PRINCIPLES AND PRACTICE OF BANKING

Reserve Bank of India (RBI)

Organization and Management and Its Role
1

1. RBI : Historical BackDro

Earliest Initiative: First attempt to set up Govt. Bank

in !!" #$ t%en Governor of &est Bengal East India 'o. Imperial Bank ( )* : +malgamation of t%ree ,residen-$ Banks into Imperial Bank ( Be-ame Govt. Banker and Issue and -ontrol of -urren-$.

.ilton /oung 'ommission (Ro$al 'ommission on Indian 'urren-$ and Finan-e) ( )*0:
Re-ommended setting up of 1%e RBI for 'entral Bank fun-tions. Re-ommendations reinfor-ed #$ 'entral Banking En2uir$ 'ommittee3 )" Esta#lis%ment of 1%e RBI: 1%e Reserve Bank of India +-t3 )"4 ena-ted and RBI set up on +pril 5 )"6 as private #ank 7it% initial paid up -apital of Rs.6-rore. 8ationalization of RBI: +fter Independen-e RBI nationalized under amended 1%e RBI +-t 3 )49

!. O"#$cti%$s
t%e o#:e-tive of RBI ; to regulate the issue of Bank Notes and Keeping of Reserves with a view to securing monetary stability in India and generally operate the currency and credit system of the country to its advantage. Ot%er o#:e-tives: Remain free from politi-al influen-e. <is-%arge -entral #anking fun-tions in t%e mone$ market +ssist t%e planned pro-ess of development of t%e Indian e-onom$. ,romotion of monetization and monetar$ integration of t%e e-onom$. RBI #$ a-t to perform all t%e fun-tions of -entral #ank toget%er 7it% developmental and promotional fun-tions attuned to t%e -ourse of planning in t%e -ountr$.

,ream#le of RBI: ,ream#le of RBI +-t3 )"4 la$ do7n

&. Co' ositio( o) I(*ia( Ba(ki(+ S,st$'

Indian Banking =$stem
Reserve Bank of India

Scheduled Commercial Banks

Scheduled Cooperative Banks

Public Sector Banks-27

Private sector Banks-37

orei!n Banks in India-"#

Re!ional Rural Banks1$%

S& 'rban Coop& Banks-(2

S& State Coop& Banks-1%

)ationali*ed Banks -1$

State Bank of India its Subsidiaries-+

,ld Private Banks-22

)e- Private Banks-+

"

-. Go%$r(i(+ Bo*,
'entral Board: 'onsist of *> <ire-tors in-luding Governor as '%airman5 <eput$ Governors not more t%an four5 4 <ire-tors out of 7%i-% four ( one ea-% from ?o-al Board and one Government Offi-ial nominated #$ 'entral Government. Entrusted 7it% responsi#ilit$ of poli-$ making5 general supervision and dire-tion of affairs and #usiness of Reserve Bank. ?o-al Board: Four ?o-al Boards for Four Regions: &estern 7it% .ead 2uarters in Mum#ai5 Eastern 7it% @olkata5 8ort%ern 7it% 8e7 <el%i and =out%ern 7it% '%ennai. 'onsist of Five <ire-tors appointed #$ 'entral Govt. for four $ears. 1%e$ represent territorial and e-onomi- interests of lo-al -ooperatives and indigenous #anks. +dvise 'entral Board on matters of lo-al importan-e. Governor: '%airman of Board as 7ell as t%e '%ief EAe-utive aut%orit$. +ssisted #$ <eput$ Governors. +ppointed for Five /ears. (

Banking <epartment: Banker to Govt. and mem#er Banks. 'onsist of

,u#li- +--ounts <epartment5 ,u#li- <e#t <epartment5 +--ounts <epartment and =e-urities <epartment. <eposit

.. Or+a(i/atio(al Str0ct0r$

Issue <epartment: Management of 8ote Issue. 'onsists of General

<epartment 3 deals 7it% resour-e operations : suppl$ of notes and -oins from Govt. press and Mints and 'as% <epartment dealing 7it% -as% transa-tions.

<epartment of 'urren-$ and Management: Fore-asting -urren-$

re2uirements5 allo-ation of -urren-$ to various #ran-%es of Issue <epartment #ased on demand pattern et-.

<epartment of Banking Operations and <evelopment (<BO<):

Responsi#le for supervision5 -ontrol and development of -ommer-ial #anking s$stem in t%e -ountr$. Regulating -ommer-ial #anks under regulator$ provisions of 1%e Banking +-t5 )4). Fulfilling o#:e-tive of promotion and development of sound and -ompetitive #anking s$stem. Fo-using on prudential regulations5 li-ensing of ne7 #anksBforeign #anks et-.5

1. Or+a(i/atio(al Str0ct0r$ 2co(t*.3

EA-%ange 'ontrol <epartment: Controlling foreign eA-%ange transa-tions and maintaining eA-%ange rate sta#ilit$. Rural ,lanning and 'redit <epartment: <istri-t 'redit ,lans5 ?ead Bank =-%eme5 Finan-ial +ssistan-e for 8+B+R<5 =pe-ial =tudies for promoting IR<,5 Framing poli-ies for rural -reditBdevelopment and Mi-rofinan-e. <epartment of E-onomi- +nal$sis and ,oli-$: E-onomi- Resear-%5 Revie7s finan-ial and #anking -onditions5 Report on 'urren-$ and Finan-e5 RBI Bulletins5 ,oli-$ studies on emerging aspe-ts of #anking and e-onom$ and +nnual Reports. Ot%er <epartments: <ept. of =tatisti-al +nal$sis and 'omputer =ervi-es5 <ept. of +dministration and ,ersonnel5 ?egal <ept. Management =ervi-es <ept.5 <ept. of 8on3Banking 'ompanies5 Banking =upervision5 'redit ,lanning 'ell5 <ept. of EAternal Investment and Operations5 <eposit Insuran-e and 'redit Guarantee 'orporation5 Industrial and EAport 'redit <ept.5 =e-retar$Cs <ept.5 RBI =ervi-e Board and .uman Resour-e <evelopment <ept. 7 (1raining Institutions).

4. F0(ctio(s o) RBI
Operational Frame7ork ( ,erforms all fun-tions of 'entral
Bank. Besides developmental and promotional fun-tions -onsistent 7it% planning priorities.

Bank for 8ote Issue:

=ole rig%t to issue -urren-$ notes of Rs.* and a#ove. One Rupee 8ote and -oins #$ MF #ut -ir-ulated under RBI supervision. +ll notes issued #$ RBI legal tenderB guaranteed #$ 'entral Govt. Rules Governing 8ote Issue: roportionate Reserve !ystem of "#$ Gold Reserve. =in-e )6!5 follo7ed %inimum Reserve !ystem & Rs.'## crore of Gold and foreign eA-%ange of 7%i-% Rs. 6 -rore Gold. +dopted . <esign5 form5 denomination and material of notes su#:e-t to approval #$ Govt. 'urren-$ '%ests: For provision of remittan-e fa-ilities to #anks and pu#li-5 fa-ilitating treasuries and #ank to fun-tion #$ minimum -as% #alan-e and fa-ilitating eA-%ange of 8e7 for oldBsoiled notes.

5. Ba(k$r to Go%$r('$(ts
Banker to 'entral and =tate Governments:

Banking transa-tions of Governments ( Maintaining <eposit

a--ounts 5 'olle-tion and ,a$ment on #e%alf of Governments5 1ransfer and Remittan-e fa-ilities. 3 Maintains 'urrent +--ount of 'entral Govt. 7it% minimum #alan-e of Rs.6> -rore. ( In pla-es 7%ere RBI no Bran-%5 =BI +-ts as RBI agent. Managing pu#li- de#ts (no7 delinked) and issue of ne7 loans. ( &a$s and Means +dvan-es repa$a#le 7it%in t%ree mont%s. +-t as agent for Government for treasur$ #ills and Govt. =e-urities. Banks re2uired to invest -ertain proportion of investment in Govt. =e-urities 3 =tatutor$ ?i2uid Ratio (=?R) (8o7 *6 D. +dvising Governments on finan-ing5 resour-e mo#ilization and institutional arrangements for flo7 of resour-es for ,lans. +dvising Government on international finan-e5 foreign trade and foreign eA-%ange. Represent Government as mem#er of IMF5 1%e &orld Bank and $ ot%er international forums.

6. Ba(k$r7s Ba(k
Banker to =-%eduled 'ommer-ial Banks:

Maintaining 'as% Reserves ( +s per +-t amended )0*5 Minimum of " per-ent of total lia#ilities (<emand and 1ime <eposits). +-ting as -learing agent for -ommer-ial #anks. =erving as lender of last resort #$ redis-ounting #ills of eA-%ange or providing loans against eligi#le se-urities during -redit stringen-$. ?ender of ?ast Resort implies: RBI provide loans to #anks 7%i-% are solvent and fa-ing li2uidit$ -run-%. ?oans given at a penal rate of interest5 ?oans given against eligi#le -ollateral se-urit$ ?oans provided till su-% time #ank turns solven
1#

18. For$i+( E9c:a(+$ ;a(a+$'$(t

'ustodian of -ountr$Cs foreign eA-%ange reserves:

Intervenes (#u$ing and selling) in FEM to ensure smoot% and orderl$ eA-%ange transa-tions and to promote a sta#le eA-%ange rates.

1ransition from FER+ to FEM+: EA-%ange -ontrol first

introdu-ed in )") under <efense of India RulesE statutoril$ laid do7n #$ Foreign EA-%ange Regulator$ +-t3 )4! and amended in )!" as Foreign EA-%ange Regulations +-t. (FER+). 8o7 repla-ed #$ Foreign EA-%ange Management +-t 3 ))) (FEM+). Fnder FER+: RBI -ontrolled -olle-tion and allo-ation of Foreign eA-%ange and FiAed EA-%ange Rate and administer foreign eA-%ange -ontrol. Fnder FEM+: RBI aut%orizes Banks and aut%orized dealers to %andle market transa-tions of foreign eA-%ange. RBI no7 fo-uses on development of -ompetitive FEM5 Manage EA-%ange Reserves and Manage sta#ilit$ in EA-%ange Rate #$ market intervention. 8o eA-%ange -ontrol. 11

11. D$%$lo '$(t Rol$

8eed for <evelopment Role:

<evelopment of finan-ial market: ,redominan-e of indigenous #anks5 imperfe-tions in t%e finan-ial s$stem5 promotion of monetization of e-onom$. <evelopment of e-onom$ #$ ensuring proper allo-ation of -redit among various se-tors. ?ead Bank =-%eme: Geograp%i-al spread of Bran-% net 7ork. +gri-ultural Finan-eB,riorit$ =e-tor +dvan-es: Role of +'< to provide finan-ial a--ommodation to -ooperatives5 eApertise and training5 +gri-ultural 'redit Funds Institutional <evelopment: I<BI5 +R<'Bno7 8+B+R<5 'redit Guarantee 'orporation5 <eposit Insuran-e 'orporation5 Regional Rural Banks(RRBs)5 EAim Bank.5 F1I5 8.B5 8IBM5 'ollege of +gri-ultural Banking. 1raining and Resear-%: 'olle-tion of data5 promote poli-$ and 12 a-tion oriented resear-% and training: B1'5 8IBM et-.

<evelopmental Role ,la$ed #$ RBI:

1!. R$+0lator, Rol$

O#:e-tive: Regulate mone$ suppl$ to a-%ieve pri-e sta#ilit$ and
development o#:e-tives. ( Maintain value of rupee5 ensure %ealt%$ and sound #anking s$stem5 and ensure effe-tive -oordination and -ontrol over -redit portfolio of Banks t%roug% monetar$ poli-$.

RationaleB8eed for Regulation: =afeguard interest of <epositors5

maintain li2uidit$ of Banks5 ensure orderl$ and effi-ient fun-tioning of Banking s$stem5 ensure effi-ient and produ-tive use of -redit5 -ontrol mone$ suppl$ to a-%ieve monetar$ poli-$ o#:e-tives and -ontrol foreign eA-%ange.

Regulator$ ,rovisions under RBI +-t: +pprove -%airman5

?i-ensing of Banks5 restri-tions on opening ne7 #ran-%5 inspe-tion of Banks 5 ,roviding guidelines and <ire-tives on -redit poli-ies5 'arr$ing out periodi-al revie7s of #anking operations5 monitoring #anks implementation of prudential regulations5 overvie7 and eAer-ise -ontrol over met%ods of operation and management of Banks 5 to remove management5 supervising amalgamation and li2uidation of Banks5 appointing li2uidator5 and impose penalt$ .
13

1&. S0 $r%isor, Fra'$<ork o) RBI.

RBI adopted Basel 'ommittee 3 *6 -ore prin-iples for effe-tive #anking supervision. <epartment of =upervision separated from <BO< in ))". 17o <epartments: <B= and <8B= set up under t%e Board of Finan-ial =upervision (BF=) 7it% Governor as -%airman in ))4. =upervisor$ pro-ess in-lude : On3site Inspe-tion and Off3site Monitoring and surveillan-e s$stem On3site Inspe-tion: +nnual Finan-ial Inspe-tions (+FI) undertaken dire-tl$ #$ RBI or eAternal auditors5 fo-uses on statutor$ mandated areas5 solven-$5 li2uidit$ and finan-ial and operational %ealt% of t%e #ank. RBI identifies areas of -on-erns and dra7s up a-tion 1" plan to monitor.

O#:e-tive: 1o maintain -ontinuous surveillan-e on performan-e5 and

finan-ial %ealt% of #anks during t%e period #et7een t%e t7o on3site inspe-tion and trigger timel$ supervisor$ B-orre-tive a-tions.

1-. O))-sit$ ;o(itori(+=S0r%$illa(c$

Modus Operandi : Mont%l$5 Guarterl$5 .alf3$earl$ and +nnual Returns

mainl$ fo-using on 'R+R5 operating results5 lending portfolio5 large -redit eAposure5 profile of o7ners%ip5 asset3lia#ilit$ management5 foreign -urren-$ #usiness et-. Build -omputerized data #ase and anal$ze and revie7 at periodi-al intervals5 Banks are rated as per '+ME?= =upervisor$ Model: 'H 'apital +de2ua-$5 +H +sset Gualit$5 MH Management 5 EHEarnings5 ?H?i2uidit$ and =H =$stems and -ontrols for Indian Banks and '+?'= Model: 'H'apital +de2ua-$5 +H +sset 2ualit$5 ?H?i2uidit$5 'H'omplian-e and =H=$stems for foreign #ank #ran-%es. ,rompt 'orre-tive +-tion (,'+): More fo-used and enfor-ement3oriented follo73up. 8o7 moving to7ards Risk Based =upervision (RB=): Fo-used on Risk profile of Banks #ased on B+=E? +--ord.Bnorms
1(

1.. Proc$ss o) 'aki(+ ;o($tar, Polic,

RBI responsi#le for formulating and implementing M, in India M, is anal$ti-al5 -onsultative and parti-ipative pro-ess ( =ignifi-ant te-%ni-al5 anal$ti-al5 institutional and d$nami- inputs go into pro-ess of making M,. + -ommittee of Board -%aired #$ t%e Governor meets ever$ 7eek to revie7 monetar$5 e-onomi- and finan-ial -onditions and implementation of M, and de-ide -ourse of a-tion needed. + M, =trateg$ Group anal$zes strategies on an on3going #asis M, -ommuni-ated to pu#li- #$ 7a$ of +nnual Monetar$ ,oli-$ =tatement of RBI Governor in +pril and Mid3term revie7 in O-to#er ever$ $ear. Monetar$ ,oli-$ +nnoun-ement -ontains in detail information on 7orking of e-onom$5 rationale #e%ind t%e poli-$ 5 targeted o#:e-tives5 monetar$5 gro7t% and inflationar$ targets5 and institutional and stru-tural aspe-ts of poli-$ measures. ,eriodi- -onsultation 7it% MF5 Govt. of India5 market parti-ipants5 1% finan-ial institutions.

11. O"#$cti%$s o) ;o($tar, Polic, o) RBI E-onomi- ,oli-$ O#:e-tives: +-%ieve faster gro7t%5 ensure
reasona#le degree pri-e sta#ilit$5 and promote distri#utive :usti-e (E2uit$). RBI Monetar$ ,oli-$ #e -onsistent 7it% overall o#:e-tives. Broad o#:e-tives of RBI Monetar$ poli-$ : 1o maintain a reasona#le degree of pri-e sta#ilit$. 1o %elp a--elerate t%e rate of e-onomi- gro7t% ( ensure ade2uate flo7 of -redit to produ-tive se-tors. Emp%asis #et7een t7o o#:e-tives : '%anged from $ear to $ear depending on -onditions prevailing in t%at $ear and previous. &%enever inflation %ig%5 pri-e sta#ilit$ re-eived more emp%asis. E2uit$ left to Fis-al poli-$5 ,ri-e sta#ilit$ %elps poor and inflation %urts t%em most. ,ri-e sta#ilit$ %as so-ial dimension. 1rade3off #et7een Inflation and Gro7t%: &%et%er pursuit of o#:e-tive of pri-e sta#ilit$ undermines a#ilit$ of e-onom$ to attain and sustain %ig% gro7t%. Regime of rising pri-es adversel$ affe-ts saving and spe-ulative investment more attra-tive. Regulation of mone$ suppl$ affe-ts adversel$ allo-ation of -redit to produ-tive se-tors and t%us slo7 do7n gro7t%. 1rade off #et7een t7o emp%asized.

14. RBI ;P Prior to Ba(k Natio(ali/atio(

Finan-ial Market %ig%l$ segmented and regulated. Interest Rates administered #$ RBI. 'redit to -ommer-ial se-tor regulatedE multiple lending rates and dire-ted -redit at su#sidized interest. RBI relied on <ire-t Met%od su-% as Interest rate regulations5 =ele-tive 'redit 'ontrol and 'RR as ma:or M, Instruments to neutralize monetar$ impa-t of Govt. <efi-it and assist Govt. #orro7ing operations.. Bank Rate and Open Market Operations onl$ limited roles in 'ommand and -ontrol +pproa-%. 8eAus #et7een M, and Fis-al ,oli-$: M, used as an institutional arrangement for finan-ing Govt. defi-it. ,ra-ti-e of eAtending =%ort term -redit to 'entral Govt. resulted in automati- monetization of fis-al defi-it. &it% lo7 $ield5 RBI residual su#s-ri#er to Govt. =e-urities not traded in t%e market. <emand for Govt. =e-urities -reated t%roug% in-reases in =?R. RBI 'redit -onstituted !6D of Monetar$ #ase (Reserve Mone$) in )!>s in-reased to )*D during )9>s.

15. RBI ;P a)t$r Natio(ali/atio(

+fter nationalization of Banks5 modus operandi for -ondu-ting M, -%anged. 'RR and 'redit Rationing t%roug% =ele-tive 'redit 'ontrols #e-ame instruments 7it% virtual eA-lusion of ot%ers. Refinan-e used to fill s%ortfall of -redit targets of #anks in relation to demand. Interest rate stru-ture administered rendering it infleAi#le and sterile as an instrument of Monetar$ ,oli-$. 'RR and =?R used to neutralize inflationar$ impa-t of gro7ing defi-it. RBI +-t amended: first to in-rease 'RR from 6 per-ent of <emand <eposits and * per-ent of time deposits to 6 to *> per-ent of <emand <eposits and * and 9 per-ent of time deposits #esides Reserve up to >> per-ent against in-remental deposits in )605 and in )6) to minimum " per-ent of all deposits and -ould var$ " and 6 per-ent. =?R limit 7as fiAed at *6 to 4> per-ent. =ingle most important instrument used to -ondu-t monetar$ poli-$ after )!>s5 in-rease in 'RR. +nd =?R as sour-e of government #orro7ing
1$

'RR: In )!"5 'RR 7as " per-ent5 in )9) rea-%ed statutor$

maAimum of 6 per-ent. =?R5 *6 per-ent in )!> rea-%ed "9.6 per-ent in )9). Besides >D'RR on in-remental deposits. 'RR and =?R used to meet gro7ing govt. defi-its.

16. RBI ;P a)t$r Ba(k Natio(ali/atio(

'redit Rationing: Minimum margins5 -eiling on amount of

-redit and dis-riminator$ interest on -ertain loans used as instruments.

'redit +ut%orization =-%eme ('+=): Mandator$ for #anks

to o#tain prior approval for an$ -redit of Rs. one -rore and a#ove for single part$. +#olis%ed in )9) and repla-ed #$ 'redit Monitoring +rrangements('M+). RBI to monitor all loans eA-eeding Rs. 6-rore to single part$ for 7orking -apital and Rs. *-rore for term loans.

Impa-t: <uring )6>s5 inflation 7as .9 per-ent. <uring )0>s5

0.* per-ent5 and in )!>s and )9>s %ig%er t%an > per-ent. .ig% inflation and lo7 gro7t%. ,%enomenal in-rease in mone$ suppl$. Fltimatel$ led to e-onomi-B#anking -risis in ))>3) 2#

!8. C:akra%art:, Co''itt$$ R$co''$(*atio(s

O#:e-tive: RBI in )9* set up a -ommittee under '%airmans%ip of =uk%amo$ '%akravart%$ 7it% o#:e-tive of evaluating various instruments of monetar$ poli-ies5 assessing intera-tion of monetar$ poli-$ and pu#li- <e#t Management and re-ommending appropriate measures for improving effe-tiveness of monetar$ poli-$. Re-ommendations of 'ommittee: ,ri-e =ta#ilit$: EAisten-e of multipli-it$ of o#:e-tives and stressed pri-e sta#ilit$ as primar$ o#:e-tive. 1o a-%ieve pri-e =ta#ilit$5 Govt. s%ould aim at raising output levels and RBI s%ould -ontrol eApansion in Reserve Mone$ and Mone$ =uppl$. Monetar$ 1argeting: =tressing inter3relation #et7een mone$5 output and pri-es5 re-ommended formulation of monetar$ poli-$ #ased on monetar$ targeting31arget for gro7t% of mone$ suppl$ #ased on anti-ipated gro7t% in output and pri-e situation. RBI and Govt. evolve a poli-$ frame7ork on level of monetar$ eApansion and eAtent of monetization of fis-al defi-it.

!1. C:akra%art:, Co''itt$$ R$co''$(*atio(s 2Co(t*.3

Interest Rate ,oli-$: Interest rate pla$ed an important role in mo#ilization of savings and allo-ation of resour-es and -annot ar#itraril$ set. Envisaged strong supportive role in monetar$ regulation and re-ommended: Greater freedom for Banks in determining lending rates. Fse of 'on-essional rates as distri#utive devise in sele-tive #asis ,ositive Real Interest rates for deposits after ad:ustment of inflation. Restru-turing of Mone$ Market: =trengt%ening of 1reasur$ Bills Market and 'all Mone$ Market and 'ommer-ial Bills Market in allo-ation of s%ort term resour-es 7it% minimum -osts and dela$s. Bank 'redit ,oli-$: Bank -redit in t%e form of loans and #ill finan-e instead 'as% 'redit. 1o promote Bill finan-ing5 interest rate of * per-ent lo7er t%an Minimum ?ending Rate. Monetar$ ,oli-$: i)RBI s%ould not depend on single instrument of monetar$ poli-$. Ii) +dopt regulator$ measures slo7l$ so t%at effe-ts not drasti-. Iii) 'reation of Reserve Mone$ 7it%in limits.
22

!!. RBI ;o($tar, Polic,: Post-R$)or' P$rio*

Multiple Indi-ator +pproa-%: RBI monetar$ ,oli-$ undergone fundamental -%ange in o#:e-tives5 frame7ork and instruments. +dopted multiple indi-ator approa-% 3 Market #ased interest rates5 -urren-$ availa#ilit$5 -redit position5 -apital flo7s5 fis-al state5 inflation rate5 eA-%ange rate et- related to output gro7t% 7it% ne-essar$ fleAi#ilit$ to respond to -%anges in formulation of poli-$ frame7ork. Market3oriented approa-% instead -ommand B-ontrol. Monetizing Fis-al <efi-its: 8o automati- monetization of Fis-al <efi-its. +greement #et7een Govt. and RBI and introdu-tion of &a$s and Means +dvan-es to provide temporar$ a--ommodation to ena#le Govt. to take -are of mismat-% #et7een re-eipts and eApenditures. Government =e-urities market related. Monetar$ Instruments: Emp%asis on market oriented instruments: OM, and market related interest rates. 'RR redu-ed from 6 per-ent in )) to 4.6 per-ent in *>>". O#:e-t to redu-e statutor$ minimum of " per-ent. =?R also #roug%t do7n to statutor$ limit of *6 per-ent level . Interest rates deregulated. Bank Rate limited role.

23

!&. RBI ;o($tar, Polic,: Post-R$)or' P$rio* 2Co(t*.3

Interest Rates: Interest Rates deregulated. Banks given

operational fleAi#ilit$ to determine deposit and lending rates 7it% -ertain restri-tions for saving deposits and small loans. Interest rates for Govt. =e-urities linked to market ?i2uidit$ +d:ustment Fa-ilit$ (?+F): RBI uses ?+F as fleAi#le instrument for li2uidit$ management and regulating interest rates. +long 7it% ?+F5 OMOs eApe-ted to pla$ ke$ role in RBI M,. Monetar$ 1argeting Frame7ork: Broad Mone$ (M") -onsidered for Intermediate 1arget of monetar$ poli-$. EAer-ise fo-used around 7orking out mone$ gro7t% strateg$ #ased on mone$ demand fun-tion -onsistent 7it% pro:e-ted G<, gro7t% and reasona#le inflation t%res%old. 1ransparen-$: 1ransparen-$ in monetar$ poli-$ 7idened and deepened t%roug% -onsultation and pu#li-ation of detailed results of anal$sis and pro:e-tions. O#:e-tive: Redu-tion in market Is un-ertaint$ and improve understanding of -ondu-ting monetar$ 2" poli-$

!-. LAF as a tool o) ;P

?+F: Me-%anism #$ 7%i-% RBI dra7s funds from mone$ market 7%en surplus and infuses li2uidit$ 7%en s%ort of suppl$. Important M, instrument to manage da$ to da$ li2uidit$ mismat-%es and smoot%en volatilit$ in mone$ market. ?+F operates on dail$ #asis #$ 7a$ of repo and reverse3repo. Repos: Mode of #orro7ing 7%ere #orro7er sells se-urities 7it% agreement to #u$ t%em #a-k neAt da$ at a predetermined pri-e. <ifferen-e #et7een sale and repur-%ase pri-es indi-ate repo rate (interest -ost of funds). In Reverse repo5 lender #u$s se-urities 7it% an agreement to sell t%em #a-k at a predetermined rate. In au-tion5 #orro7ers #ids for funds indi-ating amount t%e$ 7ant to #orro7 and t%e rate 7illing to pa$. Initiall$ au-tions -ondu-ted dail$ 7it% one da$ maturit$5 no7 multiple reoBreverse repo au-tions 7it% " to ! da$s maturit$. Minimum size #ids redu-ed from Rs. > -rore to Rs.6 -rore to allo7 smaller operators. From uniform pri-e au-tion met%od to Multiple au-tion met%ods
2(

!.. I(*$ $(*$(c$ o) C$(tral Ba(k

Originall$ 'entral Banks set up #$ private s%are%olders to maintain politi-al independen-e. General opinion against an$ kind of state interferen-e. Rationale for independen-e : =tate -ontrol result in mismanagement of -urren-$ and -redit. If 'B under state -ontrol5 -ontinuit$ of poli-ies not guaranteed 7it% -%anging Governments nor freedom from politi-al #ias assured. +fter =e-ond &orld &ar5 7it% emp%asis on development5 trend to7ards state -ontrol of 'Bs. Bank poli-$ and poli-$ of Govt. s%ould all times in %armon$ and poli-$ su#:e-t to supreme aut%orit$ of Govt. Independent Monetar$ poli-$ sometimes defeat poli-ies of =tate. 'oordination #et7een t7o inevita#le. &it% glo#alization and li#eralization5 Glo#al trend in-reasingl$ legal independen-e. +7a$ from Govt. -ontrol. Independen-e means operational freedom5 a--ounta#ilit$5 transparen-$ and -reation of eAe-utive monetar$ poli-$ me-%anism not +dvisor$ one. <ivesture of supervisor$ and 2uasi3fis-al fun-tions. 8o general -onsensus. 2%

!1. I(*$ $(*$(c$ o) RBI

RBI 7%en set up .indu marriage #et7een Bank of England (dominant %us#and) and RBI (su#servient 7ife)5 RBI to fun-tion on advisor$ -apa-it$ and $ield Govt.BBOE to determine poli-ies. +fter Independen-e5 Govt.3 Male -%auvinist %us#and and RBI do-ile traditional 7ife 7%o %ad forfeited minimum rig%t of nagging t%e %us#and. RBI d7indled to 2uasi3fis-al agen-$. Monetar$ poli-$ -aptive of fis-al stan-e and politi-s. + se-tion of Finan-e Ministr$. + fait%ful implementer of MF 7is%es. &it% li#eralization5 emp%asis on operational autonom$ and transparen-$. 8o independen-e: 8eit%er a#solute su#ordination nor a#solute independen-e status. Relations%ip #et7een RBI and Govt. autonom$ in operations and %armon$ in ,oli-ies and -oordination 7it% Govt. in a-%ieving development o#:e-tives. India %as fis-al federalism #ut still la-ks monetar$ federalism Re2uire Institutional5 fun-tional and finan-ial independen-e. .ig%er degree of operational freedom to pursue poli-$ o#:e-tives independentl$ free and fair manner 7it%out politi-al influen-e.