Presentation on

RESERVE BANK OF INDIA

*RBI established in 1935 as a non profitable institution and the Controller of Indian currency & the banker to the government. *RBI acts as an apex institution, the leader and symbol of economic development. *closely monitors developments in the whole financial sector. *plays an important part in the development strategy of the Government of India.

*member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of Directorsthe Governor(currently Duvvuri Subbarao), four Deputy Governors, one Finance Ministry representative, ten Government-nominated Directors to represent important elements from India's economy, and four Directors to represent Local Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. *Each of these Local Boards consist of five members who represent regional interests, as well as the interests of co-operative and indigenous banks.

FUNCTIONS OF RBI
Monetary Authority

Regulator and supervisor of the financial system

Manager of Foreign Exchange Issuer of currency

Developmental role
Related Functions

ROLE OF RBI

RBI, was established in 1935 as a non profitable institution and the Controller of Indian currency & the banker to the government. Present functions and roles of RBI as an apex institution of monetary and banking system have evolved over a period of time.
CONTROLLER OF CURRENCY

SUPERVISING AUTHORITY AND REGULATOR

BANKERS BANK

RBI
LENDERS OF THE LAST RESORT

BANKERS TO GOVERNMENT

1. CONTROLLER OF CURRENCY

ISSUES CURRENCY NOTES.

CHECKS FAKE CURRENCY AND ENSURE THAT

IT IS NOT REDISTRIBUTED.
IS THE OWNER OF CURRENCY CHEST.

2. BANKERS BANK

REGULATES AND ENSURES STABILITY.

CONTROLS VOLUMES OF THEIR RESERVES

(SLRs and CRRs).

EXTENDS CREDIT FACILITIES TO BANKS.

3. LENDER OF THE LAST RESORT

RAISE DEPOSITS AND BORROW MONEY TO

MEET COMMITMENTS.
BORROWING AGAINST GOVERNMENT

SECURITIES.
MERGING WEAK BANK WITH STRONG BANKS

TO ENSURE LONG TERM GROWTH.

4. BANKERS TO GOVERNMENT

MANTAINS ACCOUNTS OF VARIOUS

MINISTRIES.
ISSUER OF SECURITIES.
SHORT TERM CREDIT TO GOVERNMENT.

5. SUPERVISING AUTHORITY/REGULATOR AND SUPERVISOR

REGULATES THE BANKS AND NBFCs IN INDIA.

ADVICES GOVERNMENT FOR SALE AND

PURCHASE OF SECURITIES.
ADVICES GOVERNMENT ON HOW MUCH

INTEREST TO BE ALLOWED ON SHORT/LONG TERM CREDIT.

OTHER FUNCTIONS

CUSTODIAL OF NATIONAL METALLIC

RESERVES.
CLEARING FUNCTION.

Quantitative Instruments Open market operations

The Open market operation refers to the

purchase and/or sale of short term and long term securities by the RBI in the open market. in the money market, to influence the term and structure of the interest rate and to stabilize the market for government securities, etc

The OMO is used to wipe out shortage of money

MONETARY POLICY
A Tool used to influence Interest rates, Inflation and credit availability through changes in supply of money available in the economy . Expansionary policy Expansionary policy increases the total supply of money in the economy used to combat unemployment in a recession by lowering interest rates, Contractionary policy contractionary policy contractionary policy decreases the total money supply involves raising interest rates in order to combat inflation increasing interest rates slows the economy by making funds more expensive to firms, and promotes consumer savings which decreases revenues by firms.

Bank rate Policy

The Bank rate refers to rate at which the central

bank (i.e RBI) rediscounts bills and prepares of commercial banks or provides advance to commercial banks against approved securities.

The Bank Rate affects the actual availability and

the cost of the credit.

Current Bank Rate is 9.00%.

 Cash Reserve Ratio (CRR): The share of

net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank. CRR is 4.75%

Statutory Liquidity Ratio (SLR): The

share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities and gold. SLR is 24%.

Lender Of Last Resort:

Qualitative Instruments Fixing Margin Requirements

The margin refers to the "proportion of the loan

amount which is not financed by the bank".

This method is used to encourage credit supply for

the needy sector and discourage it for other nonnecessary sectors.

DEFINITIONS OF REPO AND REVERSE REPO

Repo rate Repo is a collateralized lending i.e. the banks which

borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date.

Reserve bank charges some interest rate on the cash

borrowed by banks. This interest rate is called repo rate.

Reverse repo rate In a reverse repo, Reserve Bank borrows money from

banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate.
Banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck

with excess funds and are not able to invest anywhere for reasonable returns.

 Repo rate Reverse repo rate

8% 7%

The increase in Repo Rate and Reverse Repo Rate is a

symbol of tightening of the policy

Effect of repo rate on rate of interest

When REPO RATE increases

Banks lend from RBI at a higher rates of interest

Banks unable to borrow at repo rate Increase in the deposit interest rate, to attract depositors

They lend it to the borrowers at a high rate of interest

As lending interest rate increases, borrowing of money decreases.

.
. Short term effects of high lending interest ratesCompanies(high debt) pay high interest

Profit & EPS dcrses so M.P dcrses

Long term effects of high lending interest ratesAutomobile, Real estate and other capital intensive industries are affected as investment decreases because of high interest rates. Effect of high interest rates on borrowersWhen the interest rates are on a rise, the borrowers who had already borrowed money have to pay more EMI (floating interest rates)
If interest rate continues to rise for a longer duration then it will have an all

round negative impact on the economy, leading it into a recessionary mode

When REPO RATE is very low

And also FIIs Capital inflow decreases

Lending and deposit interest rates will be low

Leads to inflationary situation

As a result deposits will be less attractive (consuming more, saving less)

Govt prints currency to infuse money

Bank left with less money to lend, profitability reduces

Fall in investment in the economy

.FFII VS INFLATION
1$=50 rs investment of 1000$; which is 50,000rs. After a year, he earned a profit of 13,000 rs. Now he has a total of 63,000 rs. But due to inflation, the Indian currency got depreciated, its now 1$=70rs. So when he takes his money back, he would be getting only 900$. A loss of 100$.

.
Lower rates are seen as an aid to economic growth, signal to boost economic growth.

Reason Finance is accessible at less cost, helps people borrow money cheap to invest

Positive reactions in the equity market especially Automobile, Real Estate and other capital intensive industries

EFFECT OF REPO RATE ON INFLATION

The way in which changes in the repo rate affect inflation and the rest of the

economy is known as the transmission mechanism.

Mechanism

Credit Channel

Interest Rate Channel

Exchange Rate Channel

Credit Channel
If the interest rate rises, banks choose to decrease their lending and instead buy bonds.

Companies find it more difficult to borrow money.

Companies that are either unable or unwilling to borrow must cut back their activities, postpone investment and so on, and this dampens activity in the economy.

Interest Rate Channel

The interest rate channel affects the demand for goods and services. Higher interest rates normally lead to a reduction in household consumption. Higher interest rates make it more attractive to save. Consumption also falls because existing loans now cost more in terms of interest payments. It becomes more expensive for firms to finance investment and curtail investment. If consumption and investment fall, so does aggregate demand.

Exchange Rate Channel

The exchange rate is the price of a countrys currency expressed in terms of another countrys currency. The exchange rate channel describes how monetary policy affects the value of the currency.

Higher interest rates make Indian assets more attractive than investments denominated in other currencies. The result is a capital inflow and increased demand for Rupees, which strengthens the exchange rate.

Effect of rise in rates on Forex

Rise in rates will result in appreciation in currency.

will reduce imported inflation and curb demand.