, a crisis could be averted. The very fact that the bank was able to meet the withdrawal
demands would comfort the other depositors waiting to withdraw and wean them away. Without
the 'lender of last resort' facility, banks have to resort to fire-sale of their assets and that too at a
deep discount. Thus in addition to being a banker to the government and banks, central banks also
became lenders of last resort. The main mission of a central bank is to maintain macroeconomic
stability and financial stability. Macroeconomic stability refers to achieving stable and sustainable
growth and keeping prices stable, i.e., low and stable inflation. Financial stability on the other
hand refers to keeping the financial system resilient and avoiding financial crisis. The relative
importance of these objectives have varied over time. While the pursuit of sustainable economic
growth and low and stable inflation has been fundamental to central banking activities since the
early nineteenth century with the advent of the gold standard, the importance of financial stability
became more prominent since the Great Depression of the 1930s when the world economy faced
large bank failures and deep recession. To achieve the objectives of macroeconomic stability and
financial stability, central banks have certain tools at their disposal. To achieve economic stability,
central banks use monetary policy. By varying short-term interest rates, i.e., either raising or
lowering the interest rates, they control the supply of and demand for money in the economy and
thereby economic activity and inflation. For example, if the economy is growing fast and inflation
is high, central bank may raise the interest rates it charges the banks to lend money. Higher interest
rates will permeate into other rates, such as housing loan, consumer loan, etc. As the cost of
borrowing increases, it discourages consumption and investment and thus reduces growth and
inflation. On the other hand, if the economy is growing too slow or if the inflation is too low, the
central bank will lower the interest rate. This will feed into other rates and encourage spending
and investment thereby pushing economic growth and inflation. The trick of the trade is to achieve
sustainable growth and low and stable inflation. Thus sometimes central banking is said to be “
neither a science nor an art, but a craft”. To deal with financial stability, central banks main tool
is provision of liquidity. This tool, as explained earlier, is referred to as “lender of last resort”.
Some central banks, which are also the banking regulators in their economies employ another tool,
viz., regulation and supervision, to foster financial stability. By setting prudent rules and principles
and examining and monitoring banks adherence to these rules and principles, the central banks
aim to create a healthy and robust banking and financial system. A resilient and safe banking
system will reduce the chances of financial crisis in the first place. In many countries the
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regulatory and supervisory roles are performed by multiple agencies and therefore may not be one
of the main functions of the central bank. The internationalization of commercial banking activity
brought several risks to the fore. The failure of two banks in 1974, the Franklin National Bank in
the United States and Bank Herstatt in Germany, which had international implications necessitated
international cooperation and coordination among central banks. The Basel Committee for
Banking Supervision (BCBS) was thus established. The committee sets international regulatory
standards, known as Basel Standards that forms the bedrock for all national and international
banking regulations. Since the outbreak of the financial crisis in 2007-08, the tool box of central
banks has been strengthened. These tools or measures are popularly known as “unconventional
policies”, reflecting their use in extraordinary circumstances. Quantitative or credit easing,
negative interest rates, forward guidance, etc., are some of the tools employed by central banks to
deal with the crisis and its aftermath. The central banks also became the “market maker of last
resort” during the crisis as the markets became dysfunctional.

RBI
The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent
innovation and most central banks, as we know them today, were established around the early
twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young
Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the
functioning of the Bank, which commenced operations on April 1, 1935. The Central Office of
the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in
1937. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully
owned by the Government of India.

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 with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to
its advantage; to have a modern monetary policy framework to meet the challenge of an
increasingly complex economy, to maintain price stability while keeping in mind the
objective of growth."
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Central Board
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed
by the Government of India in keeping with the Reserve Bank of India Act.

 Appointed/nominated for a period of four years

 Constitution:

o Official Directors
 Full-time: Governor and not more than four Deputy Governors

o Non-Official Directors
 Nominated by Government: ten Directors from various fields and two
government Official

 Others: four Directors - one each from four local boards

Financial Supervision on RBI

The Reserve Bank of India performs this function under the guidance of the Board for Financial
Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central
Board of Directors of the Reserve Bank of India.

Objective of BSF

Primary objective of BFS is to undertake consolidated supervision of the financial sector

comprising commercial banks, financial institutions and non-banking finance companies.

Constitution of BSF

The Board is constituted by co-opting four Directors from the Central Board as members for a
term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are
ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking
regulation and supervision, is nominated as the Vice-Chairman of the Board.
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BFS meetings

The Board is required to meet normally once every month. It considers inspection reports and
other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit
and internal audit functions in banks and financial institutions. The audit sub-committee includes
Deputy Governor as the chairman and two Directors of the Central Board as members.

The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of
Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions
on the regulatory and supervisory issues.

Functions of BSF

Some of the initiatives taken by BFS include:

i. restructuring of the system of bank inspections

ii. introduction of off-site surveillance,
iii. strengthening of the role of statutory auditors and
iv. strengthening of the internal defences of supervised institutions.

Subsidiaries of RBI

Fully owned:- Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve
Bank Note Mudran Private Limited (BRBNMPL), National Housing Bank (NHB), Reserve Bank
Information Technology Private Limited (ReBIT)
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ORGANISATION STRUCTURE OF RBI

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NEED OF RBI IN INDIA

In a country where a large section of the society is still poor, inclusive growth assumes great
significance. Access to finance is essential for poverty alleviation and reducing income inequality.
One of the core functions of the RBI, therefore, is to promote financial inclusion that leads to
inclusive growth. As the central bank of a developing country, the responsibilities of the RBI also
include the development of financial markets and institutions. Broadening and deepening of
financial markets and increasing their liquidity and resilience, so that they can help allocate and
absorb the risks entailed in financing India's growth is a key objective of the RBI. India's financial
system is dominated by banks. Their regulation and supervision is therefore important both from
the viewpoint of protecting the depositors' interest and preserving financial stability. The RBI,
deriving powers from the Banking Regulation Act, 1949, designs and implements the regulatory
policy framework for banks operating in India. Over the years, the purview of regulation and
supervision has been expanded to include non-banking entities also. The global economic
uncertainties during and after the Second World War warranted conservation of scarce foreign
exchange by sovereign intervention and allocation. Initially, the RBI carried out the regulation of
foreign exchange transactions under the Defence of India Rules, 1939 and later, under the Foreign
Exchange Regulation Act of 1947. Over the years, as the economy matured, the role shifted from
foreign exchange regulation to foreign exchange management. The 1991 balance of payment and
foreign exchange crisis was a watershed event in India's economic history. Being at the center of
country's monetary and financial system, the RBI played a key supporting role in helping the
Government manage the crisis and undertake necessary market and regulatory reforms. The
approach under the reform era included a thrust towards liberalisation, privatisation, globalisation
and concerted efforts at strengthening the existing and emerging institutions and market
participants. The Reserve Bank adopted international best practices in areas, such as, prudential
regulation, banking technology, variety of monetary policy instruments, external sector
management and currency management to make the new policy framework effective. Central
banks are at the heart of a country's payment and settlement system. “One of the principal
functions of central banks is to be the guardian of public confidence in money, and this confidence
depends crucially on the ability of economic agents to transmit money and financial instruments
smoothly and 1 securely through payment and settlement systems”. The RBI has, over the years,
taken several initiatives in building a robust and state-of-the-art payment and settlement system
that not only improves the “plumbing” of the financial system but also its stability. The last two
and a half decades have also seen growing integration of the national economy and financial
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system with the world. While rising global integration has its advantages in terms of expanding
the scope and scale of growth of the Indian economy, it also exposes India to global shocks. The
crisis of 2007-08, though not significantly impacted India, gave a glimpse of financial instability
in other economies posing threat to our financial stability. Hence, preserving financial stability
became an important mandate for the RBI.

RBI DRAW POWER FORM OTHER LAWS

On an analysis of the legal provisions, it may be possible to infer that the preamble to the RBI
Act, 1934, is not exhaustive enough to cover the objective and the purpose for which the RBI has
been established.

Aims and Objectives – The Preamble

The purposes for which the RBI has been established as India's central bank have been spelt out
in the preamble to the RBI Act, which states as follows:

i) to regulate the issue of banknotes and the 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; and

ii) that it is essential to have a modern monetary policy framework to meet the challenge of an
increasingly complex economy and the primary objective of the monetary policy is to maintain
price stability while keeping in mind the objective of growth5.

Thus, the Preamble in the RBI Act, as amended by the Finance Act, 2016, provides that the
primary objective of the monetary policy is to maintain price stability, while keeping in mind the
objective of growth, and to meet the challenge of an increasingly complex economy. However,
the functions which the RBI is undertaking are not confined only within the provisions of the RBI
Act, but extend to various areas, such as, regulation and supervision of banks, consumer
protection, management of foreign exchange, management of government securities, regulation
and supervision of payment systems, etc., for which powers are drawn from various other laws,
namely, the Banking Regulation Act, 1949, Foreign Exchange Management Act, 1999,
Government Securities Act, 2006, Payment and Settlement Systems Act, 2007, etc.–
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MAIN FUNCTION OF RBI

Monetary Authority:
 Formulates, implements and monitors the monetary policy.

 Objective: maintaining price stability while keeping in mind the objective of growth.

Regulator and supervisor of the financial system:

 Prescribes broad parameters of banking operations within which the country's banking and
financial system functions.

 Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.

Manager of Foreign Exchange:

 Manages the Foreign Exchange Management Act, 1999.

 Objective: 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.

 Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.

Developmental role:
 Performs a wide range of promotional functions to support national objectives.

Related Functions:
 Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.

 Banker to banks: maintains banking accounts of all scheduled banks.

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RBI FUNCTION ON BROAD CATEGORY

Banking Functions
RBI may transact various businesses such as acceptance of deposits without interest from
Central Government and State Governments, purchase, sale and rediscount of Bills of
Exchange, short term Loans and Advances to banks, annual Contributions to National Rural
Credit Funds, dealing in Derivatives, purchase and sale of Government Securities, purchase
and sale of shares of State Bank of India, National Housing Bank, Deposit Insurance and Credit
Guarantee Corporation, etc., keeping of deposits with SBI for specific purposes, making and
issue of Banknotes, etc. RBI also act as a 'Lender of Last Resort. This apart, the provisions of
the RBI Act enable the RBI to act as banker to Central Government and State Governments
and shall have an obligation and right respectively to accept monies for account of the Central
Government and to make payments up to the amount standing to the credit of its account, and
to carry out its exchange, remittance and other banking operations, including the management
of the public debt of the Union.

Issue Functions
Right to issue bank notes is one of the key central banking functions the RBI is mandated to
do. RBI Act confers the RBI with the sole right to issue bank notes in India. The issue of bank
notes shall be conducted by a department called the Issue Department, which shall be separated
and kept wholly distinct from the Banking Department. The RBI Act enables the RBI to
recommend to Central Government the denomination of bank notes, which shall be two rupees,
five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees,
two thousand rupees, five thousand rupees and ten thousand rupees or other denominations not
exceeding ten thousand rupees .The design, form and material of bank notes shall be that
approved by the Central Government on the recommendations of Central Board of the RBI
.Every bank note shall be a legal tender at any place in India, however, on recommendation of
the Central Board, the Central Government may declare any series of bank notes of any
denomination to be not a legal tender . Another important function is exchange of mutilated or
torn notes, which under the RBI Act is not a matter of right, but a matter of grace. The bank
notes that are being issued by the RBI are exempt from payment of stamp duty.
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Monetary Policy Functions

Monetary policy refers to the policy of the central bank with regard to the use of monetary
instruments under its control to achieve the goals specified in the Act. The Monetary Policy
Committee has been entrusted with the statutory duty to determine the Policy Rate required to
achieve the inflation target and central bank is intrusted with the conducting it.

There are several direct and indirect instruments that are used for implementing monetary
policy.

 Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight
liquidity to banks against the collateral of government and other approved securities.

 Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs
liquidity, on an overnight basis, from banks against the collateral of eligible government
securities under the LAF.

 Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term
repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity
injected under fine-tuning variable rate repo auctions of range of tenors. The aim of
term repo is to help develop the inter-bank term money market, which in turn can set
market based benchmarks for pricing of loans and deposits, and hence improve
transmission of monetary policy. The Reserve Bank also conducts variable interest rate
reverse repo auctions, as necessitated under the market conditions.

 Marginal Standing Facility (MSF): A facility under which scheduled commercial

banks can borrow additional amount of overnight money from the Reserve Bank by
dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate
of interest. This provides a safety valve against unanticipated liquidity shocks to the
banking system.

 Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers. The Bank Rate is published under Section 49
of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the MSF rate changes alongside policy
repo rate changes.
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 Cash Reserve Ratio (CRR): The average daily balance that a bank is required to
maintain with the Reserve Bank as a share of such per cent of its Net demand and time
liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette
of India.

 Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to
maintain in safe and liquid assets, such as, unencumbered government securities, cash
and gold. Changes in SLR often influence the availability of resources in the banking
system for lending to the private sector.

 Open Market Operations (OMOs): These include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity, respectively.

 Market Stabilisation Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large
capital inflows is absorbed through sale of short-dated government securities and
treasury bills. The cash so mobilised is held in a separate government account with the
Reserve Bank.

Foreign Exchange Management Function

Foreign exchange reserves form the first line of defence to calm volatility in the forex markets
and provide adequate liquidity for “sudden stop” or reversals in the capital flows. The foreign
exchange reserves are kept in major convertible currencies and invested in very high quality
assets based on the considerations of safety, liquidity and return, in that order. Reserve
management is a process that ensures that adequate official public sector foreign assets are
readily available to and controlled by the authorities for meeting a defined range of objectives
for a country or union. In this context, a reserve management entity is normally made
responsible for the management of reserves and associated risks.

The powers and responsibilities with respect to external trades and payments, development and
maintenance of foreign exchange market in India are conferred on the RBI under the provisions
of the Foreign Exchange Management Act, 1999 ('FEMA'). Section 10 of the FEMA empowers
the RBI to authorize any person to be known as authorized person to deal in foreign exchange
or in foreign securities, as an authorized dealer, money changer or off-shore banking unit or in
 22 | P a g e

any other manner as it deems fit. Similarly, it empowers the RBI to revoke an authorization
issued to an authorized dealer in public interest, or if the authorized person has failed to comply
with the conditions subject to which the authorization was granted or has contravened any of
the provisions of the FEMA or any rule, regulation, notification, direction or order issued by
the RBI. However, the revocation of an authorization may be done by the RBI after following
the prescribed procedure in the FEMA or the Regulations made thereunder.

Foreign Exchange Reserves Management: RBI's Approach

The Reserve Bank, as the custodian of the country's foreign exchange reserves, is vested with
the responsibility of managing their investment. The legal provisions governing management
of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.

Until the balance of payments crisis of 1991, India's approach to foreign exchange reserves
was essentially aimed at maintaining an appropriate import cover. The approach underwent a
paradigm shift following the recommendations of the High Level Committee on Balance of
Payments chaired by Dr. C. Rangarajan (1993). The committee stressed the need to maintain
sufficient reserves to meet all external payment obligations, ensure a reasonable level of
confidence in the international community about India's capacity to honour its obligations and
counter speculative tendencies in the foreign exchange market. Prior to 1993, the market
exchange rate was determined by the central bank. After the introduction of system of market-
determined exchange rates in 1993, the main objective of smoothening out the volatility in the
exchange rates assumed importance. The overall approach to the management of foreign
exchange reserves also reflects the changing composition of Balance of Payments (BoP) and
liquidity risks associated with different types of capital flows.

The adequacy of reserves is a matter of debate right from 1990s. In 1997, the Report of the
Committee on Capital Account Convertibility under the chairmanship of Shri S.S. Tarapore,
suggested alternative measures for adequacy of reserves. The committee, in addition to trade-
based indicators, also suggested money-based and debt-based indicators. Similar views have
been also held by the Committee on Fuller Capital Account Convertibility (Chairman: Shri S.
S. Tarapore, July 2006). The traditional approach of assessing reserve adequacy in terms of
import cover has been widened to include a number of parameters about the size, composition,
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and risk profiles of various types of capital flows. The Reserve Bank also looks at the types of
external shocks, including foreign exchange liquidity shocks, to which the economy is
potentially vulnerable. The objective is to ensure that the quantum of reserves is in line with
the growth potential of the economy, the size of risk-adjusted capital flows and national
security requirements.

The basic parameters of the Reserve Bank's policy for foreign exchange reserves management
are safety, liquidity and returns. While safety and liquidity are the twin-pillars of reserves
management, return optimization is an embedded strategy within this framework. The Reserve
Bank has framed policy guidelines stipulating stringent eligibility criteria for issuers,
counterparties, and investments to be made with them to enhance the safety and liquidity of
reserves. The Reserve Bank, in consultation with the Government, continuously reviews the
reserves management strategy.

The Reserve Bank's reserves management function has in recent years grown both in terms of
importance and sophistication for two reasons. First, the share of foreign currency assets in the
balance sheet of the Reserve Bank has substantially increased. Second, with the increased
volatility in exchange and interest rates in the global market, including the interest rates of
major economies testing the floor, the task of preserving the value of reserves and obtaining a
reasonable return on them has become more challenging.

Within the overall framework of reserve management, the Reserve Bank focuses on:

i) Maintaining market's confidence in monetary and exchange rate policies.

ii) Enhancing the Reserve Bank's intervention capacity to act in the event of undue
volatility in the foreign exchange markets.

iii) Limiting external vulnerability by maintaining foreign currency liquidity to absorb

shocks during times of crisis, including national disasters or emergencies.

iv) Providing confidence to foreign investors that all external obligations will be met, thus
reducing the costs at which foreign exchange resources are available to market
participants.

v) Adding to the comfort of market participants by demonstrating the backing of domestic

currency by external assets.
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Investment Avenues

The Reserve Bank of India Act, 1934 provides the overarching legal framework for
deployment of reserves in different foreign currency assets and gold within the broad
parameters of currencies, instruments, issuers and counterparties. In terms of Section 17 of the
RBI Act, the forex reserves are generally invested in:

1. Deposits with Bank for International Settlements and other central banks
2.
Deposits with foreign commercial banks

3. Debt instruments representing sovereign or sovereign-guaranteed liability of not more

than 10 years of residual maturity

4. Other instruments and institutions as approved by the Central Board of the Reserve Bank
in accordance with the provisions of the Act

5. Certain types of derivatives

Banking Regulation & Supervision Function

The powers of RBI to formulate banking policy, regulate banking business, protect the interests
of banking companies, supervision of banking companies, etc., are scattered across the
provisions of the BR Act, 1949. Firstly, Section 5(ca) of the BR Act, 1949, states that banking
policy means any policy, which is specified from time to time by the RBI, in the interest of the
banking system or in the interest of monetary stability or sound economic growth, having due
regard to the interests of the depositors, the volume of deposits and other resources of the bank
and the need for equitable allocation and the efficient use of these deposits and resources.
Secondly, as a part of RBI's regulatory power, it has been empowered under Section 10BB of
the BR Act, 1949, to appoint a Chairman or Managing Director of a banking company for the
reasons stated therein. Similarly, as a part of control over management, Section 36-AB of BR
Act, 1949, provides for power to appoint additional directors on the boards of banking
companies. Not only the powers to appoint managerial persons but also the power to remove
them are vested with the RBI under Section 36-AA of the BR Act, 1949. Moreover, the RBI
has been empowered under BR Act, 1949, to supersede the board of banking companies.
Though the business of banking is within the domain of a banking company, the power to
control advances by banking companies is also provided to the RBI under Section 21 of the BR
Act, 1949. Similarly, Section 22 of the BR Act, 1949 confers on the RBI the power to issue
 25 | P a g e

license and also to cancel licenses of banking companies. Another important regulatory power
that has been vested with the RBI is its power to issue directions to banking companies. Under
Section 35-A of the BR Act, 1949, RBI has the power to issue directions to banking companies
in the public interest or in the interest of banking policy or to prevent the affairs of any banking
company being conducted in a manner detrimental to the interests of the depositors or in a
manner prejudicial to the interests of the banking company or to secure the proper management
of any banking company. In this regard, it may be worthwhile to note the observations of the
Hon'ble Supreme Court of India in the case of Joseph Kuruvilla Vs. Reserve Bank of India that
in view of history of establishment of the Reserve Bank, as a Central Bank for India, its position
as a banker's bank, its control over the banking companies and banking in India, its position
as an issuing bank, its power to license the banking companies and cancel their licence and
the numerous other powers, it is unanswerable that between the Court and the Reserve Bank,
the momentous decision to wind up a tottering or unsafe banking company in the interest of the
depositors, may reasonably be left to the Reserve Bank. The RBI has been specifically
authorized to issue directions to banking companies for resolution of stressed assets. As a part
of the supervisory power, the RBI has been empowered to inspect banking companies on its
own or at the instance of Central Government under the provisions of the BR Act, 1949. Thus
an overall responsibility to find out the well-being of a banking company, in improving
monetary stability and economic growth as well as keeping in view the interests of depositors,
has been left with the Reserve Bank of India
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Regulation and Supervision of NBFCs Function

The regulation and supervision of non-banks is one of the critical functions that the RBI has
been entrusted with. RBI Act mandates every non-banking financial company to obtain a
certificate of registration from the RBI and to maintain net owned fund as may be specified by
the RBI in the Official Gazette, before commencing such non-banking financial business.
Further, as a part of regulation and supervision of non-banks, the RBI has been conferred with
the statutory powers to regulate or prohibit issue of prospectus or advertisements soliciting
deposits of money by non-banking financial companies, power to determine policy and issue
directions to non-banking financial companies, etc. Further, the RBI has been empowered
under RBI Act to call for information and issue directions to non-banking financial companies
for the reasons stated therein. As a part of the supervisory control over the non-banking
financial companies, the RBI has the power to inspect them under RBI Act, 1934. The RBI
shall exercise all these powers in the public interest or to regulate the financial system of the
country to its advantage or to prevent the affairs of any non-banking financial company being
conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial
to the interest of the non-banking financial company. This makes it clear that the power of the
RBI to regulate and supervise banking companies emanates from the provisions of the BR Act
whereas the powers to regulate and supervise non-banks has the source from RBI Act

Regulation & Supervision of Co-operative Banks Function

The RBI derives its powers to regulate Co-operative banks from the BR Act, 1949 (AACS).
Some of the regulations include issue of branch licences, authorization for extending their area
of operation, prescribing CRR and SLR requirements and prudential norms for capital
adequacy, income recognition, asset classification and provisioning norms, exposure norms,
targets for priority sector lending, inclusion of UCBs into second Schedule of the RBI Act,
1934, etc. It also issues Operational Instructions to weak banks and places the banks under
Directions before taking a decision on merger or liquidation.
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Regulation of Derivatives and Money Market Instruments Function

RBI permitted futures on 91-day T-Bill on March 7, 2011. The futures based on other money
market instrument or money market interest rate was permitted on October 28, 2016. The
exchanges registered with SEBI are free to select the underlying instrument or interest rate and
structure other details of the contracts. However, the registered exchanges are required to
submit complete details of the futures contract, duly ratified by SEBI, to the Reserve Bank for
approval before any new or modified futures contract is introduced for trading on the
exchanges. RBI also control money market through Reserve Bank has laid down prudential
norms for various money market instruments, viz., Call/Notice Money, Repurchase Agreement
(Repo), Commercial Paper (CP), Certificates of Deposit (CD), Non-Convertible Debentures
(NCDs) of original or initial maturity up to one year and derivative products linked to Money
Market interest rate/benchmark.

1. Call/Notice Money

Call/Notice Money refers to lending/borrowing of funds on uncollateralized basis among

scheduled commercial banks, cooperative banks and the PDs. The lending/borrowing is for one
day in case of Call Money, while it is for a period between two days to fourteen days in case
of Notice Money. Prudential limits have been set in respect of both outstanding borrowing and
lending transactions in Call/Notice money market for scheduled commercial banks,
cooperative banks and PDs. The Call/Notice Money transactions take place either on NDSCall,
a screen–based, negotiated, quote-driven electronic trading system managed by the Clearing
Corporation of India (CCIL), or over the counter (OTC). The OTC trades are to be reported on
the NDS-Call within 15 minutes of the execution of the trade.

2. Repurchase Agreement (Repo)

Repo is an instrument for borrowing (lending) funds by selling (purchasing) securities with an
agreement to repurchase (resell) the securities on a mutually agreed future date at an agreed
price which includes interest for the funds borrowed (lent). The transaction is called repo from
the point of view of the borrower of funds (seller of securities) and reverse repo from the point
of view of the lender of funds (buyer of securities). Currently Government securities, Corporate
bonds, Commercial Papers and Certificates of Deposits are permitted as eligible collateral for
market repos. Permitted participants in market repo include Scheduled banks, Primary Dealers,
NBFCs, HFCs, Insurance companies, listed and unlisted companies, etc., with some
 28 | P a g e

conditionality’s. The repo transactions can take place either on CCIL's anonymous repo Order
Matching System (CROMS) or bilaterally through OTC. The OTC transactions are required to
be reported on CROMS within 15 minutes of the execution of the trade. Securities purchased
under the repo cannot be sold during the period of the contract except by entities permitted to
undertake short selling. Re-repo is permitted in government securities, including state
development loans and Treasury Bills, acquired under reverse repo, subject to certain
conditions. The RBI has permitted repo in the listed corporate debt securities of original
maturity of more than one year with rating of 'AA' or above by the rating agencies registered
with SEBI. Commercial Papers (CPs), Certificates of Deposit (CDs) and Non-Convertible
Debentures (NCDs) of original maturity up to one year which are rated A2 or above by the
rating agencies registered with SEBI are also eligible instruments for undertaking repo.

3. Collateralised Lending Borrowing Obligations (CBLO)

CBLO is a money market product designed by CCIL. It facilitates borrowing and lending for
various tenors, from overnight up to a maximum of one year, in a fully collateralised
environment backed by Central Government securities and Treasury Bills. The participants
deposit the eligible securities with CCIL against which CCIL issues them the CBLOs which
constitute their borrowing limits.

4. Commercial Paper (CP)

CP is an unsecured money market instrument issued in the form of promissory note. This was
introduced in 1990 with an objective to enable highly rated corporate borrowers to diversify
their sources of short-term borrowings and provide an additional instrument to the investors.
Companies including NBFCs and All India Financial Institutions (AIFIs), other entities, such
as co-operative societies/unions, government entities, trusts, limited liability partnerships and
any other body corporate having presence in India with a net worth of ` 1 billion or higher are
eligible to issue CPs subject to the condition that any fund-based facility availed by them from
bank(s) and/or financial institutions is classified as a standard asset by all financing
banks/institutions at the time of issue. The exact end use has to be disclosed in the offer
document at the time of issue of a CP. Eligible issuer, whose total CP issuance during a calendar
year is ` 10 billion or more, have to obtain credit rating for issuance of CPs from at least two
Credit Rating Agencies registered with SEBI and should adopt the lower of the two ratings.
The minimum credit rating for a CP shall be 'A3' as per rating symbol and definition prescribed
by SEBI. No issuer shall have the issue of a CP underwritten or co-accepted. Options (call/put)
 29 | P a g e

are not permitted on a CP. A CP shall be issued in minimum denomination of ` 500,000 and
multiples thereof. All OTC trades in CP are required to be reported within 15 minutes of the
trade to the Financial Market Trade Reporting and Confirmation Platform (“F-TRAC) of
Clearcorp Dealing System (India) Ltd. (CDSL). The buyback of a CP, in full or part, is
permitted at the prevailing market price only after 30 days from the date of issue. The duties
and obligations of the Issuer, Issuing and Paying Agent (IPA) and Credit Rating Agency (CRA)
have been spelt out in the guidelines.

5. Certificate of Deposits (CD)

Certificate of Deposit (CD) is a negotiable money market instrument and issued in

dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other
eligible financial institution for a specified time period. CDs can be issued by (i) scheduled
commercial banks (excluding RRBs and LABs), and (ii) select AIFIs that have been permitted
by the RBI to raise short-term resources within the umbrella limit fixed. The maturity period
of CDs issued by banks should not be less than 7 days and not more than one year, while FIs
can issue CDs for a period not less than 1 year and not exceeding 3 years. Minimum amount
of a CD should be `100,000 and in multiples of ` 100,000 thereafter. Banks / FIs are allowed
to issue CDs on floating rate basis provided the methodology of compiling the floating rate is
objective, transparent and market based. Banks / FIs cannot grant loans against CDs.
Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may
relax these restrictions for temporary periods through a separate notification. All OTC trades
in CD are required to be reported within 15 minutes of the trade to the Financial Market Trade
Reporting and Confirmation Platform (“F-TRAC”) of Clearcorp Dealing System (India) Ltd.
(CDSL).
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6. Non-Convertible Debentures (NCDs) of original maturity up to one year

Non-Convertible Debenture (NCD) means a debt instrument issued by a corporate (including

NBFCs) with original or initial maturity up to one year and issued by way of private placement.
A corporate shall be eligible to issue NCDs if it fulfils the criteria, viz., (i) the corporate has a
tangible net worth of not less than 10 million, as per the latest audited balance sheet; (ii) the
corporate has been sanctioned working capital limit or term loan by bank/s or all-India financial
institution/s; and (iii) the borrowal account of the corporate is classified as a Standard Asset by
the financing bank/s or institution/s. An eligible corporate intending to issue NCDs shall obtain
credit rating for issuance of the NCDs from one of the rating agencies registered with SEBI or
such other credit rating as may be specified by RBI from time to time. The minimum credit
rating is 'A2' as per rating symbol and definition prescribed by SEBI. The aggregate amount of
NCDs issued by a corporate shall be within such limit as may be approved by the Board of
Directors of the corporate or the quantum indicated by the Credit Rating Agency for the rating
granted, whichever is lower. NCDs shall not be issued for maturities of less than 90 days. The
exercise date of option (put/call), if any, attached to the NCDs should not fall within 90 days
from the date of issue. Every corporate issuing NCDs shall appoint a registered Debenture
Trustee (DT). The role and responsibilities of issuers, DTs and the CRAs have been spelt out
in the guidelines

7. Forward Rate Agreement (FRA)/Interest Rate Swaps (IRS)

The FRA/IRS were introduced in July 1999 to help banks and PDs to better manage their
interest rate risk in the wake of deregulated interest rate regime. Swaps having explicit/implicit
option features such as caps/ floors/ collars are not permitted. Scheduled commercial banks
(excluding RRBs), PDs and all- India FIs are permitted to participate in the market for both
balance sheet management and market making. Non-financial corporations can use IRS/FRA
for hedging balance sheet exposures subject to one of the counterparties being an RBI regulated
entity. Mutual Funds and Insurance companies have been permitted to participate in IRS for
hedging purpose only. Major Benchmarks used for IRS currently are - Mumbai Interbank
Outright Rate (MIBOR), Mumbai Interbank Forward Offered Rate (MIFOR) and Indian
Benchmark Yield Curve
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Payment and Settlement Functions

Central banks are at the heart of a country's payment and settlement system. One of the
principal functions of central banks is to be the guardian of public confidence in money, and
this confidence depends crucially on the ability of economic agents to transmit money and
financial instruments smoothly and securely through payment and settlement systems. The RBI
has, over the years, taken several initiatives in building a robust and state-of-the-art payment
and settlement system that not only improves the “plumbing” of the financial system but also
its stability.

The RBI has always played a significant role in the development and nurture of payment and
settlement systems in our country as indicated above. As per Section 3 of the Payment and
Settlements Act 2007, the RBI is the designated authority for the regulation and supervision of
payment systems under the Act. The RBI has constituted a committee of its Central Board to
be known as the Board for Regulation and Supervision of Payment and Settlement Systems
(BPSS) as per provisions of the Act. The Department of Payment and Settlement Systems
assists the Board in performing its functions. The RBI took a studied stance with reference to
ushering in changes to and in the payment systems. Periodically, it constituted various
committees and Working Groups, such as, the Rangarajan Committee I & II, Saraf Committee,
Patil Committee and the Burman Working Group, to guide use of Information and
Communication Technology(ICT) for the benefit of banking in general and the payment
systems in particular. Further, from 1998 onwards, the RBI has been continuously bringing out
a Payment System Vision document for every three years, charting the road map for
implementation. The latest one is for the period 2015 -18. Released by the RBI in June 2016,
the vision for 2018 focuses on “Building best of class payment and settlement systems for a
'less-cash' India through responsive regulation, robust infrastructure, effective supervision and
customer centricity”.
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Consumer Protection Functions

Consumer Protection has been an ongoing effort of Reserve Bank of India. For greater
effectiveness and a more focused approach, several committees were appointed on aspects of
customer service in banks from time to time. The RBI had set up the Banking Ombudsman
Scheme to act as a visible and credible alternative dispute resolution agency for common
persons utilizing banking services and to ensure redress of grievances of users of banking
services in an inexpensive, expeditious and fair manner that provides impetus to improve
customer services in the banking sector on a continuous basis. The release of a Charter of
Customer Rights, which enshrined broad, overarching principles for protection of bank
customers and enunciates the 'five' basic rights of bank customers is a major step in this
direction.

The important initiatives of RBI in this matter are:

 Mandating the Board of the banks to discuss the customer service aspects and the
implementation of regulatory instructions on a half-yearly basis.
 Advising banks to constitute a Customer Service Committee of the Board and include
experts and representatives of customers as invitees to enable the bank to formulate
policies and assess the compliance thereof internally with a view to strengthen the
corporate governance structure in the banking system and also to bring about ongoing
improvements in the quality of customer service provided by the banks.
 Mandating banks to set up a Standing Committee on Customer Service cutting across
various departments in the bank which can serve as the micro level executive committee
driving the implementation process and providing relevant feedback while the
Customer Service Committee of the Board would oversee and review /modify the
initiatives.
 Advising banks for setting up of Customer Service Committees in branches to
encourage a formal channel of communication between the customers and the bank at
the branch level.
 Requiring banks to designate Nodal department and Nodal officer in the bank for
handling customer service and grievances of customers.
 Mandating Board approved policies on Customer Service, Customer Rights, Deposits,
Cheque Collection, Customer Compensation and Customer Grievance Redressal.
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Financial Inclusion and Development Functions

Economic growth and improved prosperity have little meaning if large sections of the society
continue to languish in poverty and lack of access to financial services. The Reserve Bank of
India has assumed, as its core purpose, the development of an efficient and inclusive financial
system. The efforts towards ensuring financial inclusion has been through mandates which
include priority sector targets and targets under financial inclusion plans, encouraging the use
of multiple methods of increasing access by creating differentiated banking outlets and
increasing awareness though financial literacy. RBI control and supervise financial system
inclusion and development through Institutional mechanism, business correspondence and
priority sector lending and to achieve this RBI formed a department called Financial Inclusion
and Development Department.

Financial inclusion and development role of the Reserve Bank envisages formulating policies
to make credit available to productive sectors of the economy including rural and Micro, Small
and Medium Enterprises (MSME) sectors. Promoting financial education and financial literacy
are the current focus of the function and encapsulates the renewed national focus on Financial

Inclusion.

The functions of the Financial Inclusion and Development Department of RBI in brief are:

 To formulate macro policy to strengthen credit ow to the priority sectors

 To ensure that priority sector lending becomes a tool for banks to capture untapped
business opportunities among financially excluded sections of the society
 To help expand Prime Minister's Jan Dhan Yojana (PMJDY) and to make it a
sustainable and scalable financial inclusion initiative through financial literacy
 To step up credit flow to MSME sector and to rehabilitate sick units through timely
credit support
 To strengthen institutional arrangement, such as, state level banker’s committee and
Lead Bank Scheme to facilitate these objectives
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DEPARTMENT OF RBI AND THEIR FUCTIONS

Monetary  Monetary Policy Department (MPD)

 Department of Economic and Policy Research (DEPR)
Policy
 Department of Statistics and Information Management (DSIM)
and Research  Financial Markets Operation Department (FMOD)
 International Department (ID)
 Department of Communication (DoC)
Regulation  Department of Banking Regulation (DBR)
 Department of Non-Banking Regulation (DNBR)
and Risk
 Department of Co-operative Bank Regulation (DCBR)
Management  Enforcement Department (ED)
 Financial Stability Unit (FSU)
Supervision  Department of Banking Supervision (DBS)
 Department of Non-Banking Supervision (DNBS)
&
 Department of Cooperative Bank Supervision (DCBS)
Inclusion  Financial Inclusion and Development Department (FIDD)
 Customer Education and Protection Department (CEPD)
Financial  Department of External Investments and Operations (DEIO)
 Financial Markets Regulation Department (FMRD)
Markets and
 Internal Debt Management Department (IDMD)
Infrastructure  Foreign Exchange Department (FED)
 Department of Payment and Settlement Systems (DPSS)
 Department of Government and Bank Accounts (DGBA)
Operations  Department of Currency Management (DCM)
 Department of Information Technology (DIT)
and
 Corporate Strategy and Budget Department (CSBD)
Human  Department of Corporate Services (DCS)
Resources  Human Resource Development Department (HRMD)
 Risk Monitoring Department (RMD)
 Inspection Department (ID)
 Legal Department (LD)
 Secretary's Department
 Central Vigilance Cell
 Rajbhasha Department
 Premises Department (PD)

This shows that RBI is not only limited to its direct control but now it’s giving more stress on
indirect control.
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CHAPTER: - 3
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RESEARCH ANALYSIS

MONETARY POLICY
Monetary policy making in India has evolved from time to time. In the last three decades, key
changes related to adoption of monetary targeting framework, transition to multiple indicator
approach and adoption of inflation targeting. In particular, the RBI Act, 1934, was amended in
May 2016 to provide a statutory basis for the implementation of the flexible inflation targeting
framework. Further, the amended RBI Act, 1934, also provides for an empowered six-member
Monetary Policy Committee (MPC) to be constituted by the Central Government to determine
the policy interest rate required to achieve the inflation target. The amended RBI Act came into
effect in June 2016.

REPO RATES
This is the interest rate at which the RBI lends money to licensed commercial banks in case
they need short term funds to meet regulatory or business requirements.

Repo Rate as monetary policy signalling tool - More than anything else, the repo rate is used
by the central bank to signal its monetary policy stance to the banks, businesses, government
and people at large. RBI reviews the repo rate from time to time as part of the monetary policy
review. Generally monetary policy fulfils two objectives – Keeping inflation under control and
accelerating the economic growth.

RBI Repo Rate Cut

The likely scenarios when repo rate is reduced:

 When the central bank wants to signal lower interest rates in the market

 When RBI is reasonably confident that inflation and fiscal deficit are in control and a
demand led price surge is unlikely

 When the economy is slowing down and the RBI wants to accelerate growth by
signalling an accommodative monetary policy

 When the external balance of payments situation of the country is seen to be stable by
the bank
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Impact of Repo Rate Hike

 As the new MCLR is linked to Repo Rate, any increase in repo rate will lead to increase
in MCLR. This will lead to increase in interest rate for borrowers who have taken
floating rate home loan, personal loan and business loan

 As the Repo Rate is increased, the demand for credit facilities (loan) will decrease, due
to higher interest rate. This will help RBI and government to control inflation

 Corporate will be able to get cheaper funds for business expansion. This will help in
achieving the growth target

RBI Repo Rate increase

The likely scenarios when the RBI is likely to raise repo rate are:

 When the central bank wants to signal higher interest rates in the market

 When RBI sees over heating in the economy and perceives a risk that inflation may
surge

 When there may be a risk of asset bubbles being created due to excessive capital
formation

 When the RBI wants to reduce speculation in foreign exchange or sees a risk of
disorderly depreciation of Indian currency

How does repo rate cut translate into lower interest rates?
When the RBI cuts repo rate, cost of funds of banks reduces. As a result, the banks are able to
advance loans to their customers at a lower cost. Banks typically use the repo rate as a signal
to determine their deposit rates, lending rates and base rates.
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REPO RATE CHART

07th Feb 19 6.25%

05th Dec 18 6.50%

05th Oct 18 6.50%

01st Aug 18 6.50%

06th Jun 18 6.25%

05th Apr 18 6.00%

07th Feb 18 6.00%

06th Dec 17 6.00%

04th Oct 17 6.00%

02nd Aug 17 6.00%

08th Jun 17 6.25%

06th Apr 17 6.25%

08th Feb 17 6.25%

07th Dec 16 6.25%

04th Oct 16 6.25%

05th Apr 16 6.50%

29th Sep 15 6.75%

02nd Jun 15 7.25%

04th Mar 15 7.50%

15th Jan 15 7.75%

28th Jan 14 8.00%

18th Dec 13 7.75%

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Repo rates graph

7th February 2019 – RBI cuts repo rate by 25 bps to 6.25%

Repo rate has been cut by 25 bps by RBI in its sixth bi-monthly monetary policy on 7th February
2019. The rate cut marks a change from the last 18 months’ policy stance of hardening rates.
This should bring in good news for home loan and mortgage loan borrowers, as the banks are
expected to reduce their MCLRs which should result in lower interest rates both for new and
existing borrowers. The reverse repo rate also stands adjusted to 6%.

2008-09 repo rate cut by RBI to tackle financial crisis

the policy repo rate was condensed by 425 basis points of 9.0 % to 4.75 %, in order to
provide liquidity at the time of global financial crisis.

Rate cuts since Jan 2015

Interest rates are being consistently cut by RBI since 2015. In Jan ‘15 the RBI interest rate
was 7.75%, which dropped to 7.5% in March ‘15. In June ’17 a further cut of 25 bps was
made, reducing the rate to 7.25%, and in Sep ’15 it further dropped by 50 bps to 6.75%. In
Apr ’16 it was 6.5%, while Oct ’16 saw it retained at 6.25% and now in 2019 it reduce to
6.25% to 6.50%
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SLR
Statutory liquidity ratio refers to the amount that the commercial banks require to maintain
in the form of gold or government approved securities before providing credit to the
customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of
India in order to control the expansion of bank credit. It is determined as % of total demand
and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are
liable to pay to the customers after a certain period mutually agreed upon and demand liabilities
are such deposits of the customers which are payable on demand. The maximum limit of SLR
is 40% and minimum limit of SLR is 18% In India now.

If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it
becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal
interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that
particular day. But, according to the circular, released by the Department of Banking
Operations and Development, Reserve Bank of India; if the defaulter bank continues to default
on the next working day, then the rate of penal interest can be increased to 5% per annum above
the Bank Rate.

The main objectives for maintaining the SLR ratio are the following:

 To control the expansion of bank credit. By changing the level of SLR, the Reserve
Bank of India can increase or decrease bank credit expansion.

 To ensure the solvency of commercial banks.

 To compel the commercial banks to invest in government securities like government

bonds.

Formula for Calculating SLR in India

SLR rate = (liquid assets / (demand + time liabilities)) × 100%

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SLR affect economy

Lower SLR, means bank can give more money as loan = lower interest rates = cheap loan =
more people take loan to start business or building house or buying car = boost in economy.
This could to inflation, if people have more cash in their hands than the items available for
purchase in the market.

Higher SLR = bank can give less money as loan = Higher interest rate = it becomes expensive
to start a new factory, buy a new house / car/bike. This can curb inflation but may also lead
to slowdown in economy, because people wait for the interest rates to go down, before taking
loans.

SLR Hike Help in Lowering Inflation

Whenever the RBI hikes the SLR rate, a lot of excess liquidity is sucked out of the markets.
Banks have lesser cash available with them to deploy as loans. Consequently, to maintain their
profit margins, they have to increase the lending rates at which they disburse loans. As loan
rates go up, consumers tend to borrow less and eventually spend less. Thus the demand for
goods and services goes down. All inflated prices start coming down due to the decrease in
demand. And as prices start moving downwards, inflation starts coming down.
 42 | P a g e

SLR CHART AND GRAPH

Apr-07 25%
Apr-08 24%
Jan-09 24%
Nov-09 25%
Dec-10 24%
Dec-11 24%
Jan-12 24%
Aug-12 23%
Mar-13 23%
Jun-14 22.50%
Aug-14 22%
Mar-15 21.50%
Apr-16 21.25%
Sep-16 21%
Oct-16 20.75%
Jan-17 20.50%
Jun-17 20%
Oct-17 19.50%
Aug-18 19.50%
Feb-19 19.25%

30%

25%

20%

15%

10%

5%

0%
Nov-12

Nov-17
May-10

Mar-11

May-15

Mar-16
Jul-09

Oct-10

Jul-14

Oct-15
Apr-08

Jun-12

Apr-13

Jun-17

Apr-18

Feb-19
Sep-08
Feb-09

Dec-09

Jan-12

Sep-13
Feb-14

Dec-14

Jan-17

Sep-18
Aug-11

Aug-16
 43 | P a g e

SLR rate cut during financial crisis (2008-2009)

The statutory liquidity ratio (SLR) was reduced to 24.0 % of NTDL from 25.0 %.

The permanent reduction in the SLR by 1.0% of NDTL has made liquid funds of the order of
Rs.40, 000 crores available for the purpose of credit expansion.

SLR rate cut program from 19.5% to 18%

It was ready to ease monetary policy to support the economy. It will reduce the SLR by 25
basis points (0.25 per cent) every calendar quarter until the SLR reaches 18 per cent of the net
demand and time liabilities (NDTL) as part of aligning it with the liquidity coverage ratio
(LCR).
The first reduction of 25 basis points will take effect in the quarter commencing January 2019.
The move may release funds locked in government securities and add to lendable liquidity.
This reduction in SLR holding is likely to free up Rs 1-1.5 lakh crore of funds in the next one
and half year into the banking system. This would keep lending rates stable or push them down
marginally.

SLR rate cut by 25bps in February 2019.

Under the SLR rate cut policy from 19.5% to 18%. RBI decided to cut the first rate of 25bps
and it is decided to cut 25bps at very quarterly till SLR reached to 18%.
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CURRENT RATES

Policy Rates
Policy repo rate 6.25%
Reverse repo rate 6.00%
Marginal Standing Facility Rate 6.50%
Bank Rate 6.50%

Reserve Ratio
Cash Reserve Ratio (CRR) 4.00%
Statutory liquidity ratio (SLR) 19.25%

Lending / Deposit Rates

Base Rate : 8.95% - 9.45%
MCLR (Overnight) : 8.15% - 8.55%
Savings Deposit Rate : 3.50% - 4.00%
Term Deposit Rate > 1 Year : 6.25% - 7.50%

Note: - The RBI has decided to reduce statutory liquidity ratio, the portion of funds which
banks are required to park in treasury bills and other instruments, by 0.25% every quarter
beginning January.

 The calibrated reduction in statutory liquidity ratio (SLR) will continue till it reaches
18%. The current SLR is 19.5%.
 SLR cut by 1.5% to 18% can reduce demand for Government bonds in the near term.
 A reduction in SLR would mean higher liquidity for the banks, so they would have
more funds to lend. This would keep lending rates stable or push them down marginally
 This reduction in SLR holding is likely to free up Rs1-1.5 trillion of funds in the next
one and half year into the banking system.
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RBI ON CRYPTOCURRENCIES

Here's what the RBI circular says regarding cryptocurrencies

"Technological innovations, including those underlying virtual currencies, have the potential
to improve the efficiency and inclusiveness of the financial system. However, Virtual
Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise
concerns of consumer protection, market integrity and money laundering, among others.

Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies,
including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
In view of the associated risks, it has been decided that, with immediate effect, entities
regulated by RBI shall not deal with or provide services to any individual or business entities
dealing with or settling VCs. Regulated entities which already provide such services shall exit
the relationship within a specified time.

RBI said that "virtual currencies, also variously referred to as cryptocurrencies and crypto
assets, raise concerns of consumer protection, market integrity and money laundering, among
others... In view of the associated risks, it has been decided that, with immediate effect, entities
regulated by the RBI shall not deal with or provide services to any individual or business
entities dealing with or settling virtual currencies"

Fencing against risk

The move has been taken to protect banks and non-banking entities from crypto-fraud that
poses a serious threat to the stability of India's economy.

In the statement, the RBI deputy governor added that "digital tokens issued by private parties
are getting international attention for quite some time for their speculative value".

Internationally, while regulatory responses to such tokens are not uniform, it is universally felt
that they can seriously undermine the anti-money laundering/FATF (Financial Action Task
Force) framework, and adversely impact market integrity and capital control. And if they grow
beyond a size, they can endanger financial stability.
 46 | P a g e

Why the move

The move was in the offing as the RBI had already clarified its stance on cryptocurrency. Even
finance minister Arun Jaitley, in his last full Budget, made it clear that the Indian government
does not recognise cryptocurrencies such as Bitcoin, Ripple and Etherium as "legal tender" and
will take all measures to eliminate their use for illegitimate transactions.

"The RBI has cautioned on at least three occasions members of the public and users of virtual
currency regarding risks they are exposing themselves to through these cryptocurrencies. We
have now decided to fence RBI-regulated entities from the risk of dealing with entities
associated with virtual currencies. They are required to stop having a business relationship with
entities dealing with virtual currencies forthwith and unwind the existing relationship within
three months."

What does this mean?

Technically, neither the RBI nor the government has banned digital currencies. Unlike China,
which enforced a blanket ban on trading and holding cryptocurrencies, the RBI's latest step is
just a clever way of stopping people from continuing to increase investments in
cryptocurrencies by simply barring banks from facilitating the transfer of money to Indian
crypto exchanges like Zebpay, Unicoin and Coindelta.

Banks have been banned from rendering services including trading, maintaining accounts,
settling, clearing, and sanctioning loans against virtual tokens. It has also been directed to not
accept virtual currency as collateral, transfer money for the purchase of virtual tokens, and open
accounts of new cryptocurrency exchanges. Once the banks close their business with these
exchanges, the move will also affect those looking to withdraw money by selling their existing
crypto holdings.

Restrictions aimed at straitjacketing virtual currencies have had the reverse impact. Despite a
correction in the price of most cryptocurrencies, transactions have gone up substantially in both
volume and value after RBI’s April circular.

The total value of bitcoin transactions in domestic exchanges went up almost 25 percent after
the RBI decided to clamp down on virtual currencies. Between April 7 and August 18, the
value of bitcoin that passed hands in the Indian market went up from Rs 6.82 crore to Rs 8.49
crore. The value of bitcoin has depreciated by 54 percent since the turn of the year. If the value
 47 | P a g e

of bitcoin has gone down, as has fresh inflow from financial institutions for their purchase and
sale.

Problem to RBI on stopping bitcoin.

 Cryptocurrency exchanges and traders seem to have developed new business models to
circumvent the central bank’s rules. The RBI circular said transactions in Indian rupees
to buy or sell cryptocurrencies should not pass through the baking system. It does not
mention anything about third-party transactions or the setting up of peer-to-peer
exchanges.
 Domestic exchanges like WazirX and Unocoin have moved to a system of trade based
on hyperlocal peer-to-peer transfers where it acts as a facilitator. People holding
cryptocurrencies such as bitcoin register with the exchange where the rupee equivalent
of the currency is held in an escrow account held by the exchange.
 An escrow account is one held by a third party on behalf of two other parties engaged
in a transaction. Assets held in escrow are watched over by the escrow agent till
contractual obligations have been met. In this case, the escrow agent is the
cryptocurrency exchange.
 When the person holding cryptocurrency finds a buyer online, funds for the transaction
are transferred to the seller’s account. On receipt of funds, cryptocurrency is relayed to
the buyer’s account. In this way, cryptocurrencies change hands without any direct
interaction between banks and exchanges.
 Moreover, exchanges have moved to collecting their share in cryptocurrencies. The
rules laid down by the RBI dictate that exchanges cannot levy a transaction charge in
rupees. Exchanges exploit the divisibility of virtual currencies to collect 0.1 percent of
the value of the transaction as commission.
 For example, if one bitcoin, valued at Rs 4.5 lakh, changes hands, the transaction fee
will amount to Rs 450. This amount, which is equivalent to 0.001 BTC (bitcoin) will
be passed on to the exchange. In this manner, exchanges and traders manage to work
around the RBI’s strict guidelines.

Thus RBI has to has to use stricter regulation and have to come with some different ideas in
order to stop bitcoin.
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DEMONETISATION
Demonetization refers to an economic policy where a certain currency unit ceases to be
recognized or used as a form of legal tender. In other words, a currency unit still loses its legal
tender status as a new one comes into circulation.

Countries which have done demonetization are:

UNITED STATES (1969)
In 1969, the United States of America under President Richard Nixon declared all bills above
$100 null and void in United States of America to curb the existence of black money in the
nation and restore the country’s sheen.

GHANA (1982)
To reduce tax evasion and clear excess liquidity, the country demonetized its 50 cedi
currency. The exercise was highly unsuccessful as the public started turning towards foreign
currency and physical assets. Moreover, the general public lost confidence in the banking
system and a fresh black market for currency cropped up.

NIGERIA (1984)
The military government under Muhammadu Buhari started issuing new currency notes with
new colours in an attempt to make the old notes obsolete. The movement aimed towards
fixing a debt-ridden and inflated economy failed miserably

MYANMAR (1987)
The military invalidated nearly 80 percent of the value of money in circulation with the
motive to curb the rising black economy. It resulted in a student demonstration followed by a
government crackdown the very next year

AUSTRALIA (1996)
In order to improve upon the security features and curb black money in the economy, the
Australian government withdrew all paper-based notes replacing them with long life
polymer-based notes of the same denomination. The move was successful in improving the
life of the bills
 49 | P a g e

ZIMBAWE (2015)
In order to stabilize its economy racked by hyperinflation, the government decided to replace
the Zimbabwe dollar with the American dollar in 2015. The move, carried out in a haste
turned out to be unsuccessful as most wealth holders saw the value of their accumulated
savings receding. Along with resentment among people, there were adverse effects on the
economy as exports took a major hit due to loss of competitiveness.

VENEZUELA (December, 2016)

In order to curb the rising inflation rate that reached 425% and tackle the growing threat of
the transnational mafias breeding in the country, the Nicolas-Maduro led government
announced demonetization of its 100 Bolivar notes (which form 77% of the nation’s cash in
circulation). The citizens were given a 72hour window before withdrawal of currency.
Following violent protests including destruction of shops, road blockages and break down of
ATMs, the government was forced to extend the deadline for use of old currency

INDIA(November, 2016)
On November 8,2016 PM Narendra Modi declared that from the stroke of midnight 500 and
1000 rupee notes would cease to be legal tender. This immediately sparked unrest and an
estimated 15 tonnes of gold worth Rs 5000 crores was bought within an hour of the
announcement. ATMs and banks were engulfed with people demanding and depositing cash.
The situation only deteriorated thereafter. Since, the Indian economy is highly dependent of
cash, the move has affected consumption and trade (evident from record low 3.63% retail
inflation rate for November 2016). In the short term, growth in cash heavy sectors such as
real estate, construction and FMCG is likely to take a hit. On the positive side, a higher
government spending and greater financial inclusion will provide a boost to the economy
over the long term. Also, cross border terrorism has been under control since the
announcement.
INDIA on 1978 1st time goes on demonetization of Rs 10000 note. So, this is not the 1st time
for INDIA to go for demonetization.
 50 | P a g e

Lessons Learnt:
More often than not, governments and leaders from around the world who forced
demonetization failed to see their dreams fruition or faced an ouster. In an attempt to crack
down upon the wrong doings of certain sections, governments also cause inconveniences to
those who have hitherto complied with law and order. How well the resentment among these
people is tackled is what determines the success of this exercise.

Although, Indian governments have resorted to demonetization in 1978 to phase out notes,
removing 85% of the notes in circulation is unprecedented. A contraction of money supply and
a decrease in liquidity is likely to result in reduced economic activity and will impact sectors
such as agriculture and the informal sector which are highly dependent on cash transactions.
The economy will not refurbish as long as the government is able to flush back the removed
notes into the system. Over time, bringing defaulters under the tax net will result in multiplier
benefits for the economy as a whole, thus, spurring growth.

DEMONETIZATION IN INDIA AND RBI

On 8th November 2016, our Hon’ble Prime Minister Shri Narendra Modi, announced
the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. The
primary reason was that the action would curtail the shadow economy and crack down on the
use of illicit and counterfeit cash to fund illegal activity including terrorism. The decision has
been a huge one as, RBI estimations suggested that 16.5 billion and 6.7 billion notes of 500
and 1000 respectively were floating in the economy and all the cost that went on to print these
had gone sunk which cannot be undermined (around ₹3 for printing one ₹1000 note). But the
amount of collection of black money that govt. was expecting was definitely a lot more than
that as almost 84% of the cash was in the notes of 500(45%) and 1000(39%).

The Reserve Bank of India had initially stipulated a window of fifty days until 30 December
2016 to deposit the demonetised banknotes as credit in bank accounts. The banknotes could
also be exchanged over the counter of bank branches up to a limit that varied over the days.
Initially, the limit was fixed at ₹4,000 per person from 8 to 13 November. This limit was
increased to ₹4,500 per person from 14 to 17 November. The limit was reduced to ₹2,000 per
person from 18 November. All exchange of banknotes was abruptly stopped from 25
November 2016. It is evident from the data known to us that over the period of the whole
 51 | P a g e

process RBI changed the guidelines several times. One of the major issues that RBI faced was
the fact that the ATMs needed recalibration because the sizes of the new notes were not
compatible with the old calibration. Finance Minister Arun Jaitley said ATMs had not been
calibrated before the announcement to demonetise Rs 500 and Rs 1,000 notes to maintain
secrecy. “It is a massive operation; it will take time.” Re-calibration of ATMs involved multiple
agencies – banks, ATM manufacturers, National Payment Corporation of India (NPCI), Switch
Operators, etc., and multiple activities making it a complex operation requiring immense
coordination among these agencies. With a view to providing direction and guidance in this
regard, it decided to set up a Task Force under the Chairmanship of Shri S. S. Mundra, Deputy
Governor, Reserve Bank of India. Consequent to the announcement of withdrawal of Legal
Tender status of banknotes of Rs 500 and Rs 1000 denominations from the midnight of
November 8, 2016, the Reserve Bank of India also made arrangements for exchange and /or
deposit of such notes at the counters of the Reserve Bank and commercial banks, Regional
Rural banks and Urban Cooperative Banks. According to sources, 97% of the demonetised
bank notes have been deposited into banks which have received a total of ₹14.97 trillion ($220
billion) as of December 30 out of the ₹15.4 trillion that was demonetised. This is against the
government’s initial estimate that ₹3 trillion would not return to the banking system. Of the
₹15.4 trillion demonetised in the form of ₹500 and ₹1000 bank notes of the Mahatma Gandhi
Series, ₹9.2 trillion in the form of ₹500 and ₹2000 bank notes of the Mahatma Gandhi New
Series has been re-circulated as of 10 January 2017, two months after the demonetization. The
currency management wings of the Reserve Bank and the banking system were geared up for
long hours on weekdays and to work on holidays. Additional manpower was deployed,
including contracting retired personnel. The presses also enhanced their labour force; worked
on long shift and holiday as well.
Direct touch points for cash delivery were trebled in number. Turn around period of logistics
were shortened. Airlifting of currency was adopted to rush stocks to needy locations. Daily
monitoring of production, supply, delivery, demand, withdrawal and stock were intensely
monitored at multiple levels. Lower denomination notes were issued in plenty. The RBI
received a lot of flak for corrections and adjustments. One comment was that the RBI issued
fifty instructions in the fifty days; a circular.
 52 | P a g e

RBI VS GOVERNMENT ON DEMONETIZATION

 The RBI Directors argued that the government's reasoning — note ban would help in
curbing black money and restricting circulation of counterfeit cash — to ban Rs 500
and Rs 1000 notes, did not really hold good.

 "Most of the black money is held not in the form of cash but in the form of real sector
assets such as gold or real-estate and… this move would not have a material impact on
those assets," the RBI Board noted.

 The Ministry of Finance stated that fake currency in denominations of Rs 1,000 and Rs
500 was on the rise and the total quantity of such currency was estimated to be around
Rs 400 crore. To this, RBI noted that "while any incidence of counterfeiting is a
concern, Rs 400 crore as a percentage of the total quantum of currency in circulation in
the country is not very significant."

 The RBI board also pointed out that the government's claim of the growth of the Indian
economy being linked to the high amount of high denomination currency in circulation
was flawed. It stated that the rate of inflation had not been taken into consideration.

 "The growth rate of economy mentioned is the real rate while the growth in currency
in circulation is nominal. Adjusted for inflation, the difference may not be so stark.
Hence, this argument does not adequately support the recommendation…," the RBI
Board noted.

 The Board has pointed out that the withdrawal these currencies would have a negative
impact on two sectors in particular -- medical and tourism. Therefore, it asked the
government to exempt private medical stores.

 "Arriving domestic long distance travellers who may be only carrying high
denomination notes will be taken by surprise at railway stations/airports for payment to
taxi drivers and porter charges and hence put to hardship. It would also have an adverse
effect on tourists," the RBI Directors had said.

So, we can notice that RBI is most epic autonomous body which also counter government when
something wrong its sees.
 53 | P a g e

Not only demonetization have negative effect but also has some positive affect, which help
government and central bank to reach its objectives for betterment of economy.

Positive affect of demonetization is: -

 With respect to the digital economy it presents a big opportunity to take the process of
financial inclusion and incentivising use of electronic modes of payment forward as
people can see the benefits of bank accounts and electronic means of payment over use
of cash.

 It actually helps India to go on the path of cashless country. Due to demonetarization,

people had no money in hand, so it compels they to use cashless mode of transaction.

 It helps to track many people under the radar of income tax system. Although mostly
people had converted their cash from black to white but it helps to make surveillance
over them because now those moneys are audited by government.

 It helps to increase tax revenue generated within the country as most of the people are
now paying taxes.

 Financial inclusion in country also increases. People are now becoming more and more
literate and curious and the functioning of bank and other financial system in an
economy etc.
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RBI ON GLOBAL FINANCIAL CRISES IN INDIA

The direct effect of the sub-prime crisis on Indian banks/financial sector was almost negligible
because

 limited exposure to complex derivatives and other prudential policies put in place by
the Reserve Bank.

 The relatively lower presence of foreign banks in the Indian banking sector also
minimized the direct impact on the domestic economy. The larger presence of foreign
banks can increase the vulnerability of the domestic economy to foreign shocks, as
happened in Eastern European and Baltic countries. In view of significant liquidity and
capital shocks to the parent foreign bank, it can be forced to scale down its operations
in the domestic economy, even as the fundamentals of the domestic economy remain
robust.

 There was also no direct impact of the Lehman failure on the domestic financial sector
in view of the limited exposure of the Indian banks.

IMPACT OF FINANCIAL CRISIS ON INDIA

 there was a sell-off in domestic equity markets by portfolio investors reflecting

deleveraging. Consequently, there were large capital outflows by portfolio investors
during September-October 2008, with concomitant pressures in the foreign exchange
market.

 While foreign direct investment flows exhibited resilience, access to external

commercial borrowings and trade credits was rendered somewhat difficult. On the
whole, net capital inflows during 2008-09 were substantially lower than in 2007-08 and
there was a depletion of reserves. However, a large part of the reserve loss (US $ 33
billion out of US $ 54 billion) during April-December 2008 reflected valuation losses.

 The contraction of capital flows and the sell-off in the domestic market adversely
affected both external and domestic financing for the corporate sector.
 55 | P a g e

 The sharp slowdown in demand in the major advanced economies is also having an
adverse impact on our exports and industrial performance

 Central Government’s fiscal deficit more than doubled from 2.7 per cent of GDP in
2007-08 to 6.0 per cent in 2008-09, reaching again the levels seen around the end of the
1990s. The revenue deficit at 4.4 per cent of GDP will be at its previous peak touched
during 2001-02 and 2002-03.

 Reflecting the slowdown in external demand, and the consequences of reversal of

capital flows, growth in industrial production decelerated to 2.8 per cent in 2008-09
(April-February) from 8.8 per cent in the corresponding period of 2007-08

 Overall, real GDP growth has slowed to 6.9 per cent in the first three quarters of 2008-
09 from 9.0 per cent in the corresponding period of 2007-08. On the expenditure side,
growth of private final consumption expenditure decelerated to 6.6 per cent from 8.3
per cent. On the other hand, reflecting the fiscal stimuli and other expenditure measures,
growth in government final consumption expenditure accelerated to 13.3 per cent from
2.7 per cent etc.

RBI's policy response:

During the consequences of the chaos caused due to bankruptcy RBI has taken certain
measures to ensure systematic operation of financial markets and financial stability which
includes extension of liquidity support to banks. The financial crisis in developed countries
led to lack of trust among the major players which almost froze the un-collateralized
interbank money markets. Central banks in larger economies have taken steps to increase
the short term liquidity requirement and also lost collateral requirement to provide the short
term liquidity in some cases. “The global financial turmoil has had knock-on effects on our
financial markets; this has reinforced the importance of focusing on preserving financial
stability,” India's central bank (Financial times, 2008)

Though India was not much affected by the turmoil it was under pressure and RBI with its
consistent monetary policies effectively managed the monetary conditions and domestic
 56 | P a g e

liquidity. This was enabled with the appropriate use of multiple instruments like repo and
reverse repo; statutory liquidity ratio (SLR), cash reserve ratio (CRR), open market
operations, including the Liquidity Adjustment Facility (LAF) and market stabilization
scheme (MSS), special market operations, and sector specific liquidity facilities.

Further, due to our forex market operations the money market liquidity was impacted which
in turn reflected the developing capital flows. The huge capital flows and their absorption
by RBI in 2007 and its previous years led to excess liquidity, which were engrossed through
operations like MSS, LAF and CRR. The MSS and LAF being able to bear a major part of
the load, some inflections in SLR and CRR were resorted (Dr. Rakesh Mohan, 2008).
Various policy initiatives imposed by RBI have provided sufficient rupee liquidity to
ensure ease of dollar liquidity and maintain a market environment responsible for sustained
credit flows to productive sectors. Since September 2008 RBI has taken certain key policy
initiatives which are listed below:

Policy Rates:

 Under the liquidity adjustment facility (LAF) the policy repo rate was condensed by
425 basis points of 9.0 % to 4.75 %.

 Under the LAF the policy reverse repo rate was reduced by 250 basis points from 6.0
% to 3.25 %.

Rupee Liquidity:

 The cash reserve ratio (CRR) was reduced from 9.0% of net demand and time liabilities
(NDTL) of banks to 5.0 % account for a deduction of 400 basis points injecting nearly
Rs.1,60,000 crore of primary liquidity in the system

 The export credit refinance limit for commercial banks was improved to from 15.0 %
of outstanding export credit to 50.0 %.

 The statutory liquidity ratio (SLR) was reduced to 24.0 % of NTDL from 25.0 %.

 A special 14-day term repo facility was organized for commercial banks up to an NTDL
of 1.5 %.

 Special refinance facilities were instituted for financial institutions (NHB, SIDBI and
Exim Bank).
 57 | P a g e

 A special refinance facility was instituted for scheduled commercial banks (excluding
RRBs) up to 1.0 % of each bank's NDTL as on October 24, 2008.

Forex Liquidity:

 The Reserve Bank sold foreign exchange (US dollars) and made available a forex swap
facility to banks.

 The interest rate ceilings on non-resident Indian (NRI) deposits were raised.

 The all-in-cost ceiling for the external commercial borrowings (ECBs) was raised. The
all-in-cost ceiling for ECBs through the approval route has been dispensed with up to
June 30, 2009.

 The systemically important non-deposit taking non-banking financial companies

(NBFCs-ND-SI) were permitted to raise short-term foreign currency borrowings.

Regulatory Forbearance:

 The risk-weights and provisioning requirements were relaxed and restructuring of

stressed assets was initiated”. (UNESCAP, 2009)

It is evident that, despite the tremendous chaos in global financial markets India could cope
well because of its strong growth, careful practices and embraced reserves. The key
component of the current monetary policy stance lies in active liquidity management. RBI
has always and will continue with its active demand management policy of liquidity
through proper use of the CRR requisites and open market operations including LAF and
the MSS using policy instruments with flexibility of being situational.
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Impact of policy Response

The results of the actions taken by RBI since September 2008 were shown in the increase
of actual potential liquidity of over Rs.4, 22,000 crores. The permanent reduction in the
SLR by 1.0% of NDTL has made liquid funds of the order of Rs.40, 000 crores available
for the purpose of credit expansion.

The overnight money markets which floated above the repo rate between September-
October 2008 have lessened and have come close to lower bound of the LAF since
November 2008. Also the liquidity problem which faced by mutual funds has been relieved
to a large extent. Most of the commercial banks have lowered standard prime lending rates.
Under the contemporary finance/liquidity facilities initiated by RBI, the total utilization has
been low and the overall liquidity remains at ease. Their availability has provided flexibility
to banks/FI's to fall back when needed.

Considering the measures taken by RBI since mid-September 2008 Indian financial
markets maintained consistency to operate in a systematic manner showing improvement
in the annual budget report of 2010. “The effectiveness of these policy measures became
evident with fast paced recovery. The economy stabilized in the first quarter of 2009-10
itself, when it clocked a GDP growth of 6.1 per cent, as against 5.8 per cent in the fourth
quarter of the preceding year. It registered a strong rebound in the second quarter, when the
growth rate rose to 7.9 per cent. With the Advance Estimates placing the likely growth for
2009-10 at 7.2 per cent, we are indeed vindicated in our policy stand. The final figure may
well turn out to be higher when the third and fourth quarter GDP estimates for 2009-10
become available.” (Pranab Mukherjee, 2010)
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Conclusion of global financial crisis

India has fled from the infectivity of the subprime turmoil to a great extent for various
reasons. The growth process of India is majorly reliant on foreign savings and has remained
1.5% in the topical years. The credit derivatives market in India is still in the initial stages
and the originate-to-distribute model in India is no comparable to the ones existing in the
developed market as there are certain restrictions on investments by locals in investing in
such products abroad and also the guidelines do not permit to quick profits. On whole
financial stability in India has been maintained through firmness of policies which avoid
surfeit risk and financial markets being very impulsive and unstable.

The future of India's banking system lies in using the Leadership and experience to innovate
the management of banking. Now, India's potential lies in reinventing banking system
making use of the developments in IT services over the next decade. This would enable
India to become one of the world's most competitive banks over the next 10 years. India's
strategy of, whether to export the talent in banking structures or to keep hold of the
leadership within the country would be the most captivating phase of India's financial
services development over the next 10 years.

Also the current global financial crisis has shown that markets can fail and such market
failures have huge costs. The financial system is prone to excesses, given the high leverage
of banks and other financial institutions. Within the financial system, banks are 'special',
whether locally- or foreign-owned, because they effectively act as trustees of public funds
through their deposit taking activities and are the lynch pins of the payments systems. The
speed with which a bank under a run collapses is incomparable with any other organisation.
A failure of one bank can have a strong contagion on the rest of the banks, even if they are
healthy. In this age of globalisation, as the current crisis has revealed, the lack of confidence
in banks in one country can also have a contagion on banks in the rest of the world. Given
the risks to financial stability, governments in advanced economies had to bail out their
largest banks and financial institutions. The notion that markets will take care of
weaknesses has once again been proven wrong. So far, the focus of banking regulation
globally has been on capital adequacy. As this crisis has shown, liquidity issues are equally
important and it is appropriate to note that, in India, we have focussed our attention on these
issues as well. Given the complex inter-linkages between banks and non-banks and the
move towards conglomerates, it is important that regulatory arbitrage loopholes are fixed
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to avoid regulatory arbitrage. It is in this context that we have tightened the regulatory
regime in regard to NBFCs over the past few years in a phased manner. It is, therefore,
important that banks and other financial sector players are well-regulated, while permitting
them the necessary flexibility to grow and expand and meet the financing needs of a
growing economy. A host of other issues such as accounting, auditing and compensation
have also received attention in the aftermath of the global financial crisis. All these issues
are engaging the active attention of policymakers and academia alike around the world (G-
20, 2009). In view of the fast pace of technological and financial innovations, regulatory
authorities would have to follow an approach that would have to be dynamic and adjust in
response to changing economic environment.
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SHADOW BANKING
Shadow banking is a universal phenomenon, although it takes on different forms. In advanced
economies where the financial system is more matured, the form of shadow banking is more
of risk transformation through securitization; while in the economically backward economies
where financial market is still in a developing stage, the activities are more of supplementary
to banking activities. However, in both the structures, shadow banking operates outside the
regular banking system and financial intermediation activities are undertaken with less
transparency and regulation than the conventional banking. In a sense, shadow banks are like
icebergs - more deeply spread than what they seem to be.

In the context of developing economies, shadow banks play a gainful role in credit delivery
and financial inclusion as they can facilitate credit availability to certain sectors that might
otherwise have difficulty in access to credit. They play both a substitute and complementary
role for commercial banks as they are able to map the financing needs of the borrowers with
the financing provision where the formal banking systems are confronted with regulatory
constraints and/or where the formal banking system's requirements are onerous for the clients
to comply with.

The term ‘shadow bank’ was coined by Paul McCulley in 2007, by and large, in the context
of US non-bank financial institutions engaging in maturity transformations (use of short-term
deposits to finance long-term loans). However, a formal touch to the institutions of shadow
banking was given by the Financial Stability Board, which defined ‘shadow banking’ as the
“credit intermediation involving entities and activities (fully or partially) outside the regular
banking system”. Shadow banking activities, thus, include credit intermediation (any kind of
lending activity where the saver does not lend directly to the borrower, and at least one
intermediary is involved), and liquidity transformation (investing in illiquid assets while
acquiring funding through more liquid liabilities) & maturity transformation (use of short-
term liabilities to fund investment in long-term assets) that take place outside the regulated
banking system. Focusing on the pre-requisites for sustenance of shadow banking, Claessens
and Ratnovski (2014) have described shadow banking as all financial activities, barring
traditional banking, which require a private or public backstop (in the form of franchise value
of a bank or insurance company, or in the form of a Government guarantee) to operate.

In the last two to three decades, growing innovations in the financial sector, changes in
regulatory framework and growing competition with non-bank entities caused banks to shift
a part of their activities outside the regulatory framework. This contributed to the growth of
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shadow banks. As a result, shadow banking activities have evolved over time in response to
newer set of regulation and supervisory guidelines and spread in the domains where the scope
for regulatory arbitrage was higher. It emerged not only as an avenue for exploiting regulatory
arbitrage but also in response to market demand for innovative financial instruments that
could mitigate risks and yield higher returns.

The recent global financial crisis brought to fore the need for monitoring and regulating the
activities of shadow banking. There is, nevertheless, a concern that the forthcoming
implementation of Basel III, which has more stringent capital and liquidity requirements for
the banks, might further push the banks to shift part of their activities outside of the regulated
environment and therefore increase shadow banking activities.

Challenges Posed by Shadow Banks

Though the focus of regulation on shadow banking activities emerged in the wake of their
alleged role in the recent global crisis, shadow banking system is not a new development.
Even in the late 1950s and early 1960s, concerns emanating from the growth of non-bank
financial intermediaries had been highlighted [Thorn (1957); Hogan (1960)]. Thorn (1957)
had advocated same degree of control over credit expansion by the NBFIs as that of the banks.
Hogan (1960) found that from late 1930s to 1950s, while the role of banking system in
Australia was declining, that of the financial intermediaries was rising and he called for
controlling the liquidity of the non-banking sector.

The biggest challenge for the regulators is to gauge the magnitude of shadow banking as this
landscape is continually evolving by arbitraging the gaps in the regulatory framework that
otherwise seek to control them. Furthermore, unlike the banking sector, which have a very
good statistical coverage, consistent database on shadow banking is not available given the
heterogeneous nature of shadow banking entities, instruments and activities.
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Some of the challenges posed by the shadow banks to the global economy and economies, in
general, are as follows:

a. Financial Stability and Systemic Risk Concerns

Across various economies, regulatory arbitrage was used to create shadow banking entities.
In many instances, banks themselves composed part of the shadow banking chain by floating
a specialized subsidiary to carry out shadow banking activities. Banks also invested in
financial products issued by other shadow banking entities. Since shadow bank entities have
no access to central bank funding or safety nets like deposit insurance, they remain vulnerable
to shocks. Given the huge size of shadow bank activities and their inter-linkages with other
entities of the financial sector, any shock in the shadow banking segment can get amplified,
giving rise to systemic risk concern. The capacity of shadow banks to precipitate systemic
crisis was manifested in the recent global financial crisis.

b. Regulatory arbitrage spread across geographical jurisdictions

Different legal and regulatory frameworks across geographical jurisdictions also pose a
significant handicap in curbing the shadow banking activities, which are spread across
borders. For instance, high taxation in some jurisdictions sometimes generates tax avoidance
strategies by financial firms. Tax haven countries with their eye on attracting foreign capital
and creation of jobs in their economies keep their tax rates low. Firms in high taxation
countries restructure their financial activity by shifting some high tax activities to low tax
countries. This, at times, generates large and significant hot money flows, which itself, is a
source of instability for both set of countries from where it outflows to where it flows in. This,
at times, has an adverse effect on financial stability, especially at a time when the whole
global economy is far more integrated than ever.

c. Challenges in the conduct of Monetary Policy

Opaqueness of its structure, size, operations and inter-linkages of shadow banks with
commercial banks and other arms of the financial sector might distort the information content
of monetary policy indicators and thereby undermine the conduct of monetary policy. For
instance, a Central Bank might lose control over the credit aggregate (as these entities broadly
remain outside the regulatory purview), which might weaken the monetary policy
transmission through credit channel. This concern was highlighted even in the 1950s. Thorn
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(1957) advocated some form of control over credit abilities of the non-bank financial
intermediaries for the successful implementation of monetary policy as these entities remain
immune to direct central bank control. Hogan (1960) had also advocated controlling the
liquidity of the non-banking sector through a flexible interest rate policy that could influence
the behaviour of the NBFIs in Australia.

Shrestha (2007) found that growing level of intermediation activities of the non-bank
financial intermediaries (NBFIs) causes a shift in deposits from banks to non-banks in South-
East Asian Countries. He observed that since the deposits of the NBFIs are not included in
the monetary aggregates, the conduct of monetary policy gets undermined for regimes, which
follow monetary targeting framework.

A Deutsche Bundesbank study (2014) contended that the growing activities of shadow banks
might weaken the transmission of monetary policy measures via commercial banks (through
interest rate and bank credit channel), but, on the contrary, the asset prices channel may
become effective in the monetary policy transmission process. An expansionary monetary
policy might fuel asset prices, which, in turn, might increase the leverage of the shadow
banks, expand their balance sheets, reduce their risk premium and thereby increase lending
to non-financial sector and finally the level of real activity.

Shadow Banking and Indian Economy

The type of entities which are called shadow banks elsewhere are known in India as the Non-
Banking Finance Companies (NBFCs). Are they in fact shadow banks? No, because these
institutions have been under the regulatory structure of the Reserve Bank of India, right from
1963 i.e. 50 full years before many in the world are thinking of doing so!

Evolution of Regulation of NBFCs in India

In the wake of failure of several banks in the late 1950s and early 1960s in India, large number
of ordinary depositors lost their money. This led to the formation of the Deposit Insurance
Corporation by the Reserve Bank, to provide the necessary safety net for the bank depositors.
The Reserve Bank did then note that the deposit taking activities were undertaken by non-
banking companies also. Though they were not systemically as important as the banks, the
Reserve Bank initiated regulating them, as they had the potential to cause pain to their
depositors.
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Later in 1996, in the wake of the failure of a big NBFC, the Reserve Bank tightened the
regulatory structure over the NBFCs, with rigorous registration requirements, enhanced
reporting and supervision. Reserve Bank also decided that no more NBFC will be permitted
to raise deposits from the public. Later when the NBFCs sourced their funding heavily from
the banking system, thereby raising systemic risk issues, sensing that it can cause financial
instability, the Reserve Bank brought asset side prudential regulations onto the NBFCs.

NBFCs of India

The ‘NBFCs’ of India include not just the finance companies, but also a wider group of
companies that are engaged in investment, insurance, chit fund, nidhi, merchant banking,
stock broking, alternative investments etc. as their principal business. NBFCs being financial
intermediaries are playing a supplementary role to banks. NBFCs especially those catering to
the urban and rural poor, namely NBFC-MFIs and Asset Finance Companies have a
complimentary role in the financial inclusion agenda of the country. Further, some of the big
NBFCs viz; infrastructure finance companies are engaged in lending exclusively to the
infrastructure sector, and some are into factoring business, thereby giving fillip to the growth
and development of the respective sector of their operations. In short, NBFCs bring the much
needed diversity to the financial sector.

Regulation of RBI on NBFCs

 Compulsory registration with RBI and maintenance of minimum NOF for

companies satisfying the 'principal business' criteria (Sec.45-IA of the RBI Act,
1934)

 Maintenance of liquid assets by NBFCs accepting public deposits (Sec.45-IB of

the RBI Act, 1934)

 Creation of a Reserve Fund by all NBFCs by transfer of 20% of their net profit
every year (Sec.45-IC of the RBI Act, 1934)

 Powers of RBI to determine Policy and issue directions to NBFCs (Sec.45JA of

the RBI Act, 1934)

 Conduct of Special Audit of the accounts of NBFCs, if necessary (Sec.45MA of

the RBI Act, 1934)
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 Power of RBI to prohibit acceptance of deposits and alienation of assets

(Sec.45MB of the RBI Act, 1934)

 Power of RBI to file winding up petition under Companies Act, 1956 (Sec.45MC
of the RBI Act, 1934)

 Introduction of nomination facility for depositors of NBFCs (Sec.45QB of the

RBI Act, 1934)

 Prohibition of deposit acceptance by unincorporated bodies engaged in financial

business (Sec.45S of the RBI Act, 1934)

 Power of RBI to impose fine on NBFCs for violations / contraventions of

guidelines (Sec.58G of the RBI Act, 1934)

LIABILITY AND ASSETS COMPOSITION OF NBFCs AND BANKS.

Liabilities

77.90%
100.00%
69.90%

50.00% 4.50% 9.90% 7%

18% 0.70%
5.90% 1.60% 4.70% BANKS
NBFCs
0.00%
other borrowing public reserve & share
deposit surplus capital

NBFCs BANKS

Amount of borrowing in total liability of NBFCs is nearly as comparable as to commercial

banks
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Assets

75.50% 60.90%
80.00%

60.00% 24.50%
40.00% 8.30% 6.30%
13.50%
20.00% 4% 7% BANKS
NBFCs
0.00%
loan & investment cash and bank others
advance

NBFCs BANKS

Loan and advance in total assets of NBFCs even increase beyond commercial bank

Analysis of above chart.

As the amount of borrowing in total liability of NBFCs is nearly as comparable as to
commercial banks and loan and advance in total assets of NBFCs even increase beyond
commercial bank. This draws attention towards the need of proper regulation of NBFCs by
RBI. If the NBFCs were not strictly looked after, then default by NBFCs will greatly affect
GDP of a country and will create a chain reaction of crisis starting from the financial sector to
different other sectors. As in other countries shadow banking is one of the biggest future risk
for the economy as because they are not under the regulation of central bank but in India, it is
not the case.
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The Dangers and the Regulatory Challenges

The growing size and interconnectedness of the NBFCs in India also raise concerns on
financial stability. Reserve Bank’s endeavour in this context has been to streamline NBFC
regulation, address the risks posed by them to financial stability, address depositors’ and
customers’ interests, address regulatory arbitrage and help the sector grow in a healthy and
efficient manner. Some of the regulatory measures include identifying systemically important
non-deposit taking NBFCs as those with asset size of ` 100 crore and above and bringing them
under stricter prudential norms (CRAR and exposure norms), issuing guidelines on Fair
Practices Code, aligning the guidelines on restructuring and securitization with that of banks,
permitting NBFCs-ND-SI to issue perpetual debt instruments, etc.

Just as the shadow banks (i.e. the NBFCs) in India are of a different genre, the dangers posed
by them are also of different genre. Consequently, the regulatory challenges that RBI face
today are different which are as follows:

 First, there are law related challenges viz. i. there are a number of companies that are
registered as finance companies, but are not regulated by the Reserve Bank, ii. there
are unincorporated bodies who undertake financial activities and remain unregulated,
iii. there are incorporated companies and unincorporated entities illegally accepting
deposits, iv. there are entities who camouflage deposits in some other names and thus
illegally accepting deposits. The law as it stands today is inadequate to deal with these
issues. In order to correct these and initiate action against violations, we need to bring
in suitable amendments to the statutory provisions. Reserve Bank is working with the
government for such improvements in the law.

 Secondly, as the entities, especially the unincorporated ones, can sprung in any nook
and corner of the country and can operate with impunity unnoticed, but endangering
their customers interest, we need arrangements and structured for effective market
intelligence gathering. The Reserve Bank is restructuring its organisational setup,
especially in its regional offices, for gathering market intelligence.

 Thirdly, empowering law and gathering intelligence by themselves are not sufficient.
Enforcement of the law is a challenge. This is primarily because of the various
agencies involved in regulating the non-banking financial activities of entities. Right
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from the central government ministries like finance and corporate affairs, agencies
like CBI and FIU-IND, regulatory agencies like the Reserve Bank, SEBI, the
Registrar of Companies, the state government agencies like the police and others, all
have to share information and coordinate and cooperate to bring in an effective, timely
and unified enforcement of the law. The Reserve Bank's State Level Coordination
Committees (SLCC) are being strengthened and a National Level Coordination
Committee is also being considered.

 Fourthly, the international requirement is that the shadow banks be brought under
tighter regulations. G-20 has already expressed it as a mission to be achieved by 2015.
In our case, bringing them under regulation is not the issue, as they already are. The
challenge for us is how differentially or how closely we should regulate the NBFCs?

Conclusion
To summarise, the shadow banks in India (i.e. the NBFCs) are of a different type; they have
been under regulation for more than 50 years; they sub serve the economy by playing a
complimentary and supplementary role to mainstream banks and also in furthering financial
inclusion. Yet, they do pose dangers, but of different variety; it primarily relates to consumer
protection. It is the constant endeavour of Reserve Bank to enable prudential growth of the
sector, keeping in view the multiple objectives of financial stability, consumer and depositor
protection, and need for more players in the financial market, addressing regulatory arbitrage
concerns while not forgetting the uniqueness of NBFC sector.
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CHAPTER :- 4
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CONCLUSION AND RECOMMENDATION

RBI is the apex banking institution in India. RBI is autonomous body promoted by the
government of India and is headquartered at Mumbai. The RBI plays a key role in the
management of the treasury, foreign exchange movement and is also the primary regulator for
banking and non-banking financial institutions. The RBI operates a member of government
mint that produce currency and coins.

The RBI has been one of the most successful central banks around the world in preventing the
effect of the subprime crisis to the Indian economy, particularly its banks. This adds a lot of
credibility to every decision that is taken by them. RBI also takes important decision regarding
economy like on cryptocurrency, demonetizations etc. It also helps in development of like
MSME and agriculture sector. Further as a large proportion of the Indian population is
impacted by inflation it was necessary for the RBI to think about the majority and try to curb
by tightening its monetary stance.

All the function of RBI, monetary, non-monetary, supervisory or promotional are equally
significant in context of the Indian economy. Under the Banking Regulation Act. RBI has been
given a wide range of power. Under the supervision & inspection of RBI, the working of banks
has greatly improved. RBI has been responsible for strong financial support to industrial &
agriculture development at the country.

RBI need to give more stress on shadow banking system as our shadow banking problem is not
like other countries that’s why it required different types of measures and stricter rules.

Need of proper planning and proper collaboration between the Government and RBI are needed
as the lack of this can be seen during the time of demonetization.
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BIBLOGRAPHY

Website: -

https://www.rbi.org.in/

ET Wealth.

www.moneycontrol.com

www.Groww.in

https://www.global-rates.com/interest-rates/central-banks/central-bank-india/rbi-interest-
rate.aspx

www.essay.uk.com

www.financialexpress.com

Books: -

RBI’s function and working.

NSE commercial banking beginner module.

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