“ The giuding principle for a Central Bank,
whatever function or group of functions, it
performs at any particular moment, is that it
should act only in public interest and without
regard to profit as a primary consideration.”
 Establishment:The Reserve Bank of India (RBI) is the central
bank of India, and was established on April 1, 1935 in
accordance with the provisions of the Reserve Bank of India
Act, 1934. The Central Office is located at Mumbai since
inception. Though originally privately owned, since
nationalisation in 1949, RBI is fully owned by the
Government of India. It was inaugurated with a share
capital of Rs. 5 Crore divided into shares of Rs. 100 each
fully paid up. The entire share was firstly owned by private
shareholders. The government of India held shares of
nominal value of Rs. 2,22,000.
RBI is governed by a central board (board
headed by a governor) appointed by the Central
Government of India. The current governor of RBI is
Dr.Y.Venugopal Reddy (who succeeded Dr. Bimal Jalan on
September 6, 2003). RBI has 22 regional offices across India.
The reserve bank of India was nationalised int the year 1949.
 Preamble:The Preamble prescribes the objective 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."
RBI Tower
 FUNCTIONS PERFORMED BY RBI: Main Functions:1. Monetary Authority:The Reserve Bank of India Formulates,
implements and monitors the monetary policy. Its main
objective is maintaining price stability and ensuring
adequate flow of credit to productive sectors.
2. Regulator and supervisor of the financial
system:Prescribes broad parameters of banking
operations within which the country’s banking and financial
system functions. Their main objective is to maintain public
confidence in the system, protect depositors’ interest and
provide cost-effective banking services to the public.
3. Manager of Exchange Control:The manager of the exchange control department
manages the Foreign Exchange Management Act, 1999. His
main objective is to facilitate external trade and payment and
promote orderly development and maintenance of foreign
exchange market in India.
4. Issuer of currency:The person who is issuer issues and exchanges or
destroys currency and coins not fit for circulation. His main
objective is to give the public adequate quantity of supplies
of currency notes and coins and in good quality.
5. Developmental role:The reserve bank of India performs a wide
range of promotional functions to support national
objectives. The promotional functions are such as contests,
coupons, maintaining good public relations, and many
more…..
6. Related Functions:There are also some of the relating functions
to the above mentioned main functions. They are such as
Banker to the Government, Banker to banks etc….
 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.
 Supervisory functions:The Reserve Bank act, 1934 and the Banking
Regulation act, 1949 have given the RBI wide powers of
supervision and control over commercial and co-operative
banks, relating to licensing and establishments, branch
expansion, liquidity of their asset, management and
methods of working, amalgamation, reconstruction, and
liquidation. The RBI is authorized to carry out periodical
inspections of banks and to call for returns and necessary
information from them. The supervisory functions of the RBI
have helped a great deal in improving the standard of
banking in India to develop on sound lines and to improve the
methods of their operation.
Promotional functions:With economic growth assuming a new
urgency since Independence, the range of the Reserve Bank’s
functions has steadily widened. The bank now performs a
variety of developmental and promotional functions, which,
at one time were regarded as outside the normal scope of
central banking. The RBI was asked to promote banking
habit, extend banking facilities to rural and semi-urban
areas, and establish and promote new specialized financing
agencies.
 Major Functions:1. The Department attends to the core (central part)
statutory function of note and coin issue and currency
management. This involves forecasting the demand for
fresh notes and coins, placing the indent with four
printing presses and mints, receiving supplies against
those indents and distributing them through the 18 offices
(15 Issue Offices + 3 Sub-Offices) of the Bank, a wide
network of currency chests, repository (where the reports
are stored) and small coin depots. The Department also
keeps an account of notes in circulation and also the
stocks
at
RBI
offices
and
currency
box.
(A currency box is an extended arm of the Issue
Department maintained with a commercial bank where
the RBI stores fresh and re-issuable notes and allows the
commercial banks to withdraw cash for its requirements
and deposit its excess cash. A repository is an extension
of the currency box wherein a portion of the currency
chest balance is permitted to be held at one or more other
local branches of the same bank). Soiled (torn/dirty)
notes are also stocked in the boxes pending transportation
to RBI.
2. The Department administers the Reserve Bank of India
Rules. The rules lay down the circumstances in which
value of torn and mutilated notes can be refunded. Soiled
notes which are unfit for circulation are mopped (cleaned)
up from circulation for destruction.
3. The Department reviews various security features of the
currency notes for incorporation in the notes from time to
time. It studies the features of the forged (artificial) notes
detected and seized with a view to determining the steps
needed to be taken to strengthen the integrity of the notes.
The Department also acts as a nodal Department for the
Bharatiya Reserve Bank Note Mudran Ltd.
 Current Issues:-
1. The Department aims at putting clean notes in
circulation in adequate quantity.
2. Reviewing the present system of distribution of notes and
coins in the light of the recommendations of external
consultants.
3. Enhancing the capacity at Regional Offices for
examination and disposal of notes through installation of
Currency Verification and Processing Systems.
4. Introducing a polymer note in the lowest denomination,
viz., Rs.10 so as to increase the circulation life of the note.
There are several departments in the
RBI. They are as follows: URBAN BANKS DEPARTMENT:The Urban Banks Department looks after the
regulation and supervision of primary co-operative banks.
The banks are outside the federal rural credit structure
supervised by NABARD and function primarily in the urban
areas. The activities of the Department can be broadly
divided into four areas, viz., regulatory, supervisory,
operational and developmental.
The regulation and supervision of primary
co-operative banks, popularly known as "urban co-operative
banks", is performed by the Urban Banks Department in coordination with the Registrars of Co-operative Societies of
the State Governments.
The Reserve Bank of India regulates the
interest rates on deposits and advances only to the extent of
prescribing interest rate on saving accounts and a minimum
lending rate on advances. It prescribes minimum cash
reserve and liquid assets to be maintained as a ratio of net
demand and time liabilities, and also lays down norms for
investments in other assets by primary co-operative banks.
The Department coordinates the refinance
facilities granted by the Reserve Bank of India to State Cooperative Banks on behalf of urban co-operative banks for
financing 22 broad groups of approved cottage and tiny
industries as an incentive for financing industrial activities.
As a part of developmental activity, the
Reserve Bank of India conducts special courses for senior
personnel of urban co-operative banks at its College of
Agricultural Banking, Pune.
The Reserve Bank has recently reviewed the
new bank licensing policy for cooperative banks and the
branch licensing policy for them in pursuance of the
recommendations of a High Power Committee under the
Chairmanship of Shri K. Madhava Rao, Member, Central
Board, Reserve Bank of India.
 RURAL PLANNING AND CREDIT DEPARTMENT:(a) Broad Work Areas:In rural planning and credit department
there is Monitoring and facilitating flow of credit to rural,
agricultural and small scale industries' sectors. Under this
the policies are framed on basis of priority sector lending.
This department makes allocations for contribution to Rural
Infrastructure Development Fund (RIDF) amongst
scheduled commercial banks. There is also implementing
and monitoring Lead Bank Scheme which aims at forging
(copying) a coordinated approach for providing bank credit
to achieve overall rural development .
Rural planning and credit department also
supervises and sets up the local banks which can be set up
with initial capital of Rs. 5 crores for serving two or three
contiguous districts. It is acting as regulators for Regional
Rural Banks, State/Central Co-operative Banks and Local
Area Banks. It is a monitoring implementation of
Government-sponsored poverty alleviation schemes. There
is also an implementation a new scheme set up by the
Reserve Bank of India to give members of public an easy and
inexpensive forum for redressal of their grievances against
banks known as “Banking Ombudsman Scheme: “
(b) Thrust Areas: Credit delivery innovations.
 Micro finance initiatives.
 Kisan credit cards.
 Restructuring co-operatives.
 Framing guidelines for rehabilitation of sick SSI’s.
 FOREIGN EXCHANGE DEPARTMENT:With the introduction of the Foreign
Exchange Management Act 1999, (FEMA) with effect from
June 1, 2000, the objective of the Foreign Exchange
Department has shifted from conservation of foreign
exchange to "facilitating external trade and payment and
promoting the orderly development and maintenance of
foreign exchange market in India". The new Act has brought
about structural changes in the exchange control
administration. Regulations have been framed for dealing
with various types of transactions. These regulations are
transparent and have eliminated case-by-case approvals.
All current account transactions are free from
restrictions except 8 transactions prohibited by the
Government of India. There are total 11 transactions which
require prior permission of the Government of India and 16
transactions on which indicative limits are fixed by the
Government and release of foreign exchange beyond those
limits requires permission from the Reserve Bank. All
Regional Offices of the Department have in turn been
authorized to release exchange for such transactions.
For capital account transactions, the Reserve
Bank regulations provide for general permissions/automatic
routes for investments in India by non-residents,
investments overseas by residents and borrowings abroad,
etc. This department ensures timely realization of export
proceeds and reviews, on a continuous basis, the existing
rules in the light of suggestions received from various trade
bodies and exporters' fora. This department also collects
data relating to forex transactions from authorized dealers
on a daily basis for exchange rate management and on a
fortnightly basis for monthly quick estimates of balance of
payments and quarterly balance of payments compilation. It
lays down policy guidelines for risk management relating to
forex transactions in banks. The Department is also
entrusted with the responsibility of licensing banks/money
changers to deal in foreign exchange and inspecting them.
There is a "Standing Consultative Committee
on Exchange Control" consisting of representatives from
various trade bodies and authorized dealers which meets
twice a year and makes recommendations for policy
formulation. With a view of further improving facilities
available to NRI’s and removing irritants, the Department is
also engaged, on an ongoing basis, in reviewing and
simplifying the procedures and rules.
 INDUSTRIAL AND EXPORT CREDIT
DEPARTMENT:Historically, Industrial and Export Credit
Department (IECD) laid down detailed policy prescriptions
for lending operations of banks. This involved formulating
inventory and receivable norms for various industries,
issuance of guidelines on matters such as Maximum
Permissible Bank Finance (MPBF), consortium (group)
arrangement and scrutiny of credit proposals under the
Credit Authorization Scheme (CAS)/Credit Monitoring
Arrangement (CMA). The stance (position) of the Reserve
Bank's policy now is to move away from micro regulation
and to undertake only macro monitoring. IECD thus
withdrew from prescribing detailed lending norms for
banks.
It now:
 Formulates macro level policies in regard to credit to
non-SSI
industries,
export,
housing
and
infrastructure development, designed to speed up
the credit delivery system of banks.
 Formulates policy regarding bank credit for
rehabilitation of sick/weak non-SSI units.
 Authorizes food credit limits for Food Corporation of
India and various State Governments and limits for
procurement of oilseeds and pulses to National
Agricultural Co-operative Marketing Federation of
India Limited and procurement of jute to Jute
Corporation of India Ltd., for drawing credit from a
consortium of banks.
 Acts as a nodal department for monitoring the
activities of National Housing Bank and
Infrastructure Development Finance Company Ltd.
 Monitors the flow of credit to industries, housing
and export sectors through a reporting system.
 Holds meetings of the Export Advisory Committee
where members are banks and export promotion
organizations, to deliberate on finance related and
exchange control related issues affecting exporters.
 Department of Banking Supervision:The Reserve Bank of India has been entrusted
with the responsibility of supervising the Indian banking
system under various provisions of the Banking Regulation
Act, 1949 and RBI Act, 1934. As regards commercial banks
and FI’s, this responsibility is discharged through the
Department of Banking Supervision (DBS), which supervises
92 commercial banks and 9 select financial institutions (FI’s),
through its 16 Regional Offices.
 Core Functions
The Department of Banking Supervision at
present exercises the supervisory role relating to commercial
banks and select FI’s in the following forms:
(a) Undertaking scheduled and special on-site inspections of
banks, their off-site surveillance as also post inspection
follow-up of compliance.
(b) Serving as the secretariat for the Board for Financial
Supervision (BFS).
(c) Determining the criteria for the appointment of statutory
auditors and special auditors and assessing audit
performance and disclosure standards.
(d) Dealing with financial sector frauds and attending to the
complaints received against the banks and FI’s from
public, banks, Government, etc.
(e) Exercising
supervisory
intervention
in
the
implementation of regulations which includes –
recommendation for removal of managerial and other
persons, suspension of business, amalgamation,
merger/winding up, issuance of directives and
imposition of penalties.
In 2004, the work relating to inspection of
Authorized Dealers has also been transferred from the
Foreign Exchange Department to Banking Supervision
Department.
 Supervisory Process
A high powered Board for Financial Supervision (BFS),
comprising the Governor of RBI as Chairman, one Deputy
Governor as Vice Chairman, other Deputy Governors and
four Directors of the Central Board of RBI as Members was
constituted in November 1994 with the mandate to exercise
the powers of supervision and inspection in relation to the
banking companies, financial institutions and non-banking
financial companies. Presently, BFS exercises supervision not
only over banks but also over select Developmental Finance
Institutions (DFI’s), Non-banking Financial Companies
(NBFC’s), Primary Dealers (PD’s) and Urban Cooperative
Banks (UCBs)............
 Supervisory Strategy
The Department of Banking Supervision has formulated and
put in place a supervisory strategy which, besides retaining
the importance of on-site inspections which has been the
main plank of banking supervision, also focuses on three
other areas:
 off-site monitoring through introduction of a set of
Returns;
 strengthening of the internal control systems in
banks and
 Increased use of external auditors in banking
supervision.
 Current Focus
(a) An On-site Annual Financial Inspection system which
focuses on statutorily mandated areas of solvency,
liquidity and operational health of the banks. It is based
on internationally adopted CAMEL model (Capital
Adequacy, Asset Quality, Management, Earnings,
Liquidity), modified as CAMELS (S for Systems &
Control) to suit the needs of Indian banking system.
(b) A supervisory rating model based on CAMELS concept
(CALCS for foreign banks), combining both qualitative
and quantitative elements to summarize the
performance of individual banks and also to assess the
aggregate strength and soundness of the banking
system.
(c) An Off-site Monitoring and Surveillance (OSMOS)
system has been set up in 1995 with the primary
objective of analyzing the financial position of the banks
in between on-site inspections. The returns received
from the banks cover a wide rage of data pertaining to
assets, liabilities and off-balance sheet exposures,
exposure to sensitive sectors, exposure of banks to
interest rate and liquidity risks (both in domestic and
foreign currencies), operations of subsidiaries etc . This
helps the policy makers to refine their regulatory as well
as monetary policy stance so as to achieve a fine balance
between growth and financial stability.
(d) Macro-prudential indicators (MPI’s) are being compiled
since March 2000, as a part of the Reserve Bank of India's
initiatives in adopting best international practices for
monitoring the stability of the financial system in India.
The MPI’s comprise both aggregated micro-prudential
indicators (AMPI’s) of the health of individual financial
institutions and macro-economic indicators (MEIs)
associated with financial system soundness.
(e) A Risk Based Supervision (RBS) approach to inspection,
envisages the monitoring of banks by allocating
supervisory resources and focusing supervisory
attention according to the risk profile of each institution.
The process also involves the continuous monitoring and
evaluation of the appropriateness of the risk
management systems and control environment of the
supervised institution in relation to its business strategy
and exposures, with a view to assessing its riskiness.
(f) A system of Prompt Corrective Action (PCA), based on a
pre-determined rule-based structured early intervention
is in place to enhance the existing supervisory
framework. Under the PCA, certain structured actions
will be initiated by the RBI in respect of banks which hit
certain defined trigger points in terms of three
parameters i.e. Capital funds to Risk Weighted Assets
Ratio (CRAR), Net Non Performing Assets (NPA’s) and
Return on Assets (RoA).
(g) Banks are being advised from time to time about the
major fraud prone areas and the safeguards necessary
for prevention of frauds, in order to prevent frauds in
the banking sector. In June 2004 a Fraud Monitoring Cell
was set up in the department to (i) review systems and
controls in financial sector (ii) discern the emerging
trends in frauds and circulate them to banks through
electronic media (iii) examine international best practices
so as to synergize them with the local requirements
wherever necessary (iv) act as a nodal agency for
interaction with various external agencies connected
with prevention and investigation of frauds such as
CVC, CBI etc (v) act as a central repository of
information on frauds in financial sector and act as a
think tank for fraud prevention.
(h) With a view to enable supervisory assessment of risks
and adherence to certain prudential regulations on
group basis, guidelines on consolidated accounting and
supervision have been issued to banks for compliance
commencing from the year ended March 31, 2003. Banks
were advised to prepare and submit consolidated
prudential reports (CPR) in this regard and these reports
are being reviewed by RBI on a half-yearly basis.
(i) A Working Group on Financial Conglomerates
constituted with one member each from the financial
regulators - RBI, SEBI and IRDA had suggested certain
criteria for identifying financial conglomerates, a
monitoring
system
for
capturing
intra-group
transactions and exposures amongst such conglomerates
and a mechanism for inter-regulatory exchange of
information in respect of conglomerates. The data/
information received from the 22 conglomerates
identified by the Group are analyzed by the respective
regulators.
(j) In view of the added emphasis on the role of market
discipline under Basel II and with a view to enhancing
transparency, banks have been advised that all cases of
penalty imposed by the Reserve Bank of India as also
strictures/directions on specific matters including those
arising out of inspection would be placed in the public
domain.
(k) The supervisory strategy of the Department of Banking
Supervision also includes:-
 Strengthening the internal controls of banks based on
the recommendations of the Jilani Committee and the
implementation of Risk based Internal Audit (RBIA)
 Increasing use of Statutory Auditors for verification
and certification of certain aspects like adherence by
banks to statutory liquidity requirements, prudential
norms relating to income recognition, classification of
assets and provisioning, authentication of bank’s
assessment of capital adequacy ratio and other ratios to
be disclosed in the Notes on Accounts, comments on
certain aspects of bank’s functioning in the form of
Long Form Audit Reports (LFAR) etc.
 A system of concurrent audit of business transactions
of banks intended to cover at least 50 percent of the
business of the bank, besides 100% audit of risk
sensitive portfolios such as forex, investments etc is in
place.
 A system of quarterly meetings between senior officials
of RBI and CEOs / CMDs of banks revolving around
the major concerns as revealed in the latest inspection
findings, the progress made therein etc has been put in
place since the year 2000. Banks’ strategic plans on
general improvement in their financial strength, steps
taken to implement such plans and results achieved
therein are also discussed. These meetings provide a
forum for bankers to raise issues relating to policy
matters that the bankers feel need clarification.
 Department of Non-Banking Supervision (DNBS): Mission:-
Developing NBFCs sector as an
integrated and healthy part of the Financial System; and
thereby, affording indirect protection to the interests of
their depositors
 Regulatory and Supervisory Framework:The RBI Act as amended in January 1997
provides for, among other things,
 Entry norms for Non-Banking Financial Companies
(NBFCs) and prohibition of deposit acceptance by
unincorporated bodies with some exceptions.
 Powers of the Bank to issue asset side regulations.
 Compulsory registration, maintenance of liquid assets
and reserve fund.
 Directions on acceptance of deposits and prudential
regulation.
 Comprehensive regulation of deposit taking NBFCs.
 Punitive action like cancellation of Certificate of
Registration, prohibition from acceptance of deposits
and alienation of assets, filing criminal complaints and
winding up petitions in extreme cases, appointment of
RBI observers in certain cases.
 Developmental activities
 Co-ordination
with State Governments
Legislations to curb unauthorized and
activities in this sector.
for State
fraudulent
 Publicity for depositors’ education and awareness,
workshops/seminars of trade and industry organizations,
depositors associations.
 Informal Advisory Group as an aid to decision making.
 Promotion of Self-Regulatory Organization (SRO) of
NBFCs.
 Training programmes for personnel of NBFCs, State
Governments and Police Officials.
 Current Focus
 New legislation for NBFCs to make unauthorized deposit
taking activity a cognizable offence
 Further the cause of public awareness through education
campaigns and workshops/seminars for various types of
public, including auditors of NBFCs
 Put in place an asset liability and risk management system
for NBFCs
 MONETARY POLICY OF THE RBI:With the introduction of the Five year plans,
the need for appropriate adjustment in monetary and fiscal
policies to suit the pace and pattern of planned development
became imperative. The monetary policy since 1952
emphasized the twin aims of the economic policy of the
government:
(a) spread up economic development in the country to
raise national income and standard of living, and
(b) to control and reduce inflationary pressure in the
economy.
This policy of RBI since the First plan period
was termed broadly as one of controlled expansion, i.e; a
policy of “adequate financing of economic growth and at the
same time the time ensuring reasonable price stability”.
Expansion of currency and credit was essential to meet the
increased demand for investment funds in an economy like
India which had embarked on rapid economic development.
Accordingly, RBI helped the economy to expand via
expansion of money and credit and attempted to check in
rise in prices by the use of selective controls.
 RBI’s Anti-inflationary Monetary Policy since
1972…..
Since 1972, the Indian economy has been
working with considerable inflationary potential ------ rapid
increase in money with the public and with the banking
system. There was also expansion of bank credit to finance
trade and industry. RBI was forced to abandon ‘controlled
expansion’ and adopt the policy of credit restraint or tight
monetary policy. RBI has generally followed this kind of
monetary policy with varying degrees of success till today.
 AN EVALUATION OF THE MONETRY POLICY:The objective of monetary policy was at one
time characterized by RBI itself as ‘controlled expansion.’ On
the one hand, RBI was thinking steps such as the bill market
scheme to expand bank credit to industry and trade and thus
help in economic development. On the either hand, RBI was
using both quantative (general credit restraint) and selective
credit controls so that the deployment of loans and advances
by the commercial banks for speculative purposes was
under control. Their was necessary to keep the rising prices
under check.
Thus, the monetary policy had twin aimsexpansion of the economy and control of inflationary
pressure. Monetary policy RBI has certain inherent
constraints and obviously limited in its usefulness.
Finally, the weapons and the powers
available to RBI are such that they cover only organized
banking sector viz, commercial banks and cooperative
banks. To the extent inflationary pressure is the result of
bank finance, Reserve Banks general and selective controls
will have positive effect. But if inflationary pressure is really
brought about by deficit financing and shortage of goods,
RBI’s control may not have effect at all. This is what is
probably happening in Indian in recent years. Besides, it
should always be kept in mind that RBI has no power over
non-banking financial institutions as well as indigenous
bankers who play such major role in financing trade and
industry.
 OBJECTIVES OF MONETARY POLICY: 1. Price stability:The chakravarty committee argued
that, in the context of planned economic development,
monetary authorities should aim at “price stability” in the
broadest sense. Price stability here does not mean constant
price level but it is consistent with an annual rise of 4% in
the wholesale price index. To achieve this objective, the
government should aim at raising output levels, while RBI
should control the expansion in reserve money and the
money supply.
2. MONETARY TARGETING:Emphasizing the inter-relation
between money, output and prices, the chakravarty
committee has recommended the formation of a monetary
policy based on monetary targeting. According to the
committee, target for growth in money supply in a broad
sense during a given year should be in terms of a range.
(a)based on anticipated growth in output, and
(b) in the light of the price situation.
The target range should be announced in advance, the target
for money supply should be reviewed in the course of the
year to accommodate revisions, if any, in the anticipated
growth in output and any change in the price situation.
3. Change in the definition of budgetary deficit:Till now the budgetary deficit of the central
government essentially took from increase in treasury bills
outstanding. Not all the treasury bills were held by RBI but
part of treasury bills were absorbed by the public. Since the
present concept of budget deficit did not distinguish
between the amounts held by RBI, it overstated the extent of
monetary impact of fiscal operation. Accordingly, the
chakravarty committee suggested a change in the definition
of budgetary deficit, so that there could be clear distinction
between revenue deficit, fiscal deficit and overall budgetary
deficit.
4. Interest rate policy:At present the interest rate structure is
completely administered by the monetary authorities under
the general direction of the government. According to the
chakravarty committee, the present system of administered
interest rates has become unduly complex and needs to be
modified the committee has mentioned some of the
important aspects of interest rate policy which need to be
taken into account, while modifying the administered
interest rate structure as for example increasing the pool of
financial savings, providing a reasonable return on saving
of small savers, reinforcing anti-inflationary policies the
need to provide credit at concessional rate of interest to the
priority sector and the profitability of banks , etc.
Thus, the chakravarty committee envisaged a
strong supportive role for interest rate policy in monetary
regulating based on monetary targeting.
5. Restructuring of the money market in India:The committee envisage (predicted) an
important role in treasury bill market, the call money
market, the commercial bills market and the inter-corporate
funds market in the allocation of sort term resources, with
minimum of cost and minimum of delay, further, according
to the committee, a well-organized money market provided
an efficient mechanism for the transmission of the monetary
regulation to the rest of economy. Accordingly, the
committee has recommended that RBI should take measures
to develop an efficient.
 Other objectives of Monetary Policy:In certain periods, RBI may be seriously
concerned with other short-term objectives and problems.
For instance, during in two years 1994-96, RBI had to enter
the foreign exchange market in a big way to prevent heavy
depreciation of the rupee. This was also done during
January 1998 and later to prevent the rupee following the
experience of South Asian currencies. Bimal Jalan, the
Governor of RBI came out strongly with a series of measures
to check the rapid sliding of his rupee against the dollar.
These objectives can be taken as short-term
objectives of monetary policy of RBI. The long-term policies
of RBI, however reflects the banks firm commitment to
pursue a low and stable order of inflation-----the assumption
is that real growth would be in jeopardy (danger), if inflation
goes beyond the margin of tolerance.
RESERVE BANK OF INDIA
 Weapons of Monetary Policy: Credit control:
1. General credit controls:Since 1955-56 and particularly after 1973-74
the inflationary rise in prices has been steadily mounting.
Increased government expenditure financed through deficit
spending has the direct effect of pushing up the prices,
wages and incomes.
RBI has various weapons of control and,
trough using them; it hopes to achieve its monitory policy.
These weapons of control are broadly two:
quantitative and qualitative controls.
 Quantitative controls are used to control volume of
credit and, indirectly, to control the inflationary and
deflationary pressures caused by expansion and
contraction of credit.
 Qualitative controls are also known as general credit
controls and consist of bank rate policy, open market
operation and cash reserve ratio.
(a)Bank Rate :
In accordance with the general tradition of
the 1930s, RBI started with the cheap money policy and has
fixed a low bank rate (3%) and did not change it till Nov
1953 when it raised the bank rate to 3.5%. the bank rate
gradually rose to 10% in July 1981 – these were only changes
during this period.
The bank rate remained unchanged at 10% for another
10years (1981-1991). It was revised upwards to 11% in July
1991 and further to 12% in October 1991.
However, the role of bank rate as an
instrument of monetary policy has been very limited in India
because of these basic factors,
 The structures of interest rates are administered by RBI –
they are not automatically linked to the bank rates.
 Commercially banks enjoy specific refinance facilities,
and not necessarily rediscount their eligible securities
with RBI at bank rates.
 The bill market is underdeveloped and the different sub
markets or the money markets are not influenced by the
bank rate.
Since the later part of 1955, India passed
through a severe liquidity crunch and as a result the prime
lending rates were ruling high. Industrial production was
affected adversely. One step which RBI took was to reduce
the bank rate from 12 to11 percent in April 1997, And
gradually to 6.5%. The reduction of the bank rate was to help
in reduction of the other interest rates and thus stimulate
borrowing from banks.
(b) Cash reserve requirements (CRR):Another weapon available to RBI for credit
control is the use of variable cash reserve requirements.
Under the RBI act, 1934, every commercial bank has to keep
certain minimum cash reserves with RBI- initially, it was 5%
against demand deposits and 2% against time deposits-these
are known as the statutory cash reserves. Since 1962, RBI
was empowered to vary the cash reserves requirement
between 3% and 15% of the total demand and time deposits.
During 1973, RBI exercised the power twice, as a form of
cred8it squeeze- the statutory reserves were raised from 3 to
5% in June 1973 and to 7% in September 1973. Since then,
RBI has raised or reduce C.R.R. a number of times (and
ultimately raised to the maximum limit of 15% of net
demand and time liabilities) to influence the volume of cash
with the commercial banking system and thus influence
there volume of credit.
2. Selective and direct credit control:Under the banking Regulation Act 1949
section 21 empowers RBI to issue directives to the banking
companies regarding their advances. These directives may
relate to:
 The purpose for which advances may or may not be
made;
 The margins to be maintained in respect of secured
advances;
 The maximum amount of advantages to any
borrower;
 The maximum amount up to which guarantees may
be given by the company on behalf of any firm,
company etc.; and
 The rate of interest and other terms and conditions for
granting advances.
Generally RBI uses three kinds of
selective credit controls:
1. minimum margins for lending against specific
securities;
2. ceiling on the amounts of credit for certain purposes;
and
3. discriminatory rate of interest charged on certain
types of advances.
While imposing selective controls. RBI
generally takes great care that bank credit for production
and transportation of commodities and exports is not
affected. Selective controls are focused mainly on credit to
traders for financing inventories (for purposes of hoarding
and speculation).
 Open market operations of RBI:
In economies with well developed money
markets, central market use open market operations- i.e.
buying and selling 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 industrial and
commercial sectors. RBI has not used this weapon for many
years.
Since 1991, the enormous inflow of foreign
funds into India created the problem of excess liquidity with
the banking sector and RBI undertook large scale open
market operations. When RBI sells government securities in
the market, it withdraws the part of the cash reserves of
commercial banks and, thereby, reduces the ability of bank
to lend to the industrial and commercial sectors.
The commercial banks will find that they
have surplus cash- they will create more credit and more
banks deposits. The supply of money will expand. Such a
policy of buying government securities will be adopted to
reserve economic recession in the country. It appears that
RBI will actively use open market operations as an
instrument of monetary policy and not simply to support the
market for government bonds.
Conclusion:RBI is the apex banking institution in
India. RBI is an autonomous body promoted by the
government of India and is headquartered at
Mumbai. The RBI plays a key role in the management
of the treasury foreign exchange movements and is
also the primary regulator for banking and nonbanking financial institutions. The RBI operates a
number of government mints that produce currency
and coins.