RK2202B40
RK2202B41
RK2202B42
Max. Marks: 30
Objective
To enhance the conceptual understanding of students and enable them to correlate theoretical
concepts with real life issues by inputting teamwork in them
Topic
Students will be divided in groups of 3 students each and an assignment will be given to each
group. Thereafter, students are required to evaluate in team and give peer rating on the task
accomplished
Evaluation
1. Peer Rating
2. Report Evaluation on Various Criteria (Rubric System)given following
Final Score = (Peer Rating * Evaluation Score) / 10
S. No
Name of Student
Registration No
1.
Amit Duhan
11206031
2.
Harman Maan
11206725
3.
Tanmay Baranwal
11202766
Signature
5 marks Exemplary
Purpose and
objective
Content
1 marks unsatisfactory
Formal structure
and presentation
of report
Conclusions /
Recommendations
Clarity and
conciseness:
Referencing
Note: Each of the parameter of evaluation will carry 5 marks. Total 30 marks are for written report.
Preamble
The Preamble of the Reserve Bank of India describes the basic functions of the
Reserve
Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantage."
OVERVIEW OF RBI
The Reserve Bank of India 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 of the Reserve Bank was initially established in Kolkata but was
permanently moved to Mumbai in 1937. Though originally privately owned, the RBI
has been fully owned by the Government of India since nationalization in 1949.
Duvvuri Subbarao who succeeded Yaga Venugopal Reddy on September 2, 2008 is
the current Governor of RBI.
The Reserve Bank of India was set up on the recommendations of the Hilton Young
Commission. The commission submitted its report in the year 1926, though the
bank was not set up for nine years.
The Preamble of the Reserve Bank of India describes the basic functions of the
Reserve Bank as to regulate the issue of Bank Notes and keeping of reserves with
a view to securing monetary stability in India and generally to operate the currency
and credit system of the country to its advantage.
It has 22 regional offices, most of them in state capitals.
RBI was started with a paid up share capital of 5 crore.on established it took over
the function of management of currency from government of India and power of
credit control from imperial bank of India.
Nationalization of RBI:
The Reserve Bank of India was nationalized with effect from 1st January, 1949 on
the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
All shares in the capital of the Bank were deemed transferred to the Central
Government on payment of a suitable compensation. The image is a newspaper
clipping giving the views of Governor CD Deshmukh, prior to nationalization
The scheduled banks can borrow from the Reserve Bank of India on the basis of
eligible securities or get financial accommodation in times of need or stringency by
rediscounting bills of exchange. Since commercial banks can always expect the
Reserve Bank of India to come to their help in times of banking crisis the Reserve
Bank becomes not only the banker's bank but also the lender of the last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so through
changing the Bank rate or through open market operations. According to the
Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular
bank or the whole banking system not to lend to particular groups or persons on
the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian
money market. Every bank has to get a licence from the Reserve Bank of India to do
banking business within India, the licence can be cancelled by the Reserve Bank of
certain stipulated conditions are not fulfilled. Every bank will have to get the
permission of the Reserve Bank before it can open a new branch. Each scheduled
bank must send a weekly return to the Reserve Bank showing, in detail, its assets
and liabilities. This power of the Bank to call for information is also intended to give
it effective control of the credit system. The Reserve Bank has also the power to
inspect the accounts of any commercial bank.
As supereme banking authority in the country, the Reserve Bank of India, therefore,
has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitative
controls.
(c) It controls the banking system through the system of licensing, inspection and
calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
areas, and establish and promote new specialised financing agencies. Accordingly,
the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the
Industrial Development Bank of India also in 1964, the Agricultural Refinance
Corporation of India in 1963 and the Industrial Reconstruction Corporation of India
in 1972. These institutions were set up directly or indirectly by the Reserve Bank
to promote saving habit and to mobilise savings, and to provide industrial finance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India set up
the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank's role in this field has become extremely important. The Bank
has developed the co-operative credit movement to encourage saving, to eliminate
moneylenders from the villages and to route its short term credit to agriculture.
The RBI has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are
related to control and regulation of money and credit, i.e., issue of currency,
control of bank credit, control of foreign exchange operations, banker to the
Government and to the money market. Monetary functions of the RBI are significant
as they control and regulate the volume of money and credit in the country.
Equally important, however, are the non-monetary functions of the RBI in the
context of India's economic backwardness. The supervisory function of the RBI may
be regarded as a non-monetary function (though many consider this a monetary
function). The promotion of sound banking in India is an important goal of the RBI,
the RBI has been given wide and drastic powers, under the Banking Regulation Act
of 1949 - these powers relate to licensing of banks, branch expansion, liquidity of
their assets, management and methods of working, inspection, amalgamation,
reconstruction and liquidation. Under the RBI's supervision and inspection, the
working of banks has greatly improved. Commercial banks have developed into
financially and operationally sound and viable units. The RBI's powers of
supervision have now been extended to non-banking financial intermediaries. Since
independence, particularly after its nationalization 1949, the RBI has followed the
promotional functions vigorously and has been responsible for strong financial
support to industrial and agricultural development in the country.
CREDIT CONTROL
One of the more pleasant aspects of the latest quarterly Monetary Policy Review
is the attempt by the Reserve Bank of India to be as predictable as possible, or at
least less disruptive than it has been before. The notion that some elements of a
tighter money policy would be announced was pretty much to be expected. While
raising repo rates by 25 basis points and leaving other indicators of liquidity
unchanged, the RBI Governor, Dr Y. V. Reddy, has tried to play both policeman and
purveyor of optimism, the former by raising marginally the cost of capital for banks
through the repo rate hike, and the latter by selectively pushing up the provisioning
norms for certain categories of borrowers hoping thereby to catch inflation by the
scruff and pull it back within the 5.5 per cent limit.
Lest the markets think the RBI is a killjoy, in its combat against inflation, the
Governor has raised the bar on growth expectations jettisoning his earlier forecast
and the prognosis of North Block for a 9 per cent GDP target for this waning
fiscal. He has tried therefore to be all things to all men, in the bargain creating a
dilemma that may not augur well for the economy in the medium to long term. The
basic problem is that the RBI cannot hope to both fight inflation and propel growth
to the levels it wants with the measures it has so far set in motion. Controls on
credit expansion for select categories with inflation potential capital markets and
commercial real-estate through higher provisioning may choke demand only if it is
sensitive to the cost of credit. But in a booming economy, higher costs can be
transmitted down the line; witness the rising housing loan rates. In many a highflying sector banks may, therefore, still find takers for expensive credit. Regardless
of the RBI's marginal increase in repo rates, the perception of a tighter money
regime will push up interest rates all around, thus contributing to the price rise
instead of combating it.
Given the nature of inflation, currently at a two-year high, the task of fighting it lies
with New Delhi. The Government must put together a gamut of measures to
remove the supply bottlenecks that are causing the price rise. The RBI admits that
the growth in agriculture has "not been sanguine" with the declining output in major
cereals pushing up prices. Focusing its Monetary Policy weapons on "credit quality"
and, therefore, the health of the banking system, the RBI has prudently left this
initiative to New Delhi.
Quantitative method
Bank Rate Policy:
Bank rate is the rate of interest which is charged by the central bank on
rediscounting the first class bills of exchange and advancing loans against approved
securities. This facility is provided to other banks. It is also known as Discount Rate
Policy.
Open Market Operations:
The term Open Market Operations in the wider sense means purchase or sale by
a central bank of any kind of paper in which it deals, like government securities or
any other public securities or trade bills etc. in practice, however the term is
applied to purchase or sale of government securities, short-term as well as longterm, at the initiative of the central bank, as a deliberate credit policy.
Change in Reserve Ratios:
Every commercial bank is required to deposit with the central bank a certain part of
its total deposits. When the central bank wants to expand credit it decreases the
reserve ratio as required for the commercial banks. And when the central bank
wants to contract credit the reserve ratio requirement is increased.
Credit Rationing:
Credit rationing means restrictions placed by the central bank on demands for
accommodation made upon it during times of monetary stringency and declining
gold reserves. This method of controlling credit can be justified only as a
measure to meet exceptional emergencies because it is open to serious abuse.
CRR(Cash Reserve Ratio):
Cash reserve Ratio (CRR) is the amount of Cash(liquid cash like gold)that the banks
have to keep with RBI. This Ratio is basically to secure solvency of the bank and to
drain out the excessive money from the banks. If RBI decides to increase the
percent of this, the available amount with the banks comes down and if RBI reduce
the CRR then available amount with Banks increased and they are able to lend
more.RBI has reduced this ratio three times and reduced it from 9 % to 5.5% in last
one month or so.
Repo Rate:
Repo rate is the rate at which our banks borrow rupees from RBI. This
facility is for short term measure and to fill gaps between demand and supply of
money in a bank .when a bank is short of funds they they borrow from bank at repo
rate and if bank has a surplus fund then the deposit the funds with RBI and earn at
Reverse repo rate. So, reverse Repo rate is the rate which is paid by RBI to banks
on Deposit of funds with RBI.A reduction in the repo rate will help banks to get
money at a cheaper rate. When the repo rate increases borrowing from RBI
becomes more expensive. To borrow from RBi bank have to submit liquid bonds
/Govt Bonds as collateral security, so this facility is a short term gap filling facility
and bank does not use this facility to Lend more to their customers present rate is
7.5% and reverse repo rate is 6%.
SLR((Statutory Liquidity Ratio)
Statutory Liquid Ratio is the amount a commercial bank needs to maintain
in the form of cash, or gold or govt. approved securities (Bonds) before providing
credit to its customers. SLR rate is determined and maintained by the RBI (Reserve
Bank of India) in order to control the expansion of bank credit.Generally this
mandatory ration is complied by investing in Govt bonds.present rate of SLR is 24
%.But Banks average is 27.5 % ,the reason behind it is that in deficit budgeting Govt
landing is more so they borrow money from banks by selling their bonds to
banks.so banks have invested more than required percentage and use these excess
bonds as collateral security ( over and above SLR )to avail short term Funds from
the RBI at Repo rate.
Qualitative method
Direct Action:
The central bank may take direct action against commercial banks that violate the
rules, orders or advice of the central bank. This punishment is very severe of a
commercial bank.
Moral persuasion:
It is another method by which central bank may get credit supply expanded or
contracted. By moral pressure it may prohibit or dissuade commercial banks to deal
in speculative business.
Legislation:
The central bank may also adopt necessary legislation for expanding or contracting
credit money in the market.
Publicity:
The central bank may resort to massive advertising campaign in the news papers,
magazines and journals depicting the poor economic conditions of the country
suggesting commercial banks and other financial institutions to control credit either
by expansion or by contraction.
[REFERENCES]
BOOKS
[1.] M.Y. Khan Indian financial system
[2.] Sudhir shah-Indian economy
WEBSITES
[1.] http://www.rbi.org.in
[2.] http://en.wikipedia.org/wiki/Reserve_Bank_of_India