1

CENTRAL BANKING

INTRODUCTION
Although the origin of central banking may be dated back to 1694 when the “ The
Governor and the Company of Bank of England”, the present day Bank of England was
established, the art of central banking assumed new dimensions only during the 20 th
century. Central banking is essentially a 20th century phenomenon.

Even during the beginning of 20th century, many countries were still without
central banks. The First World War and the consequent chaotic monetary conditions
brought home to these countries the imperative necessity of establishing a centralized
institution capable of creating and maintaining equilibrium in the monetary sphere. The
international Financial Conference held at Brussels in September 1920, pointed out
urgency of establishing a central bank in those countries, which had not yet established a
central bank. The Genoa Conference, in spring of 1922, also emphasized the importance
of a central bank as an agency to correct the financial disequilibrium and to promote
international cooperation in the monetary world.

The next decades saw many countries equipping themselves with central banks. In
1900, there were only 18 central banks whereas now there are 172.

The dynamic changes in economic organism of each country raised the status of
its central bank from the position of a bank of issue to that of a leader and symbol of
economic development. The importance of central banking institutions has thus gained
universal recognition and they now occupy a unique position in the economic map of
every civilized country. It took nearly three centuries for the ‘art of central banking’ to
attain the present day importance. The role of central bank is continually expanding. In
the words of,” De Kock central banks have developed their own code of rules and
practices , which can be descriced as “the art of central banking” but which ,in changing
world, is still in the process of evolution and subject to periodical adjustment”

A.I.A.I.M.S MUMBAI
 2

MEANING OF CENTRAL BANK

In every country there is one bank which acts as the leader of the money market,
supervising controlling the regulating the activities of the commercial banks and other
financial institutions. It acts as a bank of issue and is in close touch with the government,
as banker, agent and adviser to the latter.

Institution charged with the responsibility of managing the expansion and

contraction of the volume of money in the interest of general public welfare. It is a
institution responsible for safe guarding the finance stab of the country.

DEFINITION OF CENTRAL BANK

Institute charged with the responsibility of managing the expansion and contraction of the

volume of money in the interest of the general public welfare.”

FUNCTION OF THE CENTRAL BANK

The function of the central bank differs from country to country in accordance
with the prevailing economic situation. But there are certain functions which are
commonly performed by the central bank in almost all countries.

1. Monopoly of Note Issue

The issue money was always the prerogative of the government. Keeping the
minting of coins with itself, the government delegated the right of the printing currency
notes to the central bank. In fact the right and privilege of note issue was always
associated with the origin and development of central banks which were originally called
as banks issue. Nowadays, central banks everywhere enjoy the exclusive monopoly of
note issue and the currency notes issued by the central banks are declared unlimited legal
tender throughout the country. At one time, even commercial bank could issue currency
notes but there were certain evils in such as lack of uniformity in note issue, possibility of
over issue by individual banks and profit of note issue being enjoyed only by a few

A.I.A.I.M.S MUMBAI
 3

private shareholders. But concentration of note issue in the central bank bring about
uniformity in note issue, which in turn, facilitates trade and exchange within the country,
attaches distinctive prestige to the currency notes, enables the central bank to influence
and control the credit creation of commercial banks, avoids the over issue of notes and,
lastly, enables the government to appropriate partly of fully the profits of note issue. The
central bank keeps three consideration in view as regards issue of notes-uniformity,
elasticity (amount according to the need for money), and safety.

2. Custodian of Exchange Reserves

The Central bank holds all foreign exchange reserve key currencies such as U.S
dollars, British pounds and other prominent currencies, gold bullion, and other such
reserves in its custody. This right of the central bank enables it to exercise a reasonable
control over foreign exchange, for example, to maintain the country’s international
liquidity position at a safe margin and to maintain the external value of the country’s
currency in terms of key foreign currencies.

3. Banker to the government

Central banks everywhere perform the functions of bankers, agent and adviser to
the government. As a banker to the government, the central bank of the country keeps the
banking accounts of the government both of the centre and of the states performs the
same functions as a commercial bank ordinarily does for its customers. As a bankers and
agent to the government, the central bank makes and receives payments on behalf of the
government. It helps the government with short term loans and advances (known as ways
and means advances) to tide over temporary difficulties and also floats public loans for
the government. It also manages the public debt (i.e. floats services and redeems
government loans). It advises the government on monetary and economic matters.

A.I.A.I.M.S MUMBAI
 4

4. Banker to Commercial banks

Broadly speaking, the central bank acts as the banker’s bank in three different
capacities:

a. It acts as the custodian of the cash reserves of commercial banks.

b. It acts as the lender of the last resort.
c. It is the bank of central clearance, settlement and transfer.
A) It acts as the custodian of the cash reserves of commercial banks
Commercial banks keep part of their cash balances as deposits with the central bank of a
country known as centralization of cash reserves. Part of these balances are meant for
clearing purposes, that is , payment by one bank to another will be simple book entry
adjustment in the book of the central bank. There are many advantages when all banks
keep part of their cash reserves with the central bank of the country. In the first place,
with the same amount of cash reserves, a large amount of credit creation is possible.
Secondly, centralized cash reserves will enable commercial bank to meet crises and
emergencies. Thirdly, it enables the central bank to provide additional funds to those
banking institution which are in temporary difficulties. Lastly, it enables the central bank
to influence and control the credit creation of commercial banks by making the cash
reserves of the latter more or less.

B) Lender of the last resort

As the banker’s bank, the central bank can never refuse to accommodate commercial
bank. Any commercial bank wanting accommodation from the central bank can do so by
rediscounting (selling) eligible securities with the central bank or can borrow from the
central bank against eligible securities. By lender of the last report, it is implied that the
latter assumes the responsibility of meeting directly or indirectly all reasonable demands
for accommodation by commercial banks in times of difficulties and crisis.

A.I.A.I.M.S MUMBAI
 5

C) Clearing agent
As the central bank becomes custodian of cash reserves of commercial banks, it is but
logical for it to act as a settlement bank or a clearing house for the other banks. As all
banks have their accounts with the central banks, the claims of banks against each other
are settled by simple transfer from and to their accounts. This method of settling accounts
through the central bank, apart from being convenient, is economical as regards the use of
cash. Since claims are adjusted through accounts, there is usually no need for cash. It also
strengthens the banking system by reducing withdrawals of cash in times of crisis.
Furthermore, it keeps the central bank of informed about the state of liquidity of
commercial banks in regard to their assets.

5. CONTROL OF CREDIT

Probably the most important of all the functions performed by a central bank is
that of controlling the credit operation of commercial banks. In modern times, bank credit
has become the most important source of money in the country, relegating coins and
currency notes to a minor position. Moreover, it is possible, for commercial banks to
expand credit and thus intensify inflationary pressure or contract credit and thus
contribute to a deflationary situation. It is, thus, of great importance that there should be
some authority which will control the credit creation by commercial banks. As controller
of credit, the central bank attempts to influence and control the volume of bank credit and
also to stabilize business condition in the country.

A.I.A.I.M.S MUMBAI
 6

6. PROMOTER OF ECONOMIC DEVELOPMENT

In developing economies the central bank has to play a very important part in the
economic development of the country. Its monetary policy is carried out with the object
of serving as an instrument of planned economic development with stability. The central
bank performs the function of developing long term financial institution, also known as
development banks, to make available adequate investible funds for the development of
agriculture, industry, foreign trade, and other sectors of the economy. The central bank
has also to develop money and capital markets.

The Central bank also undertaken miscellaneous function such as providing

assistance to farmers through co-operative societies by subscribing to their share capital,
promoting finance corporations with a view to providing loans to large scale and small
scale industries.

ROLE OF CENTRAL BANK IN MONEY MARKET

1. In order to promote a sound money market, the central bank encourages extension of
banking facilities to every nook and corner of the country.
2. It enlists the cooperation of indigenous banks in the successful working of the money
market.
3. It provides funds (through its instruments like open market operations) to meet the
resource gaps which banking system faces especially during the busy season.
4. By reducing the extent of fluctuations between busy season ans the slack season, it
stabilises the availability of funds and interest thereon.
5. It evolves procedures, conventions and contact so that the different comoponents of
money market do not remain uncoordinated.
6. It develops bill market and encourages use of different instruments by the banking
system. By introducing different types of money market intruments from time to time, it
ensures growth and development of a sound money market.
7. The central bank tries to reduces the difference in rates of interest which exists between
different places, different sections of the money market and at different times.

A.I.A.I.M.S MUMBAI
 7

UK CENTRAL BANK

INTRODUCTION
The Bank of England is the centralbank of the whole of the United Kingdom and is the model
on which most modern, large central banks have been based was established in 1694 to act as the
English Government's banker, nationalized in 1946.The Bank has a monopoly on the issue of
banknotes in England and Wales.

The Bank's headquarters has been located in London's main financial district, the City of
London, on Threadneedle Street, since 1734. The current Governor of the Bank of
England isMervyn King, who took over on 30 June 2003 from Sir Edward George.

HISTORY OF THE BANK :

England's crushing defeat by France, the dominant naval power, in naval engagements
culminating in the 1690 Battle of Beachy Head, became the catalyst to Britain rebuilding itself as
a global power. England had no choice but to build a powerful navy if it was to regain global
power. As there were no public funds available, in 1694 a private institution, the Bank of
England, was set up to supply money to the King. £1.2m was raised in 12 days; half of this was
used to rebuild the Navy.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to
the plan which had been proposed by William Paterson He proposed a loan of £1.2m to the
government; in return the subscribers would be incorporated as The Governor and Company of
the Bank of England with long-term banking privileges including the issue of notes.

18thcentury:
When the idea and reality of the National Debt came about during the 18th century this was also
managed by the bank. By the charter renewal in 1781 it was also the bankers' bank – keeping
enough gold to pay its notes on demand until 26 February 1797 when war had so
diminished gold reserves that the government prohibited the Bank from paying out in gold. This
prohibition lasted until 1821.

A.I.A.I.M.S MUMBAI
 8

19th century
The 1844 Bank Charter Act tied the issue of notes to the gold reserves and gave the bank sole
rights with regard to the issue of banknotes. Private banks which had previously had that right
retained it, provided that their headquarters were outside London and that they deposited security
against the notes that they issued. A few English banks continued to issue their own notes until
the last of them was taken over in the 1930s. The Scottish and Northern Irish private banks still
have that right.

21st century
More recently, in 2007 the Bank of England, in its role as lender of last resort, helped
support Northern Rock, a specialist mortgage lender that suddenly became unable to rely on
wholesale market borrowing to finance its lending operation following the 2007 subprime
mortgage crisis,

Functions of the Bank

Monetary stability

The first objective of any central bank is to safeguard the value of the currency in terms of
what it will purchase at home and in terms of other currencies. Monetary policy is directed to
achieving this objective and to providing a framework for non-inflationary economic growth.
As in most other developed countries, monetary policy operates in the UK mainly through
influencing the price at which money is lent, in other words the interest rate.Stable prices
and confidence in the currency are the two main criteria for monetary stability. Stable prices
are maintained by making sure price increases meet the Government's inflation target. The
Bank aims to meet this target by adjusting the base interest rate, which is decided by
the Monetary Policy Committee, and through its communications strategy.

A.I.A.I.M.S MUMBAI
 9

Interest rates are set by the Bank’s Monetary Policy Committee. The MPC sets an interest
rate it judges will enable the inflation target to be met. The Bank's Monetary Policy
Committee (MPC) is made up of nine members – the Governor, the two Deputy Governors,
the Bank's Chief Economist, the Executive Director for Markets and four external members
appointed directly by the Chancellor. The appointment of external members is designed to
ensure that the MPC benefits from thinking and expertise in addition to that gained inside the
Bank of England.

How Monetary Policy Works

When the Bank of England changes the official interest rate it is attempting to influence the
overall level of expenditure in the economy. When the amount of money spent grows more
quickly than the volume of output produced, inflation is the result. In this way, changes in
interest rates are used to control inflation.
The Bank of England sets an interest rate at which it lends to financial institutions. This interest
rate then affects the whole range of interest rates set by commercial banks, building societies and
other institutions for their own savers and borrowers. It also tends to affect the price of financial
assets, such as bonds and shares, and the exchange rate, which affect consumer and business
demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which
stimulates spending.
Lower interest rates can boost the prices of assets such as shares and houses
Changes in interest rates can also affect the exchange rate.
Changes in spending feed through into output and, in turn, into employment.

Financial stability

The UK Financial System

The financial system is central to the functioning of the economy and modern life.
The system handles millions of regular transactions - spending in the shops, paying bills, wages
and savings - every day. Financial institutions, such as banks, manage vast sums of money on
behalf of individuals and businesses. Financial markets facilitate trade across the world on a
minute-by-minute basis - everything from company shares and commodities like oil, to complex
financial instruments and, of course, money itself. And large IT systems facilitate payments
between financial institutions, companies and individuals.

A.I.A.I.M.S MUMBAI
 10

One of the main purposes of the financial system is to bring together savers and investors, and so
put money to work. One person's savings are the finance for another person's investment - for
example, household savings are invested by pension funds in shares issued by companies to
expand their business.

Maintaining financial stability involves protecting against threats to the whole financial system.
Threats are detected by the Bank's surveillance and market intelligence functions. The threats are
then dealt with through financial and other operations, both at home and abroad. In exceptional
circumstances, the Bank may act as the lender of last resort by extending credit when no other
institution will.
The Bank has a statutory objective to “contribute to protecting and enhancing the stability of the
financial systems of the United Kingdom”. The Bank does this through its risk assessment and
risk reduction work, market intelligence functions, payments systems oversight, banking and
market operations, including, in exceptional circumstances by acting as lender of last resort, and
resolution work to deal with distressed banks.

In anticipation of legislation to create a Financial Policy Committee (FPC), outlined in the

Government’s consultation document A new approach to financial regulation: building a
stronger system, the Government and the Bank announced the establishment of an interim
Financial Policy Committee on 17 February 2011.
The Government envisages that the FPC will contribute to the Bank’s financial stability
objective by identifying, monitoring, and taking action to remove or reduce, systemic risks with
a view to protecting and enhancing the resilience of the UK financial system. The interim FPC
will undertake, as far as possible, the forthcoming statutory FPC’s macro-prudential role. An
important initial task will be to undertake preparatory work and analysis into potential macro-
prudential tools. The Government’s consultation document states that the interim FPC “...will
play a key role in the development of the permanent body’s toolkit by sharing its analysis and
advice on macro-prudential instruments with the Treasury, to help inform the Government’s
proposals for the FPC’s final macro-prudential tool it”.

A.I.A.I.M.S MUMBAI
 11

The Bank's Strategy

The strategic priorities endorsed by Court for 2010/11 are:

Strategic priority 1. Keep inflation on track to meet the 2% target, and sustain support
for the monetary policy framework and the benefits of low inflation.
Ensure price stability remains the central focus of monetary policy.
Strengthen and broaden the suite of models used to analyse medium-term influences on
inflation.

Strategic priority 2. Ensure the Bank has the policies, tools and infrastructure in place to
implement monetary policy, provide liquidity insurance to the banking system and manage
the risks on its balance sheet effectively.
Design and make available a broader set of instruments for implementing monetary policy,
especially when Bank Rate is close to zero.
Design and make available frameworks for providing liquidity insurance to a wide range of
banks, including at times of financial stress.
Develop the framework of market operations to allow for a wider range of collateral and,
subject to achieving the policy objectives, minimise the financial and operational risks
arising from the Bank’s market operations.
Improve the Bank’s framework for managing collateral.

Strategic priority 3. Discharge the Bank’s enhanced role for financial stability.
Contribute to the domestic and international debate on the appropriate future structure of
the financial system.
Promote and contribute to the development of effective recovery and resolution plans, and
strengthen the Bank’s Special Resolution Regime.
Design and promote more resilient financial market infrastructures, including through use
of the Bank’s payment systemoversight powers.

Strategic priority 4. Deliver efficient and effective notes issuance, banking and payment
services.
Ensure that the customer banking strategy incorporates services needed to support financial
stability and resolution activities.
Ensure that the impact of new liquidity regulations is understood and acted upon by
payment systemoperators and participants.
Review and enhance the way the Bank interacts with the wholesale cash distribution
industry.
Ensure the smooth operation of the new statutory regime for Scottish & Northern Ireland
banknotes.

A.I.A.I.M.S MUMBAI
 12

Case Study on European Central Bank

The European Central Bank (ECB)

ECB is the institution of the European Union (EU) which administers the monetary policy of

the 17 EU Eurozone  member states. It is thus one of the world's most important central banks.
The bank was established by the Treaty of Amsterdam in 1998, and is headquartered
in Frankfurt, Germany. The current President of the ECB is Jean-ClaudeTrichet, former
president of the Banque de France.

Member States of Euro Zone

Austria, Belgium, Cyprus, Estonia, France, Finland, Germany, Greece, Ireland, Italy,
Luxembourg, Malta,Netherlands, Portugal, Slovakia, Slovenia, Spain

Reserves
€526bn in total

€43bn directly
€338bn (Eurosystem incl. gold)
€145bn (forexreserves)

Base borrowing rate – 1.00%

Base deposit rate – 0.25%

A.I.A.I.M.S MUMBAI
 13

Powers and objectives

The primary objective of the ECB is to maintain price stability within the Eurozone, or in other

words to keep inflation low. The Governing Council defined price stability as inflation
(HarmonisedIndexofConsumerPrices) of below, but close to, 2%. Unlike for example the United
States Federal Reserve Bank, the ECB has only one primary objective with other objectives
subordinate to it.

The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to
conduct foreign exchange operations, to take care of the foreign reserves of the European System
of Central Banks and promote smooth operation of the financial market infrastructure under
the Target payments system and being currently developed technical platform for settlement of
securities in Europe (TARGET2Securities). Furthermore, it has the exclusive right to authorize
the issuance of euro bank notes. Member states can issue euro coins but the amount must be
authorized by the ECB beforehand (upon the introduction of the euro, the ECB also had
exclusive right to issue coins).
TARGET
 (Trans-European Automated Real-time Gross Settlement Express Transfer System) was an
interbank payment system for the real-time processing of cross-border transfers throughout
theEuropean Union.
Financial Stability
In U.S. style central banking, liquidity is furnished to the economy primarily through the
purchase of Treasury bonds by the Federal Reserve Bank. Because the European Community
does not have system-wide bonds backed by a system-wide taxation authority, it uses a different
method. Member banks, of which there are several thousand, bid for short term repo contracts of
two weeks' to three months' duration. The member banks in effect borrow cash and must pay it
back; the short durations allow interest rates to be adjusted continually. When the repo notes
come due the participating banks bid again. An increase in the quantity of notes offered at
auction allows an increase in liquidity in the economy. A decrease has the contrary effect. The
contracts are carried on the asset side of the European Central Bank's balance sheet and the
resulting deposits in member banks are carried as a liability. In lay terms, the liability of the
central bank is money, and an increase in deposits in member banks, carried as a liability by the
central bank, means that more money has been put into the economy.

A.I.A.I.M.S MUMBAI
 14

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the
sale of securities together with an agreement for the seller to buy back the securities at a later
date. The repurchase price will be greater than the original sale price, the difference effectively
representing interest, sometimes called the repo rate. 

A.I.A.I.M.S MUMBAI
 15

CASE STUDY ON CENTRAL BANK OF USA

“FEDERAL BANK"

History:

Central banking in the United States:

The first paper money issued in the United States was by the Massachusetts Bay Colony in 1690.
Soon other colonies began printing their own money as well. The demand for currency in the
colonies was due to the scarcity of coins, which had been the primary means of trade at the time.
A colony's currency was used to pay for its expenses, as well as a means to loan money to the
colony's citizens. The bills quickly became the primary means of exchange within the colonies,
and were even used in financial transactions with other colonies.However, some currencies were
not redeemable in gold and silver, which caused their value to depreciate quickly.

The first attempt at a national currency was during the American Revolutionary war. In 1775 the
Continental Congress issued paper currency, and called their bills "Continentals". But the money
was not backed by gold or silver and its value depreciated quickly.

In 1791, which was after the U.S. Constitution was ratified, the government granted the First
Bank of the United States a charter to operate as the U.S.'s central bank until 1811. Unlike the
prior attempt at a centralized currency, the increase in the federal government's power—granted
to it by the constitution—allowed national central banks to possess a monopoly on the minting of
U.S currency.Nonetheless, The First Bank of the United States came to an end when President
Madison refused to renew its charter.

Creation of First and Second Central Bank

The first U.S. institution with central banking responsibilities was the First Bank of the United
States, chartered by Congress and signed into law by President This was done despite strong
opposition from Thomas Jefferson and James Madison, among numerous others. The charter was
for twenty years and expired in 1811 under President Madison, because Congress refused to
renew it. In 1816, however, Madison revived it in the form of the Second Bank of the United
States. Years later, early renewal of the bank's charter became the primary issue in the reelection
of President Andrew Jackson. After Jackson, who was opposed to the central bank, was
reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the
Second Bank of the United States, responded by contracting the money supply to pressure
Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed
on Jackson's policies. Interestingly, Jackson is the only President to completely pay off the
national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free
Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks

A.I.A.I.M.S MUMBAI
 16

was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and
1907, provided strong demand for the creation of a centralized banking system.

Creation of Third Central Bank

The main motivation for the third central banking system came from the Panic of 1907, which
caused renewed demands for banking and currency reform. During the last quarter of the 19th
century and the beginning of the 20th century the United States economy went through a series
of financial panics.According to many economists, the previous national banking system had two
main weaknesses: an inelastic currency and a lack of liquidity. In 1908, Congress enacted the
Aldrich-Vreeland Act, which provided for an emergency currency and established the National
Monetary Commission to study banking and currency reform. The National Monetary
Commission returned with recommendations which later became the basis of the Federal
Reserve Act, passed in 1913.

Federal Reserve act:

The head of the bipartisan National Monetary Commission was financial expert and Senate
Republican leader Nelson Aldrich. Aldrich set up two commissions—one to study the American
monetary system in depth and the other, headed by Aldrich himself, to study the European
central banking systems and report on them. Aldrich went to Europe opposed to centralized
banking, but after viewing Germany's monetary system he came away believing that a
centralized bank was better than the government-issued bond system that he had previously
supported.

The Act:

The plan adopted in the original Federal Reserve Act called for the creation of a System that
contained both private and public entities. There were to be at least eight, and no more than 12,
private regional Federal reserve banks (12 were established) each with its own branches, board
of directors and district boundaries (Sections 2, 3, and 4) and the System was to be headed by a
seven member Federal Reserve Board made up of public officials appointed by the President and
confirmed by the Senate (strengthened and renamed in 1935 as the Board of Governors of the
Federal Reserve System with the Secretary of the Treasury and the Comptroller of the Currency
dropped from the Board - Section 10). Also created as part of the Federal Reserve System was a
12 member Federal Advisory Committee (Section 12) and a single new United Stantes currency,
the Federal Reserve Note (Section 16).

A.I.A.I.M.S MUMBAI
17

A.I.A.I.M.S MUMBAI
 18

Congress decided in the Federal Reserve Act that all nationally chartered banks were required to
become members of the Federal Reserve System. It required them to purchase specified non-
transferable stock in their regional Federal reserve bank and to set aside a stipulated amount of
non-interest bearing reserves with their respective reserve bank (since 1980 all depository
institutions have been required to set aside reserves with the Federal Reserve and be entitled to
certain Federal Reserve services - Sections 2 and 19). State chartered banks were given the
option of becoming members of the Federal Reserve System and thus to be supervised, in part,
by the Federal Reserve (Section 9). Member banks became entitled to have access to discounted
loans at the discount window in their respective reserve bank, to a 6% annual dividend in their
Federal Reserve stock and to other services (Sections 13 and 7). The Act also permitted Federal
Reserve banks to act as fiscal agents for the United States government (Section 15).

Key laws:

Key laws affecting the Federal Reserve have been:

 Federal Reserve Act

 Federal Income Tax
 Glass-Steagall Act
 Banking Act of 1935
 Employment Act of 1946
 Federal Reserve-Treasury Department Accord of 1951
 Bank Holding Company Act of 1956 and the amendments of 1970
 Federal Reserve Reform Act of 1977
 International Banking Act of 1978
 Full Employment and Balanced Growth Act (1978)
 Depository Institutions Deregulation and Monetary Control Act (1980)
 Financial Institutions Reform, Recovery and Enforcement Act of 1989
 Federal Deposit Insurance Corporation Improvement Act of 1991
 Gramm-Leach-Bliley Act (1999)
 Financial Services Regulatory Relief Act (2006)
 Emergency Economic Stabilization Act (2008)
 Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Purpose of the Federal Reserve System:

The primary motivation for creating the Federal Reserve System was to address banking panics.
Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to
afford means of rediscounting commercial paper, to establish a more effective supervision of
banking in the United States, and for other purposes". Before the founding of the Federal
Reserve, the United States underwent several financial crises. A particularly severe crisis in 1907
led Congress to enact the Federal Reserve Act in 1913. Today the Fed has broader
responsibilities than only ensuring the stability of the financial system.

A.I.A.I.M.S MUMBAI
 19

Current functions of the Federal Reserve System include:

 To address the problem of banking panics

 To serve as the central bank for the United States
 To strike a balance between private interests of banks and the centralized responsibility
of government
o To supervise and regulate banking institutions
o To protect the credit rights of consumers
 To manage the nation's money supply through monetary policy to achieve the sometimes-
conflicting goals of
o maximum employment
o stable prices, including prevention of either inflation or deflation moderate long-
term interest rates
 To maintain the stability of the financial system and contain systemic risk in financial
markets
 To provide financial services to depository institutions, the U.S. government, and foreign
official institutions, including playing a major role in operating the nation's payments
system
o To facilitate the exchange of payments among regions
o To respond to local liquidity needs
 To strengthen U.S. standing in the world economy

Addressing the problem of bank panics:

Bank runs occur because banking institutions in the United States are only required to hold a
fraction of their depositors' money in reserve. This practice is called fractional-reserve banking.
As a result, most banks invest the majority of their depositors' money. On rare occasion, too
many of the bank's customers will withdraw their savings and the bank will need help from
another institution to continue operating. Bank runs can lead to a multitude of social and
economic problems. The Federal Reserve was designed as an attempt to prevent or minimize the
occurrence of bank runs, and possibly act as a lender of last resort if a bank run does occur.
Many economists, following Milton Friedman, believe that the Federal Reserve inappropriately
refused to lend money to small banks during the bank runs of 1929.

A.I.A.I.M.S MUMBAI
 20

Elastic currency

The monthly changes in the currency component of the U.S. money supply show currency being
added into (% change greater than zero) and removed from circulation (% change less than zero).
The most noticeable changes occur around the Christmas holiday shopping season as new
currency is created so people can make withdrawals at banks, and then removed from circulation
afterwards, when less cash is demanded.

One way to prevent bank runs is to have a money supply that can expand when money is needed.
The term "elastic currency" in the Federal Reserve Act does not just mean the ability to expand
the money supply, but also to contract it. Some economic theories have been developed that
support the idea of expanding or shrinking a money supply as economic conditions warrant.
Elastic currency is defined by the Federal Reserve as: Currency that can, by the actions of the
central monetary authority, expand or contract in amount warranted by economic conditions.

Monetary policy of the Federal Reserve System is based partially on the theory that it is best
overall to expand or contract the money supply as economic conditions change.

A.I.A.I.M.S MUMBAI
 21

Function of Central bank:

In its role as the central bank of the United States, the Fed serves as a banker's bank and as the
government's bank. As the banker's bank, it helps to assure the safety and efficiency of the
payments system. As the government's bank, or fiscal agent, the Fed processes a variety of
financial transactions involving trillions of dollars. Just as an individual might keep an account at
a bank, the U.S. Treasury keeps a checking account with the Federal Reserve, through which
incoming federal tax deposits and outgoing government payments are handled. As part of this
service relationship, the Fed sells and redeems U.S. government securities such as savings bonds
and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S.
Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually
produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve
Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then
distribute it to other financial institutions in various ways. During the Fiscal Year 2008, the
Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per
note.

Federal funds

Federal funds are the reserve balances (also called federal reserve accounts) that private banks
keep at their local Federal Reserve Bank. These balances are the namesake reserves of the
Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a
mechanism for private banks to lend funds to one another. This market for funds plays an
important role in the Federal Reserve System as it is what inspired the name of the system and it
is what is used as the basis for monetary policy. Monetary policy works by influencing how
much money the private banks charge each other for the lending of these funds.

Federal reserve accounts contain federal reserve credit, which can be converted into federal
reserve notes. Private banks maintain their bank reserves in federal reserve accounts.

Balance between private banks and responsibility of governments

The system was designed out of a compromise between the competing philosophies of
privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the Board of
Governors, summarized the history of this compromise.

Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under
public, rather than banker, control. But the vast majority of the nation's bankers, concerned about
government intervention in the banking business, opposed a central bank structure directed by
political appointees.

A.I.A.I.M.S MUMBAI
 22

The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance
these two competing views and created the hybrid public-private, centralized-decentralized
structure that we have today.

Government regulation and supervision

Ben Bernanke (lower-right), Chairman of the Federal Reserve Board of Governors, at a House
Financial Services Committee hearing on February 10, 2009. Members of the Board frequently
testify before congressional committees such as this one. The Senate equivalent of the House
Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.

Federal Banking Agency Audit Act enacted in 1978 as Public Law 95-320 and Section 31 USC
714 of U.S. Code establish that the Federal Reserve may be audited by the Government
Accountability Office (GAO). The GAO has authority to audit check-processing, currency
storage and shipments, and some regulatory and bank examination functions; however there are
restrictions to what the GAO may in fact audit. Audits of the Reserve Board and Federal Reserve
banks may not include:

1. transactions for or with a foreign central bank or government, or nonprivate international

financing organization;
2. deliberations, decisions, or actions on monetary policy matters;
3. transactions made under the direction of the Federal Open Market Committee; or
4. a part of a discussion or communication among or between members of the Board of
Governors and officers and employees of the Federal Reserve System related to items (1),
(2), or (3). The financial crisis which began in 2007, corporate bailouts, and concerns
over the Fed's secrecy have brought renewed concern regarding ability of the Fed to
effectively manage the national monetary system. A July 2009 Gallup Poll found only
30% Americans thought the Fed was doing a good or excellent job, a rating even lower
than that for the Internal Revenue Service, which drew praise from 40%. The Federal
Reserve Transparency Act was introduced by congressman Ron Paul in order to obtain a
more detailed audit of the Fed. The Fed has since hired Linda Robertson who headed the
Washington lobbying office of Enron Corp. and was adviser to all three of the Clinton
administration's Treasury secretaries. The Board of Governors in the Federal Reserve
System has a number of supervisory and regulatory responsibilities in the U.S. banking
system, but not complete responsibility. A general description of the types of regulation
and supervision involved in the U.S. banking system is given by the Federal Reserve.

The Board also plays a major role in the supervision and regulation of the U.S. banking system.
It has supervisory responsibilities for state-chartered banks that are members of the Federal
Reserve System, bank holding companies (companies that control banks), the foreign activities
of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations
(limited-purpose institutions that engage in a foreign banking business). The Board and, under
delegated authority, the Federal Reserve Banks, supervise approximately 900 state member

A.I.A.I.M.S MUMBAI
 23

banks and 5,000 bank holding companies. Other federal agencies also serve as the primary
federal supervisors of commercial banks; the Office of the Comptroller of the Currency
supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks
that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply
only to member banks, that is, state banks that have chosen to join the Federal Reserve System
and national banks, which by law must be members of the System. The Board also issues
regulations to carry out major federal laws governing consumer credit protection, such as the
Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of
these consumer protection regulations apply to various lenders outside the banking industry as
well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in
government. They frequently testify before congressional committees on the economy, monetary
policy, banking supervision and regulation, consumer credit protection, financial markets, and
other matters.

The Board has regular contact with members of the President's Council of Economic Advisers
and other key economic officials. The Chairman also meets from time to time with the President
of the United States and has regular meetings with the Secretary of the Treasury. The Chairman
has formal responsibilities in the international arena as well.

Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also has regulatory and supervisory
responsibilities. For example, a member bank (private bank) is not permitted to give out too
many loans to people who cannot pay them back. This is because too many defaults on loans will
lead to a bank run. If the board of directors has judged that a member bank is performing or
behaving poorly, it will report this to the Board of Governors. This policy is described in United
States Code.

Each Federal reserve bank shall keep itself informed of the general character and amount of the
loans and investments of its member banks with a view to ascertaining whether undue use is
being made of bank credit for the speculative carrying of or trading in securities, real estate, or
commodities, or for any other purpose inconsistent with the maintenance of sound credit
conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit
accommodations, the Federal reserve bank shall give consideration to such information. The
chairman of the Federal reserve bank shall report to the Board of Governors of the Federal
Reserve System any such undue use of bank credit by any member bank, together with his
recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve

A.I.A.I.M.S MUMBAI
 24

System, any member bank is making such undue use of bank credit, the Board may, in its
discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the
use of the credit facilities of the Federal Reserve System and may terminate such suspension or
may renew it from time to time.

The punishment for making false statements or reports that overvalue an asset is also stated in
the U.S. Code.

Whoever knowingly makes any false statement or report, or willfully overvalues any land,
property or security, for the purpose of influencing in any way...shall be fined not more than
$1,000,000 or imprisoned not more than 30 years, or both.

These aspects of the Federal Reserve System are the parts intended to prevent or minimize
speculative asset bubbles, which ultimately lead to severe market corrections. The recent bubbles
and corrections in energies, grains, equity and debt products and real estate cast doubt on the
efficacy of these controls.

A.I.A.I.M.S MUMBAI
 25

RBI INTRODUCTION & HISTORY:

• 1935: commenced operations in kolkutta
• 1942: The Reserve Bank ceased to be the currency issuing
• 1947: stopped acting as banker to the Government of Burma.
• 1948: stopped rendering central banking services to Pakistan.
RBI was established as a shareholders bank it share capital was

RS 5 cr divided into 5 lakh fully paid up share of rs 100 each as increased the economic activity
in the country it was felt that RBI should nationalized to greater coordination monetary and fiscal
policy. In February 1947 it was decided to nationalize RBI with the payment of compensation to
shareholders 118.62 paisa per share and the first January 1949 RBI stared functioning as a
nationalized bank.

• 1949: The Government of India nationalized the Reserve Bank under the Reserve Bank
(Transfer of Public Ownership) Act, 1948.

The Reserve Bank of India has four regional representations: North in New Delhi, South in
Chennai, East in Kolkata and West in Mumbai

The institution has 22 regional offices.

Overview of Indian economy

GDP

The economy of India Is 11th largest in the world with the $ 1.43 trillion in 2010.with the growth
rate of 8.9% in 2010.in gdp largest part contributed by service sector which is 57.2% and
industrial sector and agriculture sector contributed 28% &14.6% respectively.

Deposits

In the year 1970-71 deposits was 5910 cr in 2008-09 the amount was 3830922 cr.

Fdi

From the year 1985-91 $ 200 million FDI received but from the year 2000-2010 $ 178 billion. In
the year 2008-09 we attracted $ 26.67 billion. Currently British petroleum made the $ 9 billion
deal with RIL in that $ 7.2 billion is value of stake and $ 1.8 billion is value of future payment.
this is the largest fdi investment in Indian history.

A.I.A.I.M.S MUMBAI
 26

Forex reserve

In the year 1990 Forex reserve was only $ 1 billion. but on the 28 march 2008 reserve was $ 309
billion.

Fiis’s

In the year 1993 FII’S was only 1 million but in the year 2007-08 $16.10 billion. $ 29 billion in
the 2010.

Imports :

In the year 1990-91 imports was $ 27915 million and amount raised to $156993 million in the
year 2006-07.and in the year 2010 $327 billion 2010.

Exports :

in the year 1990-91 imports was $ 18477 million and amount raised to $105152 million in the
year 2006-07.and in the year 2010 Exports $201 billion2010.

To maintain all this financial activity in proper manner and move the country on the path of
prosperity RBI playing very important role in Indian economy.

TOOLS OF RBI
 Bank Rate:
BANK RATE IS OFFICIAL MINIMUM RATE OF THE CENTRAL BANK OF THE
COUNTRY TO ADVANCE LOAN TO COMMERCIAL BANK. The rate at which RBI
rediscounts the bills.

REPO RATE:
AT WHICH RATE RBI LEND TO COMMERCIAL BANK. REPO
RATE IS THE INTEREST RATE AT WHICH THE RESERVE BANK
OF INDIA LENDS MNEY TO OTHER BANKS.

Reverse repo rate:

Reverse repo rate is return banks earn on Excess funds parked with the
central bank against Government securities. Reverse Repo rate as the
name suggests is the Rate at which RBI borrows from other
Commercial banks.

A.I.A.I.M.S MUMBAI
 27

 Cash Reserve Ratio –

The CRR refers to the cash which banks have to maintain with the RBI as a percentage of
their demand liabilities. Cash reserve Ratio (CRR) is the amount of funds that the banks
have to keep with RBI. If RBI decides to increase the percent of this, the available
amount with the banks comes down. RBI is using this method (increase of CRR rate), to
drain out the excessive money from the banks.

 Statutory Liquidity Ratio –

The SLR is the ratio of cash in hand exclusive of cash balances maintained by banks for
CRR.

SLR (Statutory Liquidity 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.

 BASE RATE:
Base Rate System is for the banks to set a level of minimum interest rates charged while
giving out the loans.

Price stability
A situation in which prices in an economy don't change much over time. Price stability would
mean that an economy would not experience inflation or deflation. It is not common for an
economy to have price stability.

To maintain price stability in the country RBI taking various measures in formulation and
implementation of monetary policy in the country.

A.I.A.I.M.S MUMBAI
 28

What is monetary policy?

Monetary policy is concerned with the money supply and credit in the economy. The RBI
increased or decrease money supply and credit in the economy depending upon market situation.

Inflation
If there is inflation in the country the monetary policy of the RBI will make attempt to reduced
inflation. The RBI will attempt tight monetary policy. Money supply will control with various
monetary policy instruments such as:

Increased the bank rate.

Repo rate 6.25% to 6.50%.

Reverse repo rate 5.25% to 5.50%.

Increased the C.R.R.

Increased from 5% to %.5.50% then again 5.505.75%and now its 6%.

Increased the S.L.R.

But RBI decreased from 25% to 24%.

The monetary policy measures may reduced money supply, and encourage people to save more
due to increased in interest rate which may turn to reduced inflation and domestic price will
come down and it will to more exports and corrects BOP.

But food inflation can not be control through rising interest rate its wrong attempt by RBI
increased the repo rate 7 times in last month and bumper crop unable to control inflation as per
report of Economic times. On the 4th February 2011 food inflation rate was 17% as compare to
15.57% on 22 January 2010.

A.I.A.I.M.S MUMBAI
 29

Deflation
If there is deflation in the country monetary policy of the RBI will make an attempt to overcome
deflation through adopting easy monetary policy. The RBI will try to increased money supply
and credit in the economy through decreased interest rate, reduction in the C.R.R , S.L.R. which
lead to increased more investment more investment will result in more production the surplus
can be exported which turn to improve again BOP.

Exchange rate policy:

The government directly or indirectly influence the foreign exchange rate in market.

Devaluation
When country face the problem of exchange rate the govt. will try to encourage exports and
reduced imports. This can be done through devaluation of domestic currency. In such situation
export will become cheaper and import will become expensive.

Depreciation:
Under flexible exchange rate system the RBI does not interfere in exchange rate determination.
The exchange rate gets adjusted depending upon market force. If there is high demand for
foreign currency then its supply, it will appreciate and if there is more need for foreign currency
then RBI will released foreign currency from its reserve to reduce the appreciation of foreign
currency. if there is less demand of foreign currency it will purchase the foreign exchange from
the market to so as to reduced the depreciation of the foreign currency and appreciation of
domestic currency.

Due to devaluation and depreciation of domestic currency the exports become cheaper and
import becomes expensive. and appreciation and overvaluation will of domestic currency exports
become costly and imports become cheaper.

A.I.A.I.M.S MUMBAI
 30

Supervision and Regulation

 Banks are fundamental to the nation’s financial system. The RBI has a critical role to
play in ensuring the safety and soundness of the banking system—and in maintaining
financial stability and public confidence in this system. As the regulator and supervisor of
the banking system, the R.B.I Prescribes broad parameters of banking operations within
which the country's banking and financial system functions. Reserve Bank protects the
interests of depositors, ensures a framework for orderly development and conduct of
banking operations conducive to customer interests and maintains overall financial
stability through preventive and corrective measures. Like licensing. Supervise and
control commercial and co-operative banks.

 To issue the licenses for the establishments of new banks

 To issue licenses for setting up of bank branches

 To prescribe minimum requirements regarding paid-up capital and reserves, maintenance

of cash and other liquid assets.

 To conduct the investigations , from time to time , regarding irregularities, frauds,

complaints, etc…

 To control methods of operations of banks

 To control appointment, re-appointment, termination of appointment of the chairman and

CEOs of Private sector banks

Development role:
To develop the quality of banking system in India. What R.B.I does……

Performs a wide range of promotional functions to support national objectives. To establish

financial institutions of national importance, for e.g.: NABARD, IDBI etc.

This includes ensuring that credit is available to the productive sectors of the economy,
establishing Institutions designed to build the country’s financial infrastructure, Expanding
access to affordable financial services and

Promoting financial education and literacy. Like prescribing lending to certain priority sectors.
directed credit for lending to priority sector weaker section of economy.

A.I.A.I.M.S MUMBAI
31

A.I.A.I.M.S MUMBAI
 32

Issue of currency
The Reserve Bank of India is the nation’s sole currency issuing authority. Along with the
Government of India, RBI is responsible for the Design and production and overall management
of the nations Currency, with the goal of ensuring an adequate supply of clean and genuine notes.
The Reserve Bank also makes sure there

Is an adequate supply of coins, produced by the government?

In consultation with the government, we routinely address

Security issues and target ways to enhance security features to

Reduce the risk of counterfeiting or forgery. The RBI issues 0.50paise to 10 rs coins and 5 rs to
1000 rs notes.

 Issues new currency and destroys currency and coins not fit for circulation. It has to keep
in forms of gold and foreign securities as per statutory rules against notes & coins issued.
to ensure uniformity in the note issue which will facilitate trade and exchange within the
country.
 to restrict or expand the supply of notes according to the requirements of the economy

Act for govt.

As banker
Reserve bank of India accepts deposits from govt. like deposited in govt. account transfer of fund
from one state to other state and also provide advance short term loans to govt. on request and
provide foreign exchange resources to govt. to pay the external debt.

As a agent
The RBI play role of agent for govt.

Collect taxes and other payment on behalf of govt.

Represent the govt. in international financial institution like world bank and IMF.

A.I.A.I.M.S MUMBAI
 33

As a adviser
RBI gives valuable advice to govt. on important issues like devaluation of currency, budgetary
policy, commercial policy, exchange rate policy.

Banker And Debt Manager To Govt.

Managing the government’s banking transactions is a key RBI role. Like individuals, businesses
and banks, governments need a banker to carry out their financial transactions in an efficient and
effective manner, including the raising of resources from the public. As a banker to the central
government, the Reserve Bank Maintains its accounts, receives money into and makes payments
out of these accounts and facilitates the transfer of government funds. RBI also act as the banker
to those state governments that have entered into an agreement with RBI.

Banker's Bank

Like individual consumers, businesses and organizations of all kinds, banks need their own
mechanism to transfer funds and settle inter-bank transactions—such as borrowing from and
lending to other banks—and customer transactions. As the banker to banks, the Reserve Bank
fulfills this role. In effect, all banks operating in the country have accounts with the Reserve
Bank, just as individuals and businesses have accounts with their banks.

The central bank acts as banker's bank in three different capacities:

(i) Custodian of cash reserve of commercial banks.

(ii) Lender of last resort.

(iii) Bank of central clearance, settlement and transfer.

Custodian of the cash reserve of commercial banks:

A central bank is the custodian of the cash reserves of the commercial banks operating in the
country. All the commercial banks keep a part of their cash reserves with the central bank.
practice of keeping cash with the central bank is compulsory in countries like USA and India and
customary in England

A.I.A.I.M.S MUMBAI
 34

Lender of last resort :

When commercial banks are not able to secure financial accommodation from other sources,
then as a last resort, they can approach the central bank for necessary facilities. The central bank,
in such a case, will be prepared to grant accommodation against eligible securities. By lender of
last resort, the central ink assumes the responsibility of meeting directly or indirectly all
reasonable demands for funds in times of emergency.

Bank of clearance, settlement and transfer.

The central bank acts as the Bring house for commercial banks keep their accounts and. maintain
cash serve with the central bank. So it is easier for the central bank to act as the clearing house of
the country. The central-bank settles the claims and counter claims of the banks by making
transfer entries in their account. To transfer and lie claims of one bank upon others, the central,
bank operates a separate department in big cities and trade centers. This department is known as
'clearing house”

Quantative controls:
RBI thinks that safe limits of credit expansion is rs 7000 cr but actual limit is 8000cr then RBI
will adopt certain tools to decrease credit limit in the economy. This technique of control is
quantative.

Bank rate:
Rediscount the bills of exchange and govt. securities held by the commercial bank.RBI will
increased the bank rate so it makes borrowing costly from it and it will impact on all commercial
bank interest rate.

OMO:
direct purchasing and selling of securities and bills in the money market by RBI with its own
initiative.

A.I.A.I.M.S MUMBAI
 35

Reserve ration which is

CRR
 The CRR refers to the cash which banks have to maintain with the RBI as a percentage of
their demand liabilities. Cash reserve Ratio (CRR) is the amount of funds that the banks
have to keep with RBI. If RBI decides to increase the percent of this, the available
amount with the banks comes down. RBI is using this method (increase of CRR rate), to
drain out the excessive money from the banks.

 The SLR is the ratio of cash in hand exclusive of cash balances maintained by banks for
CRR.
SLR (Statutory Liquidity 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.

Qualitative control:
Qualitative control is to channelized flow of bank credit from speculative and undesirable
purpose to desirable and productive for the economy. It also control demand for money
by way providing restriction and condition for borrowers.

Regulation margin requirement

This measure is adopted to prevent excessive use of credit to buy or carry securities by
speculators. The RBI fix the minimum margin requirement on loan for purchasing
securities.

Regulation of consumer credit:

Central banks control the utilization of bank credit by consumer to purchase the durable
goods by way of installment or higher purchase. Main purpose of this is to control the
demand of consumer durable goods for the interest of achieving economic stability.

A.I.A.I.M.S MUMBAI
 36

Custodian of Foreign Exchange Reserves

The central hank keeps and manages the foreign exchange reserves country: Funds coming from
and going out to foreign countries are channeled through the central bank. All the incomes in
foreign currencies accrued into central bank in the foreign exchange accounts and payments are
met from these accounts. All the balances are kept under the custody of the bank. Further the
central banks in most countries maintain both gold and foreign currencies reserves against note
issue and also to meet adverse balance of payments, it a fixes the exchange rate of domestic
currency in terms of foreign currencies a maintain stability in exchange rates. The central bank
also manages exchange control operations in accordance with the rules laid down by the
government.

A.I.A.I.M.S MUMBAI