RESERVE BANK OF INDIA: ROLE AND FUNCTIONS

NOTE ISSUING AUTHORITY

Issuance of Bank Notes

Minimum Reserve System

II

Banker to the Government

Banking Business Public Debt Management Open market Operations Ways and Means Advances

RBI is empowered to issue currency notes of the denominations of 2, 5, 10, 50, 100, 500, 1000, 5000, 10000. They bear the signature of Governor of RBI 5000, and 10000 rupee notes are not in circulation Re. 1 note issued by Ministry of Finance. It bears the signature of Secretary, Ministry of Finance In India the note issue is based on the Minimum ReservedSystem. The issue department of RBI issues bank notes against 100% backing of approved assets ( i.e. Gold coins, Bullion, Foreign securities, rupee coins, Govt of India rupee securities ,bills of exchange and promissory notes.), out of which the value of Gold coins and foreign securities should not be less than 200 crores. RBI is obliged to transact banking business and manage the public debts of the Central Government, and state Governments. Public debt management includes issuance of Treasury bills (Short term fund requirements) and Government dated bonds (Long term fund requirements), by RBI on behalf of Central / state Governments Conducting the Open Market Operations in respect of Treasury Bills and Government Securities RBI provides the Ways and Means advances to Central and state Governments for their short term requirements ( Normally for about 3 months) RBI controls the money supply in the economy, co curb inflationary and deflationary tendencies. the Monetary Policy is announced once in a year. RBI ensures the monetary and credit supply through various instruments. Some of them are as follows. These instruments are used by RBI either to infuse the liquidity or suck the excess liquidity with banks / economy It is the rate at which RBI rediscounts the Bills of commercial banks. Presently it is 6% Cash Reserve Ratio: It specifies the cash balances required to be maintained by banks RBI as a specific percentage on their adjusted net demand and time liabilities.CRR is hiked by RBI to curb the inflation. Presently it is 4.75% Statutory Liquidity Ratio. It specifies the minimum investment by a Bank in the approved securities. It is mentioned as a percentage of adjusted demand and time liabilities of a Bank. Presently it is 24%. . A higher percentage may be specified by RBI (Presently the maximum is 40%), to curb the excess liquidity with a Bank.

III IV

Controlling the Money supply Credit Supply

Monetary Policy Credit Control Instruments

Bank Rate CRR

SLR

Open Market Operations

Selective Credit Control Market stabilization scheme Fixation of Inventory Norms Directed Lending Control over Interest rates Licensing Authority Scheduled Bank Status to banks Refinance Rediscounting of Bill Liquidity Adjustment Facility

Banker to Banks

Open market operations include the buying and selling of government securities. When the economy is having the excess liquidity RBI sells government securities at attractive rate of interest, so that people having excess money invest money in these securities there by excess liquidity in the economy is removed. This is a Qualitative Control. RBI stipulates higher margin and rate of interest in respect of loans and advances against essential commodities and some other selected items to ensure hoarding of stock and black marketing. Normally RBI borrows funds from when ever required by Government. Some times RBI resorts to public borrowing to suck the excess liquidity in the economy. When ever required RBI fixes the Inventory norms for banks finance Eg: Tandon Commiittee norms, Chore Committee norms, Nayak committee norms. RBI specifies the targets to be achieved by banks in respect of certain sector. Eg: Priority sector advances. 40% to priority sectors, 10% to weaker sections etc Even though the deposit interest rates and lending rates are deregulated , certain interest rates like interest rate on S.B a/c (4%),Inte4rest rates on export credit etc are regulated by RBI A bank should comply with the minimum stipulations of RBI to do banking business A bank whose name is entered in the second schedule to the BR Act is called a scheduled bank Finance against the long term loans to the borrowers Liquidity to banks against the bills discounted by them to their clients Repo and Reverse Repo both put together is called Liquidity adjustment facility. RBI finances to banks against purchase of securities upon a condition that such securities are sold back by RBI to concerned bank on repayment of the loan. Presently the Repo rate is 6%. Reverse repo facilitates the banks to park their excess funds with RBI. Now the Reverse Repo rate is 5% Banks look towards RBI as a lender of last resort. Reserve Bank of India is the regulator of money market,Credit market and Forex Markets

Lender of last resort VI Regulator of Financial system Regulation of Financial Markets Rating System for Banks Issuance of directions to commercial banks Regulator of Payment and settlement system Forex reserves Institution of customer service committees Ombudsman scheme

RBI adopts CAMELS rating for rating the performance of Banks RBI as per the powers derived from B.R.Act issues guidelines to banks in respect of certain key areas of operations. Like IRAC nors , CAR etc. Payment systems like EFT, RTGS are effected through RBI

VII VIII

Management of Forex Reserves Improvement of Customer service in Bank

RBI controls the forex reserves as per the powers drawn from FEMA Committees like Talwar committee, FGoiporia committee are instituted for framing guidelines for customer service Ombudsman scheme is instituted to redress the grievances of customers against the banks