Professional Documents
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Economics Project 1
Economics Project 1
Economics Project 1
TOPIC: - RBI AND FINANCIAL SERVICES ACADEMIC YEAR: - 2011-12 TERM: - IST TERM
INDEX
Sr.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. CONTENTS INTRODUCTION RBIs MONEY SUPPLY POLICY FACTORS AFFECTING MONEY SUPPLY TYPES OF FINANCIAL SERVICES TRENDS AND STRATEGIES IN FINANCIAL SECTOR CONSOLIDATION COMPETITION RBIs MONETARY POLICY FOREIGN EXCHANGE SERVICES MANAGEMENT SERVICES RAPO RATE BY RBI INSURANCE AND HOME LOAN SERVICES MONETARING FOREING EXCHANGE CONCLUSION REFERENCE
INTRODUCTION
The Reserve Bank of India (RBI) is the central banking institution of India and controls the monetary policy of the rupeeas well as US$300.21 billion (2010)[1] of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. [2]Reserve bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union.Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks
In last few years, India has emerged as the one of the most rapidly growing economies in the world. India has been categorized with nations like Brazil, Russia and China (BRIC Nations) who are going to be the prime drivers of world economy in next few decades. Since the time, India first opened its gates to foreign investment (FDI & FII), there has been a complete turnaround. Now the traditional Hindu rate of growth is a thing of past and clocking 8%-9% GDP growth rate is the common norm. India along with other Asian powerhouse China makes for the fastest growing nations in the entire world. Even if we take the case of ongoing global recession, India has managed to perform far better than other nations. Right from banking system to financial regularities, the country has thrived on discipline and out-performance. The booming Indian economy resulted in widespread growth and arrival of new industries. The most sparkling phenomenon is in form of financial market of India. Financial services in India has taken a giant leap from the days of standing in banks queue for several hours for opening a saving account or trying to get some fixed deposits (FD) done. The financial services have increased manifold and now people have the choice to choose the one that most suitably fits the bill. There are several services like broking firms, investment
services, financial consulting, evergreen national banks, numerous private banks, mutual funds, car and home loans, equity market and other banking services. Services are many and offered by blue chip names of the industry. Most of the companies in financial segment offer taxation services, project consultancy services and all the services of wide financial gamut. Whether its taking a car loan or booking your favorite house, going for pension plan or getting your child insured, numerous attractive financial services are available at affordable costs. Personal banking services have acquired an altogether new meaning. Now customers have multiple choices to choose from. One can find all the financial services on the internet that are just a call away.
2. Mutual Fund
A mutual fund enables investors to pool their money and place it under professional investment management. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. There are more mutual funds than there are individual stocks.
3. Banking
Financial intermediary Institutions for receiving, lending, and safeguarding money as well as conduction other financial transactions. There are several types of banks: central banks, commercial banks, corporate banks, credit unions, savings banks, trust companies, finance companies, life insurers, investment banks, etc. Banks have drastically evolved throughout time, increasing their services but also becoming institutions that cater to greater numbers of people.
Industry Overview
The financial sector is in a process of rapid transformation. Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The role of an integrated financial infrastructure is to stimulate and sustain economic growth. The growth rate of the financial sector is 15 percent. The financial sector consists of Institutions, markets, financial instruments, specialized and non-specialized financial institutions of organized and unorganized financial markets, financial instruments and services. The common thing between all is that they facilitate transfer of funds. These parts are not always mutually exclusive; Inter-relationships between these are a part of the system e.g.. Financial Institutions operate in financial markets and are, therefore, a part of such markets. Indian Financial sector, with Ministry of Finance at the helm as policy making body, with two regulators RBI and SEBI consists of three principal segments i.e. 1. Financial Institutions
CONSOLIDATION
Consolidation means that financial services worldwide are increasingly concentrated in the hands of a few corporations. Consolidation is seen as the single most important factor transforming the financial services industry since almost a decade. Many experts predict that consolidation will continue and within 5 to 10 years there will be only five to ten top financial conglomerates in the world. In the search for more profitable opportunities, most consolidated financial firms grew through mergers and acquisitions or takeovers that were either friendly or hostile. Such process took place at national and international levels with cross-border consolidation, by trading and investing in financial services in many countries around the world. Many financial services categories, such as retail banking and insurance, were increasingly being brought under one corporate roof, which is called "cross-category consolidation".
d. Maintaining a large capital base as a sponge to absorb losses and the growing cost of technology. e. Increasing the quality of service and products to gain the trust of the customers. f. Increasing profitability in the battle against competitors
COMPETITION
Consolidation is the financial industry's way of dealing with increasing competition. Governments, regulators and supervisors worldwide try to create and maintain a free market with many competitors, for the sake of efficiency and lower prices. Competition remains fierce. The struggle is always for quicker and short-term profit which leads to strategies for more efficiency, lowering costs, expansion of profit-making clients and markets while outpacing competitors. This often means an increasing effort to standardize and automate services, to differentiate them according to the wealth of the client and to shift the focus on financial portfolios. One should also notice the importance of cross selling and cross branding (some financial companies have started to distribute products for their competitors without operating them).
respond to this transition. While global policy co-ordination was critical in dealing with a worldwide crisis, the exit process will necessarily be differentiated on the basis of the macroeconomic condition in each country. Indias rapid turnaround after the crisis induced slowdown evidences the resilience of our economy and our financial sector. However, this should not divert us from the need to bring back into focus the twin challenges of macroeconomic stability and financial sector development. This statement is organised in two parts. Part A covers Monetary Policy and is divided into four Sections: Section I provides an overview of global and domestic macroeconomic developments; Section II sets out the outlook and projections for growth, inflation and monetary aggregates; Section III explains the stance of monetary policy; and Section IV specifies the monetary measures.Part B covers Developmental and Regulatory Policies and is organised into six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets (Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory Measures for Commercial Banks (Section V) and Institutional Developments (Section VI). Part A of this Statement should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank.
MANAGEMENT SERVICES
The principal objectives behind the Reserve Bank's approach to reserves management continue to be safety and liquidity. Within these parameters, return optimisation dictates operational strategies. . The regulatory and supervisory framework for e-banking is continuing to evolve and the regulatory authorities all over the world recognize the need for cooperative approach in this area. The applicability of various existing laws and banking practices to ebanking is not tested and is still in the process of evolving, both in India and abroad. With rapid changes in technology and innovation in the field of e-banking, there is a need for constant review of different laws relating to banking and commerce. The Group, therefore, recommends that the Reserve Bank of India may constitute a multi disciplinary high level standing committee to review the legal and technological requirements of e-banking on continual basis and recommend appropriate measures as and when necessary.The Basle Committee for Banking Supervision (BCBS) has constituted an Electronic Banking Group (EBG) to develop guiding principles for the prudent risk management of e-banking activities. This Working Group, therefore, recommends that the Reserve Bank of India should maintain close contact with regulating / supervisory authorities of different countries as well as with the Electronic Banking Group of BCBS and review its regulatory framework in keeping with developments elsewhere in the world. The legal framework for reserves management is provided in the Reserve Bank of India Act 1934. Specifically, Sections 17 (12), 17(12A), 17(13) and 33(1) of the RBI Act 1934 lay down the scope of investment of foreign exchange reserves by RBI. Broadly, the following investment categories are permitted under the RBI Act:
1. 2. 3.
Deposits with other central banks and Bank for International Settlements Deposits with foreign commercial banks Investments in securities issued by the Government of any other country or by any institution incorporated outside India provided such securities are guaranteed by the Government of the country concerned. The maturity period of such investments should not exceed more than ten years from the date of such investment.
4.
Further, in order to ensure safety and liquidity of our reserves, RBI has also framed internal guidelines/procedures to manage the various risks like credit risk, liquidity risk, operational risks and market risk incidental to the reserves management.
The RBI governor said they are in the process of coming out with proper directions to the banks in this regard. We have asked banks to become more fair and transparent in the loan agreements with the common man, said Reddy. The governor also advised individual borrowers to ask for the exact tenure and EMI while taking a fixed rate loan. The RBI, he promised, would look into all consumer complaints if it is bought to the regulators notice. The governor also commented on miss-selling of products like mutual funds and insurance by banks, and said that IRDA (Insurance Regulatory and Development Authority) has powers to take action against banks if a customer feels cheated while buying an insurance product; and encouraged the customer for an approach in such cases.
The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release.
CONCLUSION
In conclusion, as has been rightly noted by the Working Group that "the applicability of various existing laws and banking practices to e-banking is not tested and is still evolving, both in India and abroad. With rapid changes in technology and innovation in the field of e-banking, there is a need for constant review of different laws relating to banking and commerce." The establishment of the multidisciplinary high level standing committee to review the legal and technological requirements of e-banking on a continual basis and recommendations of appropriate measures as and when necessary, would really be a panacea for legal clarifications as and when they arise. The key in such future and further deliberations would be to encourage banks towards innovation and where necessary or required evolve new practices and customs to complement the banking laws in force from time to time.
REFERENCE
1. http://www.thehindubusinessline.com/bline/2007/02/16/stories/2007021600700800.htm 2. http://www.livemint.com/2007/02/15011413/Reserve-Banks-move-may-not-ch.html 3. http://economictimes.indiatimes.com/articleshow/msid-2481902,prtpage-1.cms 4. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/21595.pdf 5. http://www.sendmoneyindia.org/how-rbi-controls-money-supply.php