A STUDY ON

EVOLUTION AND FUNCTIONS OF CENTRAL BANK

With Reference to

RESERVE BANK OF INDIA

A Project Report submitted to Andhra University, Visakhapatnam

In partial fulfillment for the award of the Degree
BACHELOR OF COMMERCE

Submitted by
G.V.PUJITHA

117128803066

Under the esteemed guidance of

Mr. B. SRINIVAS REDDY

Lecturer in Commerce

Department of Commerce and Management Studies

Dr. LANKAPALLI BULLAYYA COLLEGE
Affiliated to Andhra University
Visakhapatnam-530013
(2017 - 2020)

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 ACKNOWLEDGEMENT

It is of great pleasure to take the opportunity to acknowledge and express my gratitude to

all those who helped me throughout my project work.

At the outset we the students has to show our gratitude to the members of Board of
Studies, Andhra University, for including project work in the curriculum of Bachelor of
Commerce. This has given the scope for the students to excavate the practical situations in the
Banking and Financial service Industry and to throw the deep insight on the various contents of
the Banking and Financial services.

I thank the college management at all levels for providing us the platform and
environment to carry out our project and in making us a technical tool to suit the industry needs
of the current employment market.

I would also like to pay my word of gratitude and thankfulness to my project guide Sri.
B. SRINIVAS REDDY, Lecturer, Department of Commerce and Management Studies, for
his valuable guidance, support and timely advice in completion of my project work.

I would like to express my sincere gratitude to the management and staff of RESERVE BANK
OF INDIA for giving me permission to do my project work in their organization and helping me
meticulously in all the aspects of my project work.

It would be a vacuum if I forget two important personalities on this occasion, I hereby

extend my sincere respect and ton of thanks to my family and friends for their endurance,
motivation and support during all times of my achievements.

G.V.PUJITHA
117128803066

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 DECLARATION

I G.V.PUJITHA hereby declare that the project work entitled EVOLUTION AND
FUNCTIONS OF CENTRAL BANK with reference to the RESERVE BANK OF INDIA
is an authenticated work done by me for the award of the degree “Bachelor of Commerce”,
from Andhra University, with the guidance of Sri. B. Srinivas Reddy, Lecturer, Department of
Commerce, during the academic year 2019 – 2020 and my work has not been submitted to any
other University or Institution for the award of any Degree or Diploma.

G.V.PUJITHA
117128803066

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 CERTIFICATE

This is to certify that the project report entitled EVOLUTION AND FUNCTIONS OF

CENTRAL BANKING with reference to RESERVE BANK OF INDIA is a bonafide work

done by G.V.PUJITHA bearing 117128803066 the pursuant of B.Com course in Dr. Lankapalli

Bullayya College, Visakhapatnam, for the award of the degree of “Bachelor of Commerce”

from Andhra University, done under my guidance, for the academic year 2019 – 2020.

Date:
Place: Visakhapatnam B. Srinivas Reddy

(External Examiner)

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S.NO DETAILS PAGE NO.

1 CHAPTER 1

1.1 Introduction to the Project Title 8

1.2 Scope of the study

1.3 Need for the study

1.4 Objective of the study

1.5 Reasearch Methodology

1.6 Limitations of the study

2 CHAPTER 2

2.1 Industrial Profile

2.2 Company Profile

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 3 CHAPTER 3

3.1 Theortical Framework

4 CHAPTER 4

4.1 Data Analysis and Interpretation

5 CHAPTER 5

5.1 Findings

5.2 Suggestions

5.3 Conclusion

5.4 Bibliography

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CHAPTER-1

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 INTRODUCTION

Institutions known as central banks emerged or were established as Commercial banks or

Government banks. Their evolution into Central banks came with their monopoly issuing notes
and their role as Lender of last resort among other functions. Carrying out commercial business
on large scale created a conflict of a interest, so this practice was abandoned. Evolution of central
banking is essentially a twentieth century phenomenon as there were only above a dozen central
banks in the world at the turn of twentieth century.

In contrast, at present there are 160 central banks. This is not surprising since the need
for central banks obviously emerged as banking became more complex, while becoming an
increasingly important part of the economy over the time.

At its most fundamental level, a central bank is simply a bank which other banks have in
common. Small rural banks might each have deposit accounts at a larger urban bank to facilitate
their transactions in the city. By these criteria, a financial system might have several central
banks. More prosaically, a central bank is usually a government sanctioned bank that has specific
duties related to the performance of the macro economy.

Typically, an "official" central bank is charged by a central government to control the

money supply for the purpose of promoting economic stability. It may have other duties as well,
such as some degree of regulatory power over the financial system, operating a check-clearing
system, or to perform general banking services for the central government. Most industrialized
economies have a central bank. The Bank of England, the Bank of Japan, the German Bundes
bank, and the United States Federal Reserve are all central banks. While their organizational
structures and powers vary, each bank is responsible for controlling its nation's money supply.

A central bank is an independent national authority that conducts monetary

policy, regulates banks, and provides financial services including economic research. Its goals
are to stabilize the nation's currency, keep unemployment low, and prevent inflation.

Most central banks are governed by a board consisting of its member banks. The
country's chief elected official appoints the director. The national legislative body approves him
or her. That keeps the central bank aligned with the nation's long-term policy goals. At the same
time, it's free of political influence in its day-to-day operations. The Bank of England first
established that model. Conspiracy theories to the contrary, that's also who owns the U.S.
Federal Reserve.

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 It can be defined as the bank which stands as the leader of the money market—also called
the financial market—issues notes and coins, supervises, controls and regulates the activities of
the banking system and acts as the banker of the government. In our pyramidal financial
structure, the central bank sits at the top.

Samuelson defines central bank “…as a bank of bankers. Its duty is to control the
monetary base and through control of this ‘high-powered money’ to control the
community’s supply of money.” But as a private citizen, no one—even the Head of the
country—either can open a bank account or borrow money from the central bank.

“Central banking” is what a central bank does, but the definition of “central bank” is less
straightforward than it may appear at first sight. Central banking as the provision of public
policies aimed at fostering monetary and financial stability, and surveys the historical evolution
of such policies in the West from the middle Ages to today. It shows that institutional equilibiria
mattered a lot in shaping the way stabilization policies were implemented.

Central banking evolved in markedly distinct ways in city states (like Venice,
Amsterdam, Hamburg, Barcelona, or Genoa), centralized territorial polities (like Naples,
Sweden, England, Austria, or France), or decentralized territorial polities (like the United States
or the European Union). As a result, the historical evolution of central banking does not appear
to have been driven by the “survival of the fittest”, but rather by the constant adaptation of
policymaking to changing political economy equilibiria.

The Reserve Bank of India (RBI) is India's central banking institution, which controls
the issuance and supply of the Indian rupee. Until the Monetary Policy Committee was
established in 2016,[6] it also controlled monetary policy in India.[7] It commenced its operations
on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.[8] The original share
capital was divided into shares of 100 each fully paid, which were initially owned entirely by
private shareholders.[9] Following India's independence on 15 August 1947, the RBI was
nationalized on 1 January 1949.[10]

The RBI plays an important part in the Development Strategy of the Government of
India. It is a member bank of the Asian Clearing Union. The general superintendence and
direction of the RBI is entrusted with the 21-member central board of directors: the governor;
four deputy governors; two finance ministry representatives (usually the Economic Affairs
Secretary and the Financial Services Secretary); ten government-nominated directors to represent
important elements of India's economy; and four directors to represent local boards
headquartered at Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local
boards consists of five members who represent regional interests, the interests of co-operative
and indigenous banks.

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 SCOPE OF THE STUDY

 My project is mainly based on Reserve bank of India, and its evolution

 The main scope of my study is to understand how central bank provide services to other
banks and countrymen

 To study the working of Reserve Bank of India and about various steps taken by RBI for
economic development of our country

 To know about the main functions performed by RBI.

 To know the organizational structure of Central Bank.

 To know how central bank guides, controls and supervises the other banks

 To know about the historic details of Central bank.

 To understand the main objectives of central bank

 To understand the working of central bank on the basis of bar graphs and pie charts.

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 NEED OF THE STUDY

To know about central bank

To know how central bank works in other countries.

To know about the policies made by central bank for booming its economy.

To know the financial surplus and deficit of the economy

To know how central bank functions as a custodian of cash reserve.

To understand various policies made by central bank.

To get a brief idea regarding origin of central bank

To know about various publications of central bank

To know the impact of central bank policies on other banks like Commercial banks, Regional
Rural banks, Co-operative banks.

To know how central bank works as a banker and debt manager of Government.

To understand the main objectives of central bank

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 OBJECTIVE OF THE STUDY

 To know about the key role played by central bank in the economy.

 To know about the role of Central bank during economic depression.

 To understand the Reserve content from Central banks for currency printing.

 To understand Balance of Payment and Balance of Trade.

 To know about Cash Reserve Ratio, Statutory Liquidity Ratio fixed by Central bank.

 To know about different changes made in policies of Central Bank in different years.

 To know about the branches and support bodies of Central bank.

 To know how central bank works as a regulator of banking system.

 To know about various rates fixed by central bank like Repo rate, Bank rate, Reverse

Repo rate.

 To know how rules and regulations framed by central bank leads the economy towards

development.

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 RESEARCH METHODOLOGY

Research is a procedure of logical and systematic application of the fundamentals of science to

the general and overall questions of a study and scientific technique which provide precise tools,
specific procedures and technical rather than philosophical means for getting and ordering the
data prior to their logical analysis and manipulation.
Different type of research designs is available depending upon the nature of research project and
availability of abeld manpower and circumstances.

Research Design

I t i s t h e b l u e p r i n t f o r t h e f u l f i l l m e n t o f objectives and answering questions. It is a

master plan specifying the method and procedures for collecting and analyzing needed
information.

 Develop a plan of data analysis.

 Specifies the sampling process and size.
 Specifies the measurement.
 Define the information needed.
 Specify the scaling procedures.

Data Collection Methods

The source of data includes primary and secondary data sources.

 Primary Data
Primary data has been collected directly from website rbi.org.in

 Secondary Data
Secondary data has been collected from Standard textbooks, Newspapers,
Magazines and Internet sources.

 Research Instrument
Research instrument used for the primary data collection is Questionnaire.

 Sample Design
Probability Sampling

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 Sampling Technique
Convenience

 Area of Study
Visakhapatnam, Andhra Pradesh

 Statistical Tool Applied

Percentage analysis with the help of Pie chart.

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 LIMITATION OF THE STUDY

 The project relied on the primary data.

 The study is based on limited samples.

 The research was carried out for a short period of time.

 Certain time it was difficult to interpret.

 Slow method and lengthy process.

 Omission of replies

 The respondents restricted themselves from answering the questions mentioned with the
fear of disclosing their views to others.

 Data collected is qualitative, leads to change in the perceptions from time to time.

 It is based on only on monetary information and non-monetary factors are ignore.

 The study is based on selected schemes therefore limiting the area of research.

 This analysis is carried on certain assumptions hence the assumptions would biased.

 It is only study of interim reports of the concern.

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CHAPTER-2

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 INDUSTRIAL PROFILE

The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles
after the First World War. The Reserve Bank of India was conceptualized based on the
guidelines presented by the Central Legislative Assembly which passed these guidelines as the
RBI Act 1934. RBI was conceptualized as per the guidelines, working style and outlook
presented by Dr.B.R.Ambedkar in his book titled “The Problem of the Rupee – Its origin and its
solution” and presented to the Hilton Young Commission. The bank was set up based on the
recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known
as the Hilton–Young Commission.

The Preamble of the RBI describes its basic functions to regulate the issue of bank notes,
keep reserves to secure monetary stability in India, and generally to operate the currency and
credit system in the best interests of the country. The Central Office of the RBI was established
in Calcutta (now Kolkata) but was moved to Bombay (now Mumbai) in 1937. The RBI also
acted as Burma's (now Myanmar) central bank until April 1947 (except during the years of
Japanese occupation (1942–45)), even though Burma seceded from the Indian Union in 1937.
After the Partition of India in August 1947, the bank served as the central bank for Pakistan until
June 1948 when the State Bank of Pakistan commenced operations. Though set up as a
shareholders’ bank, the RBI has been fully owned by the Government of India since its
nationalization in 1949. RBI has monopoly of note issue.

In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru,
developed a centrally planned economic policy that focused on the agricultural sector. The
administration nationalized commercial banks and established, based on the Banking Companies
Act, 1949 (later called the Banking Regulation Act), a central bank regulation as part of the RBI.
Furthermore, the central bank was ordered to support economic plan with loans.

1961–1968
As a result of bank crashes, the RBI was requested to establish and monitor a deposit
insurance system. Meant to restore the trust in the national bank system, it was initialized on 7
December 1961. The Indian government founded funds to promote the economy, and used the
slogan "Developing Banking". The government of India restructured the national bank market
and nationalized a lot of institutes. As a result, the RBI had to play the central part in controlling
and supporting this public banking sector.

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1969–1984
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks.
Upon Indira Gandhi's return to power in 1980, a further six banks were nationalized. The
regulation of the economy and especially the financial sector was reinforced by the Government
of India in the 1970s and 1980s. The central bank became the central player and increased its
policies a lot for various tasks like interests, reserve ratio and visible deposits. These measures
aimed at better economic development and had a huge effect on the company policy of the
institutes.
The banks lent money in selected sectors, like agricultural business and small trade
companies. The Banking Commission was established on Wednesday, 29 January 1969, to
analyze banking costs, effects of legislations and banking procedures, including non banking
financial intermediaries and indigenous banking on Government of India economy; with Mr.
R.G. Saraiya as the chairman.
The branch was forced to establish two new offices in the country for every newly established
office in a town. The oil crises in 1973 resulted in increasing inflation, and the RBI restricted
monetary policy to reduce the effects.

1985–1990
A lot of committees analyzed the Indian economy between 1985 and 1991. Their results
had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira
Gandhi Institute of Development Research and the Security & Exchange Board of
India investigated the national economy as a whole, and the security and exchange board
proposed better methods for more effective markets and the protection of investor interests.
The Indian financial market was a leading example for so-called "financial repression"
(Mckinnon and Shaw).The Discount and Finance House of India began its operations in the
monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to
invest in the property market and a new financial law improved the versatility of direct deposit
by more security measures and liberalisation.

1991–1999
The national economy contracted in July 1991 as the Indian rupee was devalued.The
currency lost 18% of its value relative to the US dollar, and the Narsimham Committee advised
restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory
liquidity ratio. New guidelines were published in 1993 to establish a private banking sector.
This turning point was meant to reinforce the market and was often called neo-liberal. The
central bank deregulated bank interests and some sectors of the financial market like the trust and
property markets. This first phase was a success and the central government forced a diversity
liberalization to diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed
nationalized banks in July to interact with the capital market to reinforce their capital base. The

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central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Private
Limited—on 3 February 1995 to produce banknotes.

Since 2000
The Foreign Exchange Management Act, 1999 came into force in June 2000. It should
improve the item in 2004–2005 (National Electronic Fund Transfer). The Security Printing &
Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and
produces banknotes and coins. The national economy's growth rate came down to 5.8% in the
last quarter of 2008–2009 and the central bank promotes the economic development.

In 2016, the Government of India amended the RBI Act to establish the Monetary Policy
Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the MPC
membership is evenly divided between members of the RBI (including the RBI governor) and
independent members appointed by the government. However, in the event of a tie, the vote of
the RBI governor is decisive.

The Reserve Bank of India is the central Bank of India entrusted with the
multidimensional role. It performs important monetary functions from issue of currency note to
maintenance o f monetary stability in the country. Initially the Reserve Bank of India was a
private share holder’s company which was nationalized in 1949. Its affairs are governed by the
Central Board of Directors appointed by the Government of India. Since its inception the
Reserve Bank of India had played an important role in the economic development and monetary
stability in the country. This paper is an attempt explore into the role, functions, and contribution
of RBI in Indian Economy.

The Reserve Bank of India (RBI) was established in the year 1935 in accordance with the
Reserve Bank of India Act, 1934. The Reserve Bank of India is the central Bank of India
entrusted with the multidimensional role. It performs important monetary functions from issue of
currency note to maintenance o f monetary stability in the country. Initially the Reserve Bank of
India was a private share holder’s company which was nationalized in 1949. Its affairs are
International Journal of Business Administration and Management. Since its inception the
Reserve Bank of India had played an important role in the economic development and monetary
stability in the country.

The Royal Commission on Indian Currency and Finance appointed on August 25, 1925
has suggested the establishment of the Central Bank in India, later the Indian Central Banking
Enquiry Committee, 1931 stressed the establishment of the Central Bank in India. The Reserve
of Bank was established on April 1, 1935 under the Reserve Bank of India Act, 1934.The main
object of Reserve o f India is, “to regulate the issue of Bank notes and the keeping of reserves
with a view to securing monetary stability in India and generally to operate the currency any
credit system of the country to its advantage”.

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 The Reserve Bank of India was established as a private share holder‟s bank. The Central
office of Reserve Bank of India was initially located in Calcutta which was later shifted to
Bombay. The Reserve Bank of India issued first of its currency notes in January 1938 in de
nomination of Rs.5 and Rs.10 and later in the same year denomination of Rs.100, Rs.1000 and
Rs.10000 were issued Post Independence The Reserve Bank of India was nationalized in the year
1949 through the Reserve Bank (Transfer of Public Ownership) Act, 1948 and all shares were
transferred to Central Government.

BRANCHES AND SUPPORT BODIES:

The RBI has four regional representations: North in New Delhi, South in Chennai, East in
Kolkata and West in Mumbai. The representations are formed by five members, appointed for
four years by the central government and with the advice of the central board of directors serve
as a forum for regional banks and to deal with delegated tasks from the Central Board.

It has two training colleges for its officers, viz. Reserve Bank Staff College, Chennai and
College of Agricultural Banking, Pune . There are three autonomous institutions run by RBI
namely National Institute of Bank Management (NIBM), Indira Gandhi Institute of Development
Research (IGIDR), Institute for Development and Research in Banking
Technology (IDRBT).[44] There are also four zonal training centres at Mumbai, Chennai,
Kolkata, and New Delhi.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD
committee to control the financial institutions. It has four members, appointed for two years, and
takes measures to strength the role of statutory auditors in the financial sector, external
monitoring, and internal controlling systems. The Tarapore committee was set up by the Reserve
Bank of India under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the
road map" to capital account convertibility. The five-member committee recommended a three-
year time frame for complete convertibility by 1999–2000.

On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of

India, said RBI will open an office in the north-eastern state of Arunachal Pradesh.

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 COMPANY PROFILE

The central board of directors is the main committee of the central bank. The
Government of India appoints the directors for a four-year term. The board consists of a
governor, and not more than four deputy governors; four directors to represent the regional
boards; two — usually the Economic Affairs Secretary and the Financial Services Secretary —
from the Ministry of Finance and ten other directors from various fields.
The Reserve Bank — under Raghuram Rajan's governorship — wanted to create a post
of a chief operating officer (COO), in the rank of deputy governor and wanted to re-allocate
work between the five of them (four deputy governor and COO).

ORGANISATION STRUCTURE:

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The bank is headed by the governor, currently SHAKTIKANTA DAS.
There are four deputy governors:
 BP KANUNGO
 N. S. VISHWANATHAN
 VIRAL ACHARYA
 MAHESH KUMAR JAIN
Two of the four deputy governors are traditionally from RBI ranks and are selected from
the bank's executive directors. One is nominated from among the chairpersons of public sector
banks and the other is an economist. An Indian Administrative Service officer can also be
appointed as deputy governor of RBI and later as the governor of RBI as with the case
of Y.Venugopal Reddy and DuvvuriSubbarao. Other persons forming part of the central board of
directors of the RBI are Dr. NachiketMor, Y. C. Deveshwar, Prof DamodarAcharya, Ajay Tyagi
and AnjulyDuggal.
Uma Shankar, chief general manager (CGM) in charge of the Reserve Bank of India's
financial inclusion and development department has taken over as executive director (ED) in the
central bank.
Sudha Balakrishnan, a former vice president at National Securities Depository Limited,
assumed charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May 2018;
she was given the rank of an executive director.

RBI Annual publications

 Annual Report – The annual report is a statutory report of the Reserve Bank of India
that is released every year. This report consists of valuation and progress of the Indian
economy. Overview of the economy, the working of the Reserve Bank during that year
and the RBI’s projected vision and agenda for the following year along with the annual
accounts of the Reserve Bank

 Report on Trend and Progress of Banking in India – This document is an assessment

of the policies and progress of the financial sector for the preceding year.

 Lectures – The Reserve Bank of India has constituted three annual lectures. Two of these
lectures are conducted by past Governors of the Reserve Bank and one lecture is by a
noted economist.

 Report on Currency and Finance – This report is documented and presented by the staff
of Reserve Bank of India bank and focusses on a particular theme and presents a
detailed economic analysis of the issues related to the theme. Handbook of Statistics on
the Indian Economy – This report is an important initiative by the Reserve Bank to
improve data distribution. It is a resourceful storehouse of major statistical information.

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  State Finances: A Study of Budgets – The report is an essential source of segregated
state-wise financial data and provides an analytical data-driven conceptualisation on the
fiscal position of state governments across India. These data inputs are used to analyse
specific issues of relevance.

 Statistical Tables Relating to Banks in India – This annual publication contains

holistic timeline data with regards to the Scheduled Commercial Banks (SCBs) of India.
The report also covers the information of balance sheets and performance indicators for
each SCB in India. The journal also includes segregated data sources on some essential
factors relating to bank-wise, bank group-wise and state-wise level of information.

 Basic Statistical Returns – This is another data-focused yearly journal which represents
complex information on the number of offices, employees, deposits and credit of
Scheduled Commercial Banks in minute levels of detail such as, region-wise, state-wise
and district-wise information. This information also trickles down to the population and
credit requirements in each bank.

RBI Policies
 Repo Rate: Repo or repurchase rate is the benchmark interest rate at which the RBI
lends money to all other banks for a short-term. When the repo rate increases, borrowing
from RBI becomes more expensive and hence customers or the public bear the outcome
of high-interest rates. Reverse Repo Rate (RRR) Reverse Repo rate is the short-term
borrowing rate at which RBI borrows money from other banks. The Reserve Bank of
India uses this method to reduce inflation when there is excess money in the banking
system. Cash Reserve Ratio (CRR) is the particular share of any bank’s total deposit
that is mandatory and to be maintained with the Reserve Bank of India in the form of
liquid cash. Statutory liquidity ratio (SLR) Leaving aside the cash reserve ratio, banks
are required to maintain liquid assets in the form of gold and approved securities. A
higher SLR disables the banks to grant more loans.

 Payment System Initiatives

 The Reserve Bank has taken many steps towards initiating and updating secure and
sustainable methods of payment systems in India to meet public requirements.
 Currently, payment methods in India consist of paper-based instruments, electronic
instruments and other instruments, such as pre-paid system (e-wallets), mobile internet
banking, ATM-based transactions, Point-of-sale terminals and online transactions.

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  Paper-based Payments

 Use of paper-based instruments such as cheques and demand drafts accounts for nearly
60% of the volume of total non-cash transactions in India. These forms of payments have
been steadily decreasing over a period of time due to the electronic modes of payments
gaining popularity due to the comparative convenience, safety and overall efficiency.
 Magnetic Ink Character Recognition (MICR) technology was introduced by RBI in the
paper-based payment method for speeding up and bringing in efficiency in the processing
of cheques.
 A separate clearing system for paper-based payment method was introduced for clearing
cheques of high-value ranging from rupees one lakh and above. Also, the introduction of
cheque truncation (CTS) system restricts the physical movement of cheques and utilises
images for enhanced secure payment processing.

 Electronic Payments

The initiatives taken by the Reserve Bank in the domain of electronic payment systems are
immense and vast. The types of electronic forms of payment by the RBI are as follows:

Electronic Clearing Service (ECS) – This enables customer bank accounts to be credited with a
specified value and payment on a set date. This makes EMIs, or other monthly bills hassle free.

 National Electronic Clearing Service (NECS) – This facilitates multiple advantages to

beneficiary accounts with destination branches against a single debit of the account of the
sponsor bank.
 Electronic Funds Transfer (EFT) – This retail funds transfer system was to enable an
account holder of a bank to electronically transfer funds to another account holder with
any other intermediate or participating bank.
 National Electronic Funds Transfer (NEFT) – A secure system to facilitate real-time
fund transfer between individuals/corporates.
 Real Time Gross Settlement (RTGS) – A funds transfer function in which transfer of
money takes place from one bank to another on a real-time basis without delaying or
netting with any other transaction.
 Clearing Corporation of India Limited (CCIL) – This system is for banks, financial
institutions, non- banking financial companies and primary dealers, to serve as an
industry service mechanism for clearing settlement of trades in money market,
government securities and foreign exchange markets.
 The RBI (Reserve Bank of India) has made changes to the Prepaid Payment Instruments
(PPI) also known as e-wallets. These changes include KYC – known your customer
compliance. KYC is the process of collecting user details by the service provider and
verifying the same with the respective government bodies.

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CHAPTER-3

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 THEORITICAL FRAMEWORK

EVOLUTION OF RBI

The shape of the Reserve Bank of India (RBI) which was set up in 1935 during British
rule was influenced by two different attitudes, though with agreement that it should be
independent of government. The British rulers were swayed by the prevailing monetary
orthodoxy, of keeping the functions of raising and using money separate from that of creating
money, while the nationalists wanted independence for the RBI in order to insulate it from the
interference of the alien power. Despite this general agreement, the act establishing the RBI was
so drafted that it left several gray areas for interpretation of the RBI-government relationship.

As a result, the executive started, from the beginning, to encroach on the autonomy of the
RBI, as evidenced by the finance member of the government of India selecting the composition
of the RBI Board, and also by a virtual dismissal of its first governor, Sir Osborne Smith, on the
ostensible grounds of disagreement on the issue of fixing the bank rate.

During World War II, the authority of the RBI was further clipped in regard to its
monetary policy, when it was forced to pursue a government-initiated low interest rate policy to
keep the cost of financing the war low and to expand money supply through accumulation of
sterling (foreign exchange) balances.

After a brief interlude of relative autonomy experienced after independence in 1947, the
RBI's monetary policy domain shriveled rapidly when planning dominated India's overall
economic policy. Since 1951, the government aimed at a mixture of public and private sectors,
but much greater weight was assigned to the former. This had serious consequences for the RBI's
functioning, organization, and the use of its policy instruments.

Its main policy instruments, such as open market operations, and cash reserve and
statutory liquid assets ratios, took the character of fiscal instruments directed more toward raising
resources for the government than facilitating the financing of private sector investment—the
main area for the exercise of monetary policy. Even more significantly, the RBI was obliged to
extend credit to government, which fueled inflationary pressures in the economy.

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 ORIGIN OF RESERVE BANK OF INDIA

 1926: The Royal Commission on Indian Currency and Finance recommended the creation
of a central bank for India.

 1927: A bill to give effect to the above recommendation was introduced in the Legislative
Assembly. But it was later withdrawn due to lack of agreement among various sections of
people.

 1933: The White Paper on Indian Constitutional Reforms recommended the creation of a
Reserve Bank. A fresh bill was introduced in the Legislative Assembly.

 1934: The Bill was passed and received the Governor General’s assent

 1935: The Reserve Bank commenced operations as India’s central bank on April 1 as a
private shareholders’ bank with a paid up capital of rupees five crores (rupees fifty million).

 1942: The Reserve Bank ceased to be the currency issuing authority of Burma (now
Myanmar).

 1947: The Reserve Bank stopped acting as banker to the Government of Burma.

 1948: The Reserve Bank stopped rendering central banking services to Pakistan.

 1949: The Government of India nationalized the Reserve Bank under the Reserve Bank
(Transfer of Public Ownership) Act, 1948.

Currently, the Bank’s Central Office, located at Mumbai, has twenty-seven departments.
These departments frame policies in their respective work areas. They are headed by senior officers
in the rank of Chief General Manager.

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 HISTORIC DETAILS

The origins of the Reserve Bank of India can be traced to 1926 when the Royal
Commission on Indian Currency and Finance – also known as the Hilton-Young Commission –
recommended the creation of a central bank for India to separate the control of currency and credit
from the Government and to augment banking facilities throughout the country

The origins of the Reserve Bank of India can be traced to 1926 when the Royal Commission
on Indian Currency and Finance – also known as the Hilton-Young Commission – recommended
the creation of a central bank for India to separate the control of currency and credit from the
Government and to augment banking facilities throughout the country.

The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a
series of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role
and functions have undergone numerous changes, as the nature of the Indian economy and financial
sector changed.

There were several causes for the creation of a central bank. Though the rupee was the
common currency, there were several species of rupee coins of different values in circulation. The
authorities, however, endeavored to evolve a standard coin. For many years, the Sicca of
Murshidabad was, in theory, the standard coin, and the rates of exchange of the various rupees in
terms of the Sicca rupee varied, the discount being called the batta.

The Government received enquiries from the Collectors as to the batta they should charge on the
different species they received from zamindars and farmers.

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 FUNCTIONS

The central bank of any country executes many functions such as overseeing monetary
policy, issuing currency, managing foreign exchange, working as a bank for government and as a
banker of scheduled commercial banks. It also works for overall economic growth of the
country. The preamble of the Reserve Bank of India describes its main functions 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.

 Financial supervision:
The primary objective of RBI is to undertake consolidated supervision of the financial sector
comprising commercial banks, financial institutions, and non-banking finance companies.
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. 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 the Department of Banking Supervision (DBS), the
Department of Non-Banking Supervision (DNBS) and the Financial Institutions Division (FID)
and gives directions on the regulatory and supervisory issues.

 Regulator and supervisor of the financial system :

The institution is also the regulator and supervisor of the financial system and prescribes
broad parameters of banking operations within which the country's banking and financial system
functions. Its objectives are to maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public. The Banking Ombudsman
Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of
complaints by bank customers. The RBI controls the monetary supply, monitors economic
indicators like the gross domestic product and has to decide the design of the rupee banknotes as
well as coins.

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  Regulator and supervisor of the payment and settlement systems:
Payment and settlement systems play an important role in improving overall economic
efficiency. The Payment and Settlement Systems Act of 2007 (PSS Act)[48] gives the Reserve
Bank oversight authority, including regulation and supervision, for the payment and settlement
systems in the country. In this role, the RBI focuses on the development and functioning of safe,
secure and efficient payment and settlement mechanisms. Two payment systems National
Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) allow individuals,
companies and firms to transfer funds from one bank to another. These facilities can only be
used for transferring money within the country.
NEFT operates on a deferred net settlement (DNS) basis and settles transactions
in batches. The settlement takes place for all transactions received until a particular cut-off time.
It operates in hourly batches — there are twelve settlements from 8 am to 7 pm on weekdays and
six between 8 am and 1 pm on Saturdays.[49] Any transaction initiated after the designated time
would have to wait until the next settlement time. In RTGS, transactions are processed
continuously, all through the business hours. RBI's settlement time is 9 am to 4:30 pm on
weekdays and 9 am to 2 pm on Saturdays.

 Banker and debt manager to government:

Just as individuals need a bank to carry out their financial transactions effectively and
efficiently, governments also need a bank to carry out their financial transactions. The RBI
serves this purpose for the Government of India (GoI). As a banker to the GoI, the RBI maintains
its accounts, receive payments into and make payments out of these accounts. The RBI also
helps the GoI to raise money from the public via issuing bonds and government-approved
securities.
The RBI is also a banker to the government and performs merchant banking function for the
central and the state governments. It also acts as their banker. The National Housing
Bank (NHB) was established in 1988 to promote private real estate acquisition. The institution
maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian
banking system is resilient enough to face the stress caused by the drought-like situation because
of poor monsoon this year.

 Managing foreign exchange:

The central bank manages to reach different goals of the Foreign Exchange Management
Act 2009. Their objective is to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
With increasing integration of the Indian economy with the global economy arising from
greater trade and capital flows, the foreign exchange market has evolved as a key segment of the
Indian financial market and the RBI has an important role to play in regulating and managing
this segment. The RBI manages foreign exchange and gold reserves of the nation.

30 | P a g e
 On a given day, the foreign exchange rate reflects the demand for and supply of foreign
exchange arising from trade and capital transactions. The RBI's Financial Markets Department
(FMD) participates in the foreign exchange market by undertaking sales/purchases of foreign
currency to ease volatility in periods of excess demand for/supply of foreign currency.

 Issue of currency:
Other than the Government of India, the Reserve Bank of India is the sole body
authorized to issue banknotes in India.
The bank also destroys banknotes when they are not fit for circulation. All the money
issued by the central bank is its monetary liability, i.e., the central bank is obliged to back the
currency with assets of equal value, to enhance public confidence in paper currency. The
objectives are to issue bank notes and give the public an adequate supply of the same, to
maintain the currency and credit system of the country to utilize it in its best advantage, and to
maintain the reserves.
The RBI maintains the economic structure of the country so that it can achieve the
objective of price stability as well as economic development because both objectives are diverse
in themselves.

For the printing of notes, RBI uses four facilities:

 The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned
company of the Government of India, have printing presses at Nashik, Maharashtra
and Dewas, Madhya Pradesh.
 The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI,
has printing facilities in Mysore, Karnataka and Salboni, West Bengal.
For the minting of coins, SPMCIL has four mints
at Mumbai, Noida, Kolkata and Hyderabad for coin production.
Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI),
the RBI works as an agent of GoI for the distribution and handling of coins. RBI also works to
prevent counterfeiting of currency by regularly upgrading security features of currency.
The RBI is authorized to issue notes with face values of up to Rs10,000 and coins up
to 1,000 rupees.
New 500 and ₹2,000 notes were been issued on 8 November 2016. The old series
of ₹1,000 and ₹500 notes were demonetized from midnight on 8 November 2016.
Earlier ₹1,000 notes have been discarded by the RBI.

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Detection of fake currency:

In order to curb the counterfeit money problem in India, RBI has launched a website to raise
awareness among masses about fake banknotes in the
market. www.paisaboltahai.rbi.org.inprovides information about identifying fake currency.
On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will
completely withdraw from circulation of all banknotes issued prior to 2005. From 1 April 2014,
the public will be required to approach banks for exchanging these notes. Banks will provide
exchange facility for these notes until further communication. The reserve bank has also clarified
that the notes issued before 2005 will continue to be legal tender. This would mean that banks
are required to exchange the notes for their customers as well as for non-customers. From 1 July
2014, however, to exchange more than 15 pieces of `500 and `1000 notes, non-customers will
have to furnish proof of identity and residence as well as show aadhar to the bank branch in
which he/she wants to exchange the notes.
This move from the reserve bank is expected to unearth black money held in cash. As the
new currency notes have added increased security features, they would help in curbing the
menace of fake currency.

 Banker's bank:
Reserve Bank of India also works as a central bank where commercial banks are account
holders and can deposit money. RBI maintains banking accounts of all scheduled
banks. Commercial banks create credit. It is the duty of the RBI to control the credit through the
CRR, bank rate and open market operations. As banker's bank, the RBI facilitates the clearing of
cheques between the commercial banks and helps the inter-bank transfer of funds. It can grant
financial accommodation to schedule banks. It acts as the lender of the last resort by providing
emergency advances to the banks.
As the banker to banks, RBI focuses on:
 Enabling smooth, swift and seamless clearing and settlement of inter banking
obligations.
 Providing an efficient means of funds transfer for banks.
 Acting as a lendor of last Resort.

 Regulator of the Banking System:

RBI has the responsibility of regulating the nation's financial system. As a regulator and
supervisor of the Indian banking system it ensures financial stability & public confidence in the
banking system. RBI uses methods like On-site inspections, off-site surveillance, scrutiny &
periodic meetings to supervise new bank licenses, setting capital requirements and regulating
interest rates in specific areas. RBI is currently focused on implementing norms.

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RBI also guides and supervises:
 Commercial banks and all India development financial Institutions.
 Urban co-operative banks.
 District Central co-operative Banks and State co-operative banks
 Regional Rural banks
 Non banking Financial companies

 Custodian to foreign exchange:

The Reserve Bank has custody of the country's reserves of international currency, and
this enables the Reserve Bank to deal with crisis connected with adverse balance of payments
position.
The Reserve Bank plays a key role in regulation and development of the foreign exchange
market and assumes three broad roles relating to foreign exchange:
 Regulating transactions related to the external sector and facilitating the devolpment of
the foreign exchange market
 Ensuring smooth conduct and orderly conditions in the domestic foreign exchange
market
 Managing the foreign currency assets and gold reserves of the country

 Developmental role:
This role is perhaps, the most heralded aspect of our activities, yet it remains among the most
critical. This includes ensuring that credit is available to the productive sectors of the economy,
establishing institutions designed to build the country’s financial infrastructure, expanding access
to affordable financial services and promoting financial education and literacy. Over the years,
the RBI has added new institutions as the economy has evolved.
Some of the institutions established by the RBI include:
 Unit Trust of India (1964), the first mutual fund of the country.
 Industrial Development Bank of India (1964) a development finance institution for
industry.
 National Bank for Agriculture and Rural Development (1982) for promoting rural and
agricultural credit.
 National Housing Bank (1980) an apex financial institution for promoting and regulating
housing finance

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 CHARACTERSTICS

POLICY RATES AND RESERVE RATIOS

Rates as of third bi-monthly monetary policy meet of FY1920 (7 August 2019)

Policy rates

Policy repo rate 5.40 %

Reverse repo rate 5.15 %

Marginal standing facility rate 5.65 %

Bank rate 5.65 %

Reserve ratios

Cash reserve ratio (CRR) 4.00 %

Statutory liquidity ratio (SLR) 18.75 %

Lending and deposit rates[90]

Base rate 8.95%–9.40%

MCLR (overnight) 8.05%–8.50%

Savings deposit rate 3.50%–4.00%

Term deposit rate for > 1 year 6.25%–7.50%

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  Repo rate
Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the
RBI lends money to the commercial banks for a short-term (a maximum of 90 days). When the
repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more
expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make
it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks
can't carry out their business at a profit whereas the very opposite happens when the repo rate is
cut down. Generally, repo rates are cut down whenever the country needs to progress in banking
and economy.
If banks want to borrow money (for short term, usually overnight) from RBI then banks
have to charge this interest rate. Banks have to pledge government securities as collateral. This
kind of deal happens through a re-purchase agreement. If a bank wants to
borrow ₹100 crore (US$14 million), it has to provide government securities at least
worth ₹100 crore (could be more because of margin requirement which is 5%–10% of loan
amount) and agree to repurchase them at ₹106.5 crore (US$15 million) at the end of borrowing
period. So the bank has paid ₹6.5 crore (US$940,000) as interest. This is the reason it is called
repo rate.
The government securities which are provided by banks as collateral cannot come
from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).
To curb inflation, the RBI increases repo rate which will make borrowing costly for
banks. Banks will pass this increased cost to their customers which make borrowing costly in
whole economy. Fewer people will apply for loans and aggregate demand will be reduced. This
will result in inflation coming down. The RBI does the opposite to fight deflation. When the RBI
reduces the repo rate, banks are not legally required to reduce their own base rate.The present
repo rate is 5.40 %.

 Reverse repo rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate
is the short term borrowing rate at which RBI borrows money from banks. The reserve bank uses
this tool when it feels there is too much money floating in the banking system. An increase in the
reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result,
banks prefer to lend their money to RBI which is always safe instead of lending it to others
(people, companies, etc.) which is always risky.
Repo rate signifies the rate at which liquidity is injected into the banking system by RBI,
whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the
banks. Currently, reverse repo rate is pegged to be 0.25% (or 25 bps) below the repo rate.

 Statutory liquidity ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold,
cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger

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proportion of their resources in liquid form and thus reduces their capacity to grant loans and
advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds
from loans and advances to investment in government and approved securities.
In well-developed economies, central banks use open market operations—buying and
selling of eligible securities by the central bank in the money market—to influence the volume of
cash reserves with commercial banks and thus influence the volume of loans and advances they
can make to the commercial and industrial sectors. In the open money market, government
securities are traded at market-related rates of interest. The RBI is resorting increasing to open
market operations in recent years. Generally, the RBI uses

1. Minimum margins for lending against specific securities.

2. A ceiling on the amounts of credit for certain purposes.
3. The discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:

1. Part of the interest rate structure, i.e. on small savings and provident funds, are
administratively set.
2. Banks are mandatory required to keep 19.50% of their NDTL (net demand and time
liabilities) in the form of liquid assets.
3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.
The share of net demand and time liabilities that banks must maintain in safe and liquid assets ,
such as government securities, cash, and gold. Here it would be pertinent to mention the gold
swap of July 2014.The present SLR is 18.75%.

 Bank rate
Bank rate is defined in Section 49 of the RBI Act of 1934 as the ‘standard rate at which
RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for
purchase'. When banks want to borrow long term funds from the RBI, it is the interest rate which
the RBI charges to them. It is currently set to 5.65 %. The bank rate is not used to control money
supply, but penal rates continue to be linked to the bank rate. If a bank fails to
meet SLR or CRR requirements then the RBI will impose a penalty of 300 basis points above
bank rate.

 Liquidity adjustment facility (LAF)

Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the
Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to
park excess funds with the RBI on an overnight basis against the collateral of government
securities.RBI accepts applications for a minimum amount of ₹5 crore (US$720,000) and in
multiples of ₹5 crore thereafter.

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  Cash reserve ratio (CRR)
CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the
bank's net demand and time liabilities to ensure the liquidity and solvency of the scheduled
banks. The share of net demand and time liabilities that banks must maintain as cash with the
RBI. The RBI has set CRR at 4%. A 1% change in CRR affects the economy
by ₹1,000,000 crore (US$140 billion). An increase sucks this amount from the economy, while a
decrease injects this amount into the economy. So if a bank has ₹200 crore (US$29 million)
of NDTL then it has to keep ₹8 crore (US$1.2 million) in cash with RBI. RBI pays no interest on
CRR.
Let's assume the economy is showing inflationary trends and the RBI wants to control
this situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to 20%
then bank will be left only with ₹60 crore (US$8.7 million) for operations. Now it will be very
difficult for the bank to maintain profitability with such a small amount of capital

 Open market operation (OMO)

Open market operation is the activity of buying and selling of government securities in
open market to control the supply of money in banking system. When there is excess supply of
money, central bank sells government securities thereby sucking out excess liquidity. Similarly,
when liquidity is tight, RBI will buy government securities and thereby inject money supply into
the economy.

 Marginal standing facility (MSF)

This scheme was introduced in May 2011 and all the scheduled commercial bank can
participate in this scheme. Banks can borrow up to 2.5% percent of their respective net demand
and time liabilities. The RBI receives application under this facility for a minimum amount of
Rs. 1 crore and in multiples of Rs. 1 crore thereafter.
The important difference from repo rate is that bank can pledge government securities
from its SLR quota (up to one percent). So even if SLR goes below 20.5% by pledging SLR
quota securities under MSF, the bank will not have to pay any penalty. The MSF rate is set to
100 basis points above bank rate and currently is at 5.65 % as of 7 August 2019.

 Margin requirements
Loan-to-value (LTV) is the ratio of loan amount to the actual value of asset purchased.
The RBI regulates this ratio so as to control the amount a bank can lend to its customers.
For example, an individual wants to buy a car using borrowed money and the car’s value
is ₹10 lakh (US$14,000). If the LTV is set to 70% he can borrow a maximum of ₹7
lakh (US$10,000).The RBI can decrease or increase to curb inflation or deflation respectively.

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  Selective credit control
Under this measure, the RBI can specifically instruct banks not to give loans to traders of
certain commodities e.g. sugar, edible oil, etc.
This prevents the speculation/hoarding of commodities using money borrowed from banks.

 Moral suasion
Under this measure, the RBI try to persuade banks through meetings, conferences, media
statements to do specific things under certain economic trends. For example, when the RBI
reduces repo rate, it asks banks to reduce their base rate as well. Another example of this
measure is to ask banks to reduce their non-performing assets.

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 OBJECTIVES

 The Reserve Bank of India was established with the main motto of regulating all the banks
in India. The objective was to keep in check the reserves as well as the issue of bank notes.

 So, it was done to secure the monetary stability and thereby to operate the credit system and
currency of the country to its own advantage.

 Prior to the RBI, the government of India and the Imperial Bank of India were unable to
control the Indian financial system by keeping it in check.

 Therefore, a committee led by the Hilton and young commission in 1935, shifted the entire
financial system to the RBI.

 So, the primary target for RBI was to control and regulate the various financial policies and
help in the development of the banking facilities throughout India.

 The primary objective for the RBI would be to regulate the various banking functions for
India in the money market. Thus, they focus mainly on issuing new notes.

 The RBI was established with the aim of being a banker’s bank and also the bank for the
government. Its task was to promote the economic growth of the country through various
frameworks and economic policies of the government.

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 LIMITATIONS

 Restricted Scope of Monetary Policy in Economic Development

In reality the monetary policy has been assigned only a minor role in the process of
economic development. The monetary policy is not given any predominant role in the process of
economic development. The role assigned to the Reserve Bank is minor indeed. The Reserve
Bank in expected to see that the process of economic development should not be hindered for
want of availability of adequate funds.

 Limited Role in Controlling Prices:

The monetary policy of Reserve bank has played only a limited role in controlling the
inflationary pressure. It has not succeeded in achieving the objective of growth with stability.
The former Governor of Reserve Bank, I.G. Patel states,’ the role of monetary policy in
combating inflation is strictly limited and that monetary policy can be effective only if it is a part
of an overall framework of policy which includes not only fiscal and foreign exchange policy but
also what is described as an income policy’. In India, however, the monetary policy of the
Reserve Bank is not appropriately integrated with fiscal, foreign exchange and income policies.

 Unfavourable Banking Habits:

An important limitation of the monetary policy is unfavourable banking habits of Indian
masses. People in India prefer to make use of cash rather than cheque. This means that a major
portion of the cash generally continues to circulate in the economy without returning to the banks
in the form of deposits. This reduces the credit creation capacity of the banks.
Moreover in India there is predominance of currency in the money supply. This hampers
the credit creating capacity of the banks. Due to high proportion of currency in money supply,
banks have to face the problem of large withdrawals of currency every time they create credit.
Fortunately, the recent trend is increasing deposit ratio in money supply. It is expected to make
money policy more effective.

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  Underdeveloped Money Market:
Another limitation of monetary policy in India is underdeveloped money market. The
weak money market limits the coverage, as also the efficient working of the monetary policy.
The money market comprises of the parts, the organised money market and unorganised
money market. The money policy works only in organised money market. It fails to achieve the
desired results in unorganised money market.

 Existence of Black Money:

The existence of black money in the economy limits the working of the monetary policy.
The black money is not recorded since the borrowers and lenders keep their transactions secret.
Consequently the supply and demand of money also not remain as desired by the monetary
policy. In the words of V. Pandit, ‘Black money is rightly regarded as a threat to the official
money credit policy mechanism to manage demand and price in several sectors of the economy.

 Conflicting Objectives:
An important limitation of monetary policy arises from its conflicting objectives. To
achieve the objective of economic development the monetary policy is to be expansionary but
contrary to it to achieve the objective of price stability a curb on inflation can be realised by
contracting the money supply. The monetary policy generally fails to achieve a proper
coordination between these two objectives.

 Influence of Non-Monetary Factors:

An important limitation of monetary policy is its ignorance of non-monetary factors. The
monetary policy can never be the primary factor in controlling inflation originating in real
factors, deficit financing and foreign exchange resources.
The Reserve Bank has no control over deficit financing. It cannot regulate the deficit financing,
which affects money supply considerably.

 Limitations of Monetary Instruments:

An important limitation of monetary policy is related to the inherent limitations in the various
instruments of credit control. There are limitations regarding frequent and sharp changes in the
bank rate, as these are supposed to conflict with the development objectives. Most bank rates are
virtually fixed and mutually unrelated so that the scope for adjustment is very limited.
The margin requirements have tended to be so high for most of time due to prolonged inflation,
that the scope for further increase in them is limited. The CRR and SLR have also been fixed
very high locking most of the funds in low yielding assets. These limitations of monetary
instruments hamper the smooth working of monetary policy.

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  Not Proper Implementation of the Monetary Policy:
Successful application of monetary policy is not merely a question of availability of
instruments of credit control. It is also a question of judgement with regard to timing and the
degree of restraint employed or relaxation allowed.
However, past experience shows that Reserve Bank’s credit restrictions have always fallen short
of the required extent of restraint. The Bank has adopted a hesitant attitude in the field of
monetary control. In short, the monetary policy of the Reserve Bank suffers from many
limitations. It requires improvements in many directions.

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CHAPTER-4

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 DATA ANALYSIS AND INTERPRETATION

 RBI REPO RATE-INDIAN CENTRAL BANK’S INTEREST RATE

Charts - historic RBI interest rates

Graph Indian interest rate RBI - interest rates last year

Graph Indian interest rate RBI - long-term graph

THE CURRENT INDIAN INTEREST RATE RBI (Base Rate) IS 5.400%

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 GROWTHS IN DEPOSITS

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INDIA GDP ANNUAL GROWTH RATE
The Indian economy advanced 5 percent year-on-year in the second quarter of 2019, slowing from a
5.8 percent expansion in the prior period and missing market consensus of 5.7 percent. It was the
weakest growth rate since the first quarter of 2013, amid a slowdown in manufacturing and
construction sectors. GDP Annual Growth Rate in India averaged 6.20 percent from 1951 until 2019,
reaching an all time high of 11.40 percent in the first quarter of 2010 and a record low of -5.20
percent in the fourth quarter of 1979

Calender GMT Actual Previous Consensus TE

Forecast
2019-01-31 Fiscal year GDP Growth in 2017-18 7.2% 8.2% 7.5%

2019-02-28 GDP Growth Rate YOY Q4 6.6% 7% 6.9% 7%

2019-05-31 GDP Growth Rate YOY Q1 5.8% 6.6% 6.3% 6.1%

2019-08-30 GDP Growth Rate YOY Q2 5% 5.8% 5.7% 5.6%

2019-11-29 GDP Growth Rate YOY Q3 5% 5.5%

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INR=INDIAN RUPEE

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 DESIGN OF GST IN INDIA

Design of GST in India is complex, not in tune with some of other economies; which have single
rate of GST with simple administration too. Major reason for same is the shared scope to levy
and collect indirect taxes in India, among centre and states. States were not intended, to forgo its’
authority of levy and administration including collection; in favour of centre; which results into
dual GST (CGST and SGST apart from IGST, Which is applicable in case of Inter-state sale or
Imports)

For period from April 2018 to June 2019, average monthly collection (in Rs. Crores) of each
component (as %age to gross collection shown in pie-chart below) is

CGST SGST IGST From IGST Other Cess from Other then
Imports then Imports Imports Import cess
16,617 22,927 24,252 25,614 838 7270

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CHAPTER-5

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 FINDINGS

 Reserve Bank has succeeded in controlling the organised sector of the Money Market, but
not the unorganised one. It has virtually failed in regulating or controlling the activities of
rural money lenders and other indigenous banker

 Reserve Bank prepared a plan for the development of Bill Market in 1952. But till date
there is no independent and organised widespread bill market in India. Bill Market in
India does not receive first-rate Discountable Bills.

 Despite the fact that lot of steps have been initiated by the Reserve Bank to provide
enough agricultural credit, its availability continues to be far behind its requirement.
Agricultural credit it still being dominated by rural money lenders and other indigenous
bankers who charge very high interest rates.

 During 46-years, after independence, Reserve Bank has tried to spread banking activity in
all parts of the country. Yet it is not sufficient in view of the large size of population.
Also, most of the banking activity is concentrated in urban areas. People in small villages
and sub-urban areas still deprived of the banking facility.

 Instability in the internal value of the rupee has been the biggest failure of the Reserve
Bank. Because of the ever increasing circulation of money, prices have been rising
almost non-stop. Value of the rupee has been reduced to just 7 Paise during the last 47-
years or so.

 Reserve Bank has also failed as a Bank of the Bankers its lack of assistance to the
Commercial Banks caused their closure. Between 1939 -1946 nearly 444 banks failed in
the country. Closure of three banks in 1985 is also a notable point. Failure of the banks
erodes faith of the people in the banking system.

 The Reserve Bank has yet not succeeded in getting the Commercial Banks any notable
foreign exchange business. Foreign exchange business almost continues to be a
monopoly of foreign banks. Some of the Indian Banks have opened their branches
abroad, but not with any notable success so far.
 In 1992-93, country witnessed large scale share scam involving hundreds of crores of
rupees. It was a glaring example of the failure of Reserve Bank of India.

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 SUGGESTIONS

The RBI deserves credit for more frequent communication with financial markets. The move
toward quarterly economic assessments and policy announcements are steps toward the right
direction. However, the art of written central bank communication is a new experience for
the RBI, so it is understandable if there is a bit of learning by doing. A few suggestions to
improve the communication:

 Standalone, shorter monetary policy statement: The current statements are way too
long (the latest one was 71 pages), possibly because they attempt to cover too many
things, from monetary policy measures to financial development initiatives. There is a
pressing need for a standalone monetary policy statement; non-monetary policy measures
can be issued as a separate statement.

 Single policy interest rate: The monetary policy statement should focus on a single
policy interest rate (in India's case, the reverse repo rate). By giving importance of a
potential monetary signal in the repo rate and the bank rate, the RBI only causes
confusion.

The bank rate is practically dead, while the repo rate is not the operational monetary
policy rate. The cash reserve ratio's usage is so infrequent now that it does not warrant a
mention in every quarterly statement. All other central banks are able to use a single
interest rate for communicating with markets.

 Continuity in policy statements: The clarity in communication that came across in the
media comments by the governor and deputy governor was conspicuous by its absence in
the policy statement. Separately, there appears to be a mismatch between the concern
about the inflation outlook expressed in recent statements, the guidance offered, and the
actual monetary action.

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 CONCLUSION

RBI is apex banking institution in India.RBI is an 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 movements and is also the primary regulator for
banking and non-banking financial institutions.The RBI operates a number of government mints
that produces currency and coins.

The RBI has been one of the most successful central banks around the world in
preventing the effects 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. Further, as a large proportion of
the Indian population is impacted by inflation by tightening its monetory stance.

All the functions of RBI monitory, non monitory 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 powers. Under the supervision and inspection of RBI, the working of
banks has greatly imporoved. RBI has been responsible for strong financial support to industrial
and agricultural development in the country

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 BIBLOGRAPHY

• GiriappaSomu (2002), “Impact of Information Technology on Banks”, Mohit Publication.

• Gupta S. P. (1969), “Statistical Methods”, Sultan Chand and Sons.

.
• Information Technology, Data communications & electronic banking, 2nd edition, 2007,
Banking Course Book, Indian Institute of Banking and Finance, Macmillan

• Security in Electronic Banking, 2nd edition, 2007, Banking Course Book, Indian Institute of
Banking and Finance, Macmillan

• Reserve Bank of India. Report of the Committee on Mechanisation in Banking Industry.

• RBI (1998) Report of the committee on banking sector reforms (The Narsimham committee)
Mumbai: reserve bank of India

Websites

• www.rbi.org.in

• www.Banknetindia.com

• http://en.wikipedia.org/wiki/Bank#History

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