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CENTRAL BANKING SYSTEM

FINAL DRAFT SUBMITTED IN FULFILLMENT OF PROJECT FOR THE


SUBJECT

BANKING LAW

BY

AMAN ADITYA

(Roll No.- 1204, 8th Semester, B.B.A LL.B (Hons.))

SUBMITTED TO

Prof. Dr. Ajay Kumar

CHANAKYA NATIONAL LAW UNIVERSITY

PATNA

1
ACKNOWLEDGEMENT

Apart from the efforts of the researcher, the success of the project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my gratitude
to the people who have been instrumental in the successful completion of this project.
It is a fact that any research work prepared, compiled or formulated in isolation is
inexplicable to an extent. This research work, although prepared by me, is a culmination of
efforts of a lot of people.
Firstly, I would like to thank our Banking Law teacher, Dr. Ajay kumar for giving me the
topic related to Central Banking system to research which assisted me in acquiring some
knowledge about the topic. I would like to thank him for his valuable suggestions towards the
making of this project. I would also like to express my gratitude towards the library staff of
my college who assisted me in acquiring the sources necessary for the compilation of my
project.

Aman Aditya

2
RESEARCH METHODOLOGY
The project involves doctrinal method of research. The researcher has based the study on the
primary and secondary sources. The primary source used are Bare Acts, the secondary
sources used are books, case laws and articles. A uniform method of citation is used and
works of various scholars which were referred is gratuitously acknowledged in the citation.

OBJECT
The object of the researcher is to know about
 The evolution of central banking system in India.
 The monetary control measure of Reserve Bank of India.

RESEARCH QUESTION
Following are the research questions in the project:

1) What are the role and functions of the Central Bank?


2) How did the evolution of Central Bank take place?
3) What are the monetary control measures of the central bank?

3
4
CONTENTS

1. INTRODUCTION ............................................................................................................... 6

2. EVOLUTION OF CENTRAL BANK IN INDIA ............................................................... 9

3. ROLE AND FUNCTION OF CENTRAL BANK ............................................................ 11

4. MONETARY CONTROL MEASURE OF RBI ............................................................... 14

4.1. Bank rate policy .......................................................................................................... 14

4.2. Open market operations .............................................................................................. 15

4.3. Cash Reserve Ratio ..................................................................................................... 16

4.4. Moral Suasions ........................................................................................................... 17

4.5. Selective Credit Controls ............................................................................................ 18

5. CONCLUSION .................................................................................................................. 19

6. BIBLIOGRAPHY .............................................................................................................. 21

5
INTRODUCTION

The banking sector is the lifeline of any modern economy. It is one of the important financial
pillars of the financial sector, which plays a vital role in the functioning of an economy. It is
very important for economic development of a country that its financing requirements of
trade, industry and agriculture are met with higher degree of commitment and responsibility.
Thus, the development of a country is integrally linked with the development of banking. In a
modern economy, banks are to be considered not as dealers in money but as the leaders of
development. They play an important role in the mobilization of deposits and disbursement of
credit to various sectors of the economy. The banking system reflects the economic health of
the country. The strength of an economy depends on the strength and efficiency of the
financial system, which in turn depends on a sound and solvent banking system. A sound
banking system efficiently mobilized savings in productive sectors and a solvent banking
system ensures that the bank is capable of meeting its obligation to the depositors.

In India, banks are playing a crucial role in socio-economic progress of the country after
independence. The banking sector is dominant in India as it accounts for more than half the
assets of the financial sector. Indian banks have been going through a fascinating phase
through rapid changes brought about by financial sector reforms, which are being
implemented in a phased manner.

The pattern of central banking in India was based on the Bank of England. England had a
highly developed banking system in which the functioning of the central bank as a banker's
bank and their regulation of money supply set the pattern1.

Later models, especially those in developing countries showed that central banks play an
advisory role and render technical services in the field of foreign exchange, foster the growth
of a sound financial system and act as a banker to government2.

Central bank in India is an apex financial authority. The essential feature of a central bank is
its discretionary control over the monetary system of the country. It also occupies a pivotal

1
Anonymous, Role of central bank, http://www.pondiuni.edu.in/storage/dde/downloads/finiii_ifs.pdf, last seen
on 22nd April 2017
2
Anonymous, measures taken up by the central bank, http://www.economics-
ejournal.org/economics/discussionpapers/2012-48/file, last seen on 22nd April 2017

6
position in the monetary and banking structure of the country. Its goals are to stabilize the
nation's currency, keep unemployment low and prevent inflation.

It works as a Monetary Authority: Formulates, implements and monitors the monetary policy
for

A) maintaining price stability, keeping inflation in check ;

B) ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system: lays out parameters of banking
operations within which the country’s banking and financial system functions for-

A) maintaining public confidence in the system,

B) protecting depositors’ interest ;

C) providing cost-effective banking services to the general public.

Regulator and supervisor of the payment systems:

A) Authorises setting up of payment systems;

B) Lays down standards for working of the payment system;

C)lays down policies for encouraging the movement from paper-based payment systems to
electronic modes of payments.

D) Setting up of the regulatory framework of newer payment methods.

E) Enhancement of customer convenience in payment systems. F) Improving security and


efficiency in modes of payment.

Manager of Foreign Exchange:

RBI manages forex under the FEMA- Foreign Exchange Management Act, 1999. In order to

A) facilitate external trade and payment

B) promote development of foreign exchange market in India.

7
Issuer of currency: RBI issues and exchanges currency as well as destroys currency & coins
not fit for circulation to ensure that the public has adequate quantity of supplies of currency
notes and in good quality.

Developmental role: RBI performs a wide range of promotional functions to support


national objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.

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

Banker to banks: An important role and function of RBI is to maintain the banking accounts
of all scheduled banks and acts as banker of last resort.

It also works as an agent of Government of India in the IMF.

8
EVOLUTION OF CENTRAL BANK IN INDIA

In India, the efforts to establish a banking institution with central banking character dates
back to the late 18th century3. On June 2, 1806 the Bank of Calcutta established in Calcutta.
It was the First Presidency Bank during the British. Bank of Calcutta was established mainly
to fund General Wellesley's wars against Tipu Sultan and the Marathas. Along this, another
two Presidency banks were set up under charters from the British East India Company- Bank
of Bombay (l5th April 1840 at Bombay) and the Bank of Madras (On I July 1843 at Madras).
These worked as quasi central banks in India for many years. In 1806, the Bank of Calcutta
renamed as the Bank of Bengal. This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established under
charters from the British East India Company4.

The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India5.

It was only towards the close of the nineteenth century and the beginning of the twentieth that
the term ‘central bank’ came to be used in India. It was proposed at that time to amalgamate
the three Presidency Banks into one strong institution.

Even the ‘State Bank’ proposed by John Maynard Keynes in 1913 was to engage in both
central banking and commercial banking functions. The amalgamation of the Presidency
Banks took place in 1921, the new institution being called the Imperial Bank of India, but it
was not entrusted with all the central banking functions; in particular, currency management
remained with Government6.

By 1919 the wheel had turned full circle and the Presidency Banks, on their own, came
together and submitted to Government a scheme for their amalgamation, which on this
occasion was accepted by Government. In the early twenties of this century, central banking
came to be treated as a separate class of business, distinct from commercial banking; it was

3
Rakesh mohan, evolution of central banking system, http://rakeshmohan.com/docs/RBIBulletinJune2006-1.pdf,
last seen on 22nd April 2017.
4
Anonymous, central banking system, http://su.digitaluniversity.ac/downloads/9%20_1.pdf, last seen on 23rd
April 2017.
5
Ibid.
6
Dr. J. Sadakkadullah, Role of central Bank,
https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf, last seen on 23rd April 2017.

9
considered that a single institution could not suitably perform both types of functions7. Thus,
in 1926, the Hilton Young Commission recommended the setting up of an institution the
Reserve Bank of India -which was to be entrusted with pure central banking functions; it was
to take over from the Imperial Bank such of the central banking functions as that institution
had been performing till then, and the Imperial Bank was to be left free to do only
commercial banking business8. Origins of the Reserve Bank of India.9

 1926: The Royal Commission on Indian Currency and Finance recommended creation
of a central bank for India.
 1927: A bill to give effect to the above recommendation was introduced in the
Legislative Assembly, but 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 crore (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 nationalised the Reserve Bank under the Reserve
Bank (Transfer of Public Ownership) Act, 1948.

7
Rakesh Mohan, evolution of central banking system, http://rakeshmohan.com/docs/RBIBulletinJune2006-
1.pdf, last seen on 23rd April 2017.
8
Dr. J. Sadakkadulla, Role and function of Central Bank,
https://rbidocs.rbi.org.in/rdocs/content/PDFs/89630.pdf, last seen on 24th April 2017.
9
Dr. J. Sadakkadullah, Role of central Bank,
https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf, last seen on 23rd April 2017.

10
ROLE AND FUNCTION OF CENTRAL BANK

Traditional Functions of RBI Traditional functions are those functions which every central
bank of each nation performs all over the world.

1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency
notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20,
50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to
exchange these currency notes for other denominations. It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes
and government of India bonds. Basically these functions are in line with the objectives with
which the bank is set up. It includes fundamental functions of the Central Bank. They
comprise the following tasks10.

2. Banker to other Banks: The RBI being an apex monitory institution has obligatory powers
to guide, help and direct other commercial banks in the country. The RBI can control the
volumes of banks reserves and allow other banks to create credit in that proportion. Every
commercial bank has to maintain a part of their reserves with its parent's viz. the RBI.
Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the
lender of the last resort11.

3. Banker to the Government: The RBI being the apex monitory body has to work as an agent
of the central and state governments. It performs various banking function such as to accept
deposits, taxes and make payments on behalf of the government. It works as a representative
of the government even at the international level. It maintains government accounts, provides
financial advice to the government. It manages government public debts and maintains
foreign exchange reserves on behalf of the government. It provides overdraft facility to the
government when it faces financial crunch12.

4. Exchange Rate Management: It is an essential function of the RBI. In order to maintain


stability in the external value of rupee, it has to prepare domestic policies in that direction.
Also it needs to prepare and implement the foreign exchange rate policy which will help in

10
Vipul B. Patel / International Journal for Research in Management and Pharmacy Vol. 2, Issue 6, June 2013.
11
Nakul Anand, Indian Banking System,
http://nakulanand.in.managewebsiteportal.com/files/documents/RBI.pdf, last seen on 24th April 2017.
12
Supra note 9.

11
attaining the exchange rate stability. In order to maintain the exchange rate stability it has to
bring demand and supply of the foreign currency (U.S Dollar) close to each other. (IJRMP)

5. Credit Control Function: Commercial bank in the country creates credit according to the
demand in the economy. But if this credit creation is unchecked or unregulated then it leads
the economy into inflationary cycles. On the other credit creation is below the required limit
then it harms the growth of the economy. As a central bank of the nation the RBI has to look
for growth with price stability. Thus it regulates the credit creation capacity of commercial
banks by using various credit control tools13.

6. Supervisory Function: The RBI has been endowed with vast powers for supervising the
banking system in the country. It has powers to issue license for setting up new banks, to
open new branches, to decide minimum reserves, to inspect functioning of commercial banks
in India and abroad, and to guide and direct the commercial banks in India. The RBI has been
performing as a promoter of the financial system since its inception.

Some of the major development functions of the RBI are maintained below14.

1. Development of the Financial System: The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient financial
system is a precondition of the rapid economic development of the nation. The RBI has
encouraged establishment of main banking and non-banking institutions to cater to the credit
requirements of diverse sectors of the economy.

2. Development of Agriculture: In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It has successfully
rendered service in this direction by increasing the flow of credit to this sector. It has earlier
the Agriculture Refinance and Development Corporation (ARDC) to look after the credit,
National Bank for Agriculture and Rural Development (NABARD) and Regional Rural
Banks (RRBs).

3. Provision of Industrial Finance: Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small, medium
and large industry is very significant.

13
Dr. J. Sadakkadullah, function of central bank,
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIB140520012.pdf,
14
Ibid.

12
4. Provisions of Training: The RBI has always tried to provide essential training to the staff
of the banking industry. The RBI has set up the bankers' training colleges at several places.

5. Collection of Data: Being the apex monetary authority of the country, the RBI collects
process and disseminates statistical data on several topics. It includes interest rate, inflation,
savings and investments etc. This data proves to be quite useful for researchers and policy
makers15.

6. Publication of the Reports: The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the economy. The reports and
bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual
Report, Report on Trend and Progress of Commercial Banks India., etc. This information is
made available to the public also at cheaper rates.

7. Promotion of Banking Habits: As an apex organization, the RBI always tries to promote
the banking habits in the country. It institutionalizes savings and takes measures for an
expansion of the banking network. During economic reforms it has taken many initiatives for
encouraging and promoting banking in India16.

8. Promotion of Export through Refinance: The RBI always tries to encourage the facilities
for providing finance for foreign trade especially exports from India. The Export-Import
Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India
(ECGC) are supported by refinancing their lending for export purpose.

4. Supervisory Functions of RBI The reserve bank also performs many supervisory functions.
It has authority to regulate and administer the entire banking and financial system17.

15
Anonymous, Roles and objectives of modern central banks, http://www.bis.org/publ/othp04_2.pdf, last seen
on 24th April 2017.
16
Supra note 12.
17
Supra note 14.

13
MONETARY CONTROL MEASURE OF RBI

Monetary control is the main function of the central bank of the country. It is required for the
smooth functioning of the economy. Formulating and administering monetary policy involves
using of instruments within its control to influence the level of aggregate demand for goods
and services for regulation of total money supply and credit.

In the Indian context, the basic functions of the Reserve Bank of India as enunciated in the
Preamble to the RBI Act, 1934 are: “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 and credit system of the country to its advantage.” Thus, the Reserve Bank’s
mandate for monetary policy flows from its monetary stability objective 18.
The central bank relies on two types of instruments: direct and indirect. The direct
instruments of monetary control are reserve requirements, administered interest rates and
credit controls; and the indirect instrument of control is open market operation.

BANK RATE POLICY

Bank rate is the rate charged by the central bank for rediscounting first class bills of exchange
and government securities held by Commercial Banks. The Bank rate policy affects the cost
and availability of credit to the Commercial Banks. When there is inflation the central bank
raises the bank rate. This will raise the cost of borrowing of the Commercial Banks, so they
will charge a higher rate of interest on their loans and advances to the customer19.

Bank rate is defined under section 49 of the RBI Act 1934, it is the standard rate at which
Bank is prepared to buy and rediscount bill of exchange or other commercial paper eligible
for purchase under the Act20.

When there is deflation in the economy, the central bank will lower the bank rate. Opposite
trend takes place leading to expansion of credit to the economy.

Changes in the bank rate influence the entire interest rate structure, i.e. short term as well as
long term interest rates. A rise in the bank rate leads to a rise in the other market interest
rates, which implies a clear money policy increasing the cost of borrowing. Similarly, a fall in

18
Supra note 9.
19
Supra note 1.
20
Section 49, Reserve Bank of India Act 1934.

14
the bank rate results in a fall in the other market rates, which implies a cheap money policy
reducing the cost of borrowing21.

In India, the bank rate has been of little significance except as an indicator of changes in the
direction of credit policy. The bank rate was changed nine times during the period 1951-74,
but only thrice during 1975-96. In 1997, it was changed thrice; in 1998 four times, twice in
1999 and once in 2000. It should become effective in the near future since interest rates have
been deregulated and market determined through the adoption of auction procedure for
treasury bills and government securities. Variations in bank rate have little significance in a
scenario where hardly any rates are linked to it and the amount of refinance extended to
banks at this rate is minimal22.

OPEN MARKET OPERATIONS

Section 17 (8) of the Reserve Bank of India Act authorises the Reserve Bank to engage in
purchase and sale of securities of any maturity of the Central government and the State
government23. The technique of open market operations as an instrument of credit control is
superior to bank rate policy. The need for open market operation was felt only when the bank
rate policy turned out to be a rather weak, instrument of monetary control. According to some
experts, bank rate policy and open market operations are complementary measures in the area
of monetary management.

The term, open market operations stands for the purchase and sale of Government securities
by the RBI from/to the public and banks on its own account. In its capacity as the
Government‘s banker and as the manager of public debt, the RBI buys all the unsold stock of
new Government loans at the end of the subscription period and thereafter keeps them on sale
in the market on its own account. Such purchases of Government securities by the RBI are
not genuine market purchases, but constitute only an internal arrangement between the
Government and RBI whereby RBI work as its agent.

During inflation, the RBI sells securities in the market. The individual buyers make payments
by withdrawing their deposits with banks. If the buyers are commercial banks, their cash
holding with the central bank gets reduced. So the banks are forced to stop grant fresh loans
and recall loans already granted. The investment activity in the economy gets slackened and

21
Ibid.
22
Ibid
23
Section 17 (8), The Reserve Bank of India Act

15
the inflationary situation is reduced. During depression or crisis, the central bank purchases
securities from the open market, in which banks are also included. The RBI pays cash in
return to the sellers of the securities. The public deposits their money with the banks. This
increase the cash balances of commercial banks which are used to give fresh loans. There will
be a rise in the level of economic activity and consequent increase in the level of investment,
employment and price24.

CASH RESERVE RATIO

The commercial banks have to keep with the central bank a certain percentage of their
deposits in the form of cash reserves. In India initially CRR was 5 percent. In 1962 RBI was
empowered to vary it between 3 to 15 percent since then it has been increased or decreased a
number of times. Increasing the CRR leads to credit contraction and reducing it will lead to
credit expansion.

According to section 18 of the Banking Regulation Act 194925-

Cash reserve.-- (1) Every banking company, not being a scheduled bank, [shall maintain in
India on a daily basis] by way of cash reserve with itself or by way of balance in a current
account with the Reserve Bank, or byway of net balance in current accounts or in one or more
of the aforesaid ways, a sum equivalent to [such per cent.] of the total of its demand and time
liabilities in India as on the last Friday of the second preceding fortnight [as the Reserve Bank
may specify, by notification in the Official Gazette, from time to time, having regard to the
needs of securing the monetary stability in the country] and shall submit to the Reserve Bank
before the twentieth day of every month are turn showing the amount so held on alternate
Fridays during a month with particulars of its demand and time liabilities in India on such
Fridays or if any such Friday is a public holiday under the Negotiable Instruments Act,
1881(26 of 1881), at the close of business on the preceding working day.

Statutory Liquidity Ratio (SLR) :

Apart from the CRR, banks in India are also subject to statutory liquidity requirement. Under
this 90 requirement, commercial banks along with other financial institutions like life

24
Deepak Mohanty, How does the Reserve Bank of India conduct its monetary policy? ,
tp://www.bis.org/review/r110816a.pdf last seen on 24 th April 2017.

25
Banking Regulation Act 1949.

16
Insurance Corporation of India, the General Insurance Corporation and the Provident Funds
are required under law to invest prescribed minimum proportions of their total
assets/liabilities in government securities and other approved securities. The underlying
philosophy of this provision is to allocate total banks credit between the government and the
rest of the economy.

The assurance of a certain minimum share of bank credit to the government affects the
borrowings of the government from the RBI and hence serves as a tool of quantitative
monetary control. The SLR provision has created captive market for government securities
which increases automatically with the growth in the liabilities of the banks. Moreover, it has
kept the cost of the debt to the government low in view of the generally low rate of interest
on government securities.

Section 2426 talks about the maintenance of the percentage of asset-

Section 24 sub clause (2A)- A scheduled bank, in addition to the average daily balance which
it is, or may be, required to maintain under section 42 of the Reserve Bank of India Act, 1934
(2 of 1934) and every other banking company, in addition to the cash reserve which it is
required to maintain under section 18, shall maintain in India, assets, the value of which shall
not be less than such percentage not exceeding forty per cent, of the total of its demand and
time liabilities in India is on the last Friday of the second preceding fortnight as the Reserve
Bank may, by notification in the Official Gazette, specify from time to time and such assets
shall to maintained, in such form and manner, as may be specified in such notification.

MORAL SUASIONS

Moral suasion refers to the advice or indication given by the central bank, generally to banks
and sometimes to other financial institutions also, in the matter of their lending and other
operations with the objective that they might implement or follow it. Moral suasion may be
quantitative in content, such as fixation of the aggregate amount of credit to be granted by
banks during a period, or caution to be exercised in granting advances against commodities
whose prices are subject to speculative tendencies. Periodically, letters are issued to banks

26
Ibid

17
urging them to exercise control over credit in general or advances against specified
commodities or unsecured advances in particular27.

SELECTIVE CREDIT CONTROLS

Selective credit controls have been used by the bank mainly with a view to restraining
excessive speculative stock-building of commodities in short supply either as a result of a
crop shortage or as a result of a fall in the production of manufactured articles following raw
materials shortages, etc. The commodities in respect of which these articles of consumption
or items important for exports are food grains, oilseeds, jute, cotton textiles and sugar. These
controls have taken the form of objectives to increase the margin requirements, to regulate
the size of credit limit per borrower with a view to ensure maintenance of an aggregate level
of credit against a particular commodity at a certain level which may have reference to the
level of credit maintained in the corresponding period in the past, etc. Adjustments to suit the
needs of the economy in a particular region have also been incorporated in these controls28.

27
Anonymous, RBI’s monetary measures to monitor recession ,
http://psalegal.com/upload/publication/assocFile/Banking%20Laws%20Bulletin%20-%20Issue%20VII.pdf, last
seen on 25th April 2017.
28
Ibid.

18
CONCLUSION

In the developing countries, the central bank is seen as a key institution in bringing about
development and growth in the economy. In the initial years of the RBI before independence,
the banking network was thinly spread and segmented. Foreign banks served foreign firms,
the British army and the civil service.

The Reserve Bank of India is the central bank in India. It is the apex monetary and financial
institution responsible for the efficient working of the monetary mechanism which is
indispensible for a rapid development of the economy. The reserve bank performs several
functions it has been characterized as controller of monetary expansion. It aims at controlling
inflation by restraining the secondary expansion of credit and regulating the supply of money
in order to meet the requirements of different sectors of the economy to accelerate the pace of
economic growth.

The monetary policy can be either expansionary (followed in deep recession) or


contractionary (followed in times of economic boom). It deals with both the lending and
borrowing rates of interest for commercial banks by way of several policy instruments. The
RBI through the commercial banks regulates the liquidity for industries as a measure to
control prices of goods and services. The monetary policy aims to maintain price stability,
full employment and economic growth in the economy. The RBI announces it monetary
policy once a year, a mid-course review six months thereafter and quarterly reviews.

During the reforms though Monetary Policy has achieved higher success. It is not free from
limitation or demerits. That needs to be evaluated on a proper scale.

1. Monetary Policy fails to tackle Budgetary Deficit; the higher level of budget deficit has
made Monetary Policy ineffective. The automatic monetization of deficit has let to high
monetary expansion.

2. The coverage area of Monetary Policy is limited Monetary Policy covers only commercial
banking sector. Other non-banking institutions remain untouched. It limits the effectiveness
of the Monetary Policy in India.

3. Money market is not organized- There is a huge size of money market in our country. It
does not come under the control of the RBI. Thus any tool of the Monetary Policy does not
affect the unorganized money market making Monetary Policy less affective.

19
4. Predominance of cash transaction- In India still there is huge dominance of the cash in total
money supply. It is one of the main obstacles in the effective implementation of the Monetary
Policy. As it operates on the bank credit rather than on cash.

5. Increase volatility –As the Monetary has adopted changes in accordance to the changes in
the external sector in India, It could lead to high amount of the volatility.

The limitation and demerit under the monetary policy needs to be removed and it needs to be
evaluated on a proper scale.

20
BIBLIOGRAPHY

ONLINE SOURCES REFERRED:


 https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf,
 http://www.pondiuni.edu.in/storage/dde/downloads/finiii_ifs.pdf.
 http://www.bis.org/publ/othp04_2.pdf
 http://rakeshmohan.com/docs/RBIBulletinJune2006-1.pdf
 http://su.digitaluniversity.ac/downloads/9%20_1.pdf.
 http://www.igidr.ac.in/indiapolecon/Political%20Economy%20of%20Central%20Ban
king%20-%20Partha%20Ray%20-%20Nov%2017%202014.pdf.
 https://www.imf.org/external/pubs/ft/wp/2011/wp1136.pdf
 http://psalegal.com/upload/publication/assocFile/Banking%20Laws%20Bulletin%20-
%20Issue%20VII.pdf
 http://nakulanand.in.managewebsiteportal.com/files/documents/RBI.pdf
BARE ACT

 Reserve Bank of India Act, 1934.


 Banking Regulation Act, 1949.

ONLINE JOURNAL

 Vipul B. Patel / International Journal for Research in Management and Pharmacy Vol.
2, Issue 6, June 2013

E-BOOK-

PRINCIPLES AND SYSTEMS OF BANKING, by G. S.POPLI (Author), ANURADHA


JAIN (Author).

 URL- http://www.pondiuni.edu.in/storage/dde/downloads/finiii_ifs.pdf.

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