Reserve Bank of India –RBI

role & functions

policy rates
RBI –establishment and key
role
Establishment
The Reserve Bank of India was established on April 1, 1935 in accordance
with the provisions of the Reserve Bank of India Act, 1934 ,initially
established in Calcutta but was permanently moved to Mumbai in 1937.
Though originally privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of India.
the basic functions of the Reserve Bank are
"to regulate the issue of Bank notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage;
to have a modern monetary policy framework
to meet the challenge of an increasingly complex economy, to maintain
price stability while keeping in mind the objective of growth."
 Central board
The Reserve Bank's affairs are governed by a central board of directors.
The board is appointed by the Government of India in keeping with the
Reserve Bank of India Act.
Appointed/nominated for a period of four years
Constitution:
◦ Official Directors
◦ Full-time : Governor and not more than four Deputy Governors
◦ Non-Official Directors
◦ Nominated by Government: ten Directors from various fields and two government Official
◦ Others: four Directors - one each from four local board

Functions : General superintendence and direction

of the Bank's affairs
Local Boards
One each for the four regions of the country in Mumbai, Calcutta,
Chennai and New Delhi
Membership:
◦ consist of five members each
◦ appointed by the Central Government
◦ for a term of four years

Functions :
To advise the Central Board on local matters and to represent
territorial and economic interests of local cooperative and indigenous
banks; to perform such other functions as delegated by Central Board
from time to time.
ORGANISATION STRUCTURE
 Legal Framework
Acts administered by Reserve Bank of India
◦ Reserve Bank of India Act, 1934
◦ Public Debt Act, 1944 / Government Securities Act, 2006
◦ Government Securities Regulations, 2007
◦ Banking Regulation Act, 1949
◦ Foreign Exchange Management Act, 1999
◦ Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
◦ Credit Information Companies(Regulation) Act, 2005
◦ Payment and Settlement Systems Act, 2007
◦ Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS Regulations,
2008
◦ The Payment and Settlement Systems (Amendment) Act, 2015
◦ Factoring Regulation Act, 2011
Other relevant Acts
Negotiable Instruments Act, 1881

State Bank of India Act, 1955

Companies Act, 1956/ Companies Act, 2013

Securities Contract (Regulation) Act, 1956

Deposit Insurance and Credit Guarantee Corporation Act, 1961

Regional Rural Banks Act, 1976

National Bank for Agriculture and Rural Development Act, 1981

National Housing Bank Act, 1987

Recovery of Debts Due to Banks and Financial Institutions Act, 1993

Competition Act, 2002

Indian Coinage Act, 2011 : Governs currency and coins

Banking Secrecy Act

The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
 Main Functions
1. Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability while keeping in mind the objective of growth.

2. Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and
financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and provide cost-
effective banking services to the public.

3. Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
 Main Functions – contd.,
4. Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and in good
quality.

5. Developmental role
Performs a wide range of promotional functions to support national
objectives.

6. Related Functions
Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks
 The organization
Offices
◦ Has 27 regional offices, most of them in state capitals and 04 Sub-offices.

Training Establishments (5)

◦ College of Agricultural Banking
◦ Reserve Bank of India Staff College
◦ National Institute for Bank Management
◦ Indira Gandhi Institute for Development Research (IGIDR)
◦ Institute for Development and Research in Banking Technology (IDRBT)

Subsidiaries (3) -Fully owned:

◦ Deposit Insurance and Credit Guarantee Corporation of India (DICGC),
◦ Bharatiya Reserve Bank Note Mudran Private limited (BRBNMPL),
◦ National Housing Bank(NHB)
 Policy rates as on May 2023
Repo rate 6.5 % the rate at which the RBI lends funds to
commercial banks and other financial institutions
within the country.(against securities)
Rev. Repo 3.35 % the rate at which RBI borrows money from banks
Rate within the country. (banks park surplus liquidity
with RBI)
MSF - 6.75 % RBI lends funds overnight to scheduled banks,
Marginal against government securities. RBI has introduced
Standing this borrowing scheme to regulate short-term
Facility Rate asset liability mismatch in a more effective
manner.
Bank Rate 5.15 % Bank rate is the rate charged by the central bank
for lending funds to commercial banks.
CRR and SLR as on MAY 2023
CRR SLR
Legal Provision Sec 42 (1) RBI act 1934 Sec 24(2a) Banking Regulation
act 1949
Min & Max RBI discretion Min RBI discretion –Max 40%

Present 4.50 % 18.0 %

Kept as Cash balance with RBI Cash in hand ,Gold and
investment in approved
securities
Basis As % of NDTL at FN As % of NDTL on daily basis.
average basis

NDTL = Demand and time liabilities (deposits) – deposits

with other banks
Lending rates determination in
India –historical developments
Post independence to early 90s
◦ Rigid banking system ,excessive control
◦ RBI determined lending rates
◦ Inflexible mechanism

Post 90s economic reforms –PLR regime

◦ RBI deregulated the lending rates
◦ OCT 1994 – banks were given freedom to set loan rates for loans above Rs 2.00
lakhs (w.r.t risk perception and commercial judgement)
◦ Banks to declare PLR –Prime lending Rate
◦ PLR- int. rate that bank would charge the most credit worthy customer /borrower
◦ PLR used to be the floor rate for all loans above Rs. 2 lakhs
◦ 2001-02 RBI permitted lending at sub PLR rates
◦ PLR was rigid ,inflexible not inline with Policy and direction of the Economy
 Lending rates determination in
India –historical developments
contd.,
APRIL 2003 – Introduction of BPLR
◦ BPLR –benchmark prime lending rate
◦ banks can fix the BPLR with the approval of their Boards.
◦ However, the RBI stipulates the interest rates as BPLR is influenced by the Repo rate
and CRR
◦ New vs Old customers disparity
◦ Cross subsidization problems
◦ Ineffective monetary policy transmission
◦ The calculations of BPLR is not that transparent and sometimes the banks under this
system could lend to customers below the BPLR.
Lending rates determination in
India –historical developments
contd.,
July 2010 –Introduction of Base rate system
◦ Banks to announce their base rate (the min. rate under all circumstances)
◦ Banks had free hand in computation
◦ Shortcoming in methodology
◦ Fixed vs floating terms
◦ Again ineffective transmission

April 2016 – MCLR

◦ MCLR – Marginal Cost of Funds Based Lending Rate System
◦ April 2017 onwards all new loans are to be priced using MCLR