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SEMINAR PRESENTATION WRITE-UP

Session: 2018-19
MBA-(Specialized Courses)…….. (II-Sem.)
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SEMINAR PRESENTATION WRITE-UP
TABLE OF CONTENTS

Sr. No. Title Page No.

RBI AND ITS AUTONOMY
INTRODUCTION

The Reserve Bank of India (RBI) is India’s central bank,

also known as the banker’s bank. The RBI
controls monetary and other banking policies of the
Indian government. The Reserve Bank of India was
established on April 1, 1935, in accordance with
the Reserve Bank of India Act, 1934. The Reserve Bank
is permanently situated in Mumbai since 1937.

HISTORY OF RBI
In 1921, there presidency bank was confluent to
imperial bank of India. It was primarily a commercial
bank but discharge certain central banking function.
Especially as a banker to the government. The issue of
notes continued to be direct responsibility of the
British government.
In year 1926, the commission on Indian currency and
finance which is also known as Hilton young
commission suggested for establishment of RBI. And
the bill was introduced in assembly in 1927 and the bill
was dropped on constitutional grounds. After a
recommendation of central bank enquiry committee in
1933 they contained a provision that the RBI free from
political influence
In assembly on September 1934 and started
functioning from 1st April 1935.

CONSTITUTION
The initial capital of RBI five crore.50000 share 100
each with fully paid up capital. The entire share capital
was contributed by private shareholders with the
exception of the nominal value of RS. 2.2 lakh
subscribed by the central government.

NATIONALISATION
After independence in the public opinion was strongly
in favour of nationalisation of the Reserve Bank. A
decision was taken in this regard in 1974.
Consequently, the Reserve Bank of India Act, was
passed in 1948.the entire share capital of the bank was
acquired by the Central Government against
compensation to shareholder at RS.118.10 per share
from 1st January 1949, it began to function as a
government owned intuition.
FUNCTIONS OF THE RESERVE BANK
Issue of Notes — The Reserve Bank has the
monopoly for printing the currency notes in the
country. It has the sole right to issue currency notes of
various denominations except one rupee note (which is
issued by the Ministry of Finance). The Reserve Bank
has adopted the Minimum Reserve System for
issuing/printing the currency notes. Since 1957, it
maintains gold and foreign exchange reserves of Rs.
200 Cr. of which at least Rs. 115 cr. should be in gold
and remaining in the foreign currencies.

Banker to the Government– The second important

function of the Reserve Bank is to act as the Banker,
Agent and Adviser to the Government of India and
states. It performs all the banking functions of the
State and Central Government and it also tenders
useful advice to the government on matters related to
economic and monetary policy. It also manages the
public debt of the government.

Banker’s Bank - The Reserve Bank performs the same

functions for the other commercial banks as the other
banks ordinarily perform for their customers. RBI lends
money to all the commercial banks of the country.
Controller of the Credit - The RBI undertakes the
responsibility of controlling credit created by the
commercial banks. RBI uses two methods to control
the extra flow of money in the economy. These
methods are quantitative and qualitative techniques to
control and regulate the credit flow in the country.
When RBI observes that the economy has enough
money supply and it may cause inflationary situation in
the country then it squeezes the money supply through
its tight monetary policy and vice versa.

Custodian of Foreign Reserves - For the purpose of

keeping the foreign exchange rates stable, the Reserve
Bank buys and sells the foreign currencies and also
protects the country's foreign exchange funds. RBI sells
the foreign currency in the foreign exchange market
when its supply decreases in the economy and
viceversa. Currently India has Foreign Exchange
Reserve of around US$ 360bn.

Other Functions - The Reserve Bank performs a number

of other developmental works. These works include
the function of clearing house arranging credit for
agriculture (which has been transferred to
 NABARD) collecting and publishing the economic data,
buying and selling of Government securities (gilt edge,
treasury bills etc) and trade bills, giving loans to the
Government buying and selling of valuable
commodities etc. It also acts as the representative of
Government in International Monetary Fund (I.M.F.)
and represents the membership of India.

Roles of RBI
New department constituted in RBI - On July 6, 2005 a
new department, named financial market department
in reserve bank of India was constituted for
surveillance on financial markets. This newly
constituted dept will separate the activities of debt
management and monetary operations in future. This
department will also perform the duties of developing
and monitoring the instruments of the money market
and also monitoring the government securities and
foreign money markets.

ADMINSTRATION OF RBI
The Reserve Bank of India comes under the purview of
the following Acts:
Reserve Bank of India Act, 1934,
Public Debt Act, 1944,
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.
Government Securities Regulations, 2007,

Management of the Reserve Bank of

India
The general superintendence and direction of the
affairs of the Reserve Bank of India are vested in the
Central Board of Directors, which consists of 20
members as detailed below:
A Governor and Four Deputy Governors appointed by the
Central Government,
Four Directors nominated by the Central Government,
Ten other Directors,
 One Government official nominated by the Central
Government.

Governor of RBI
Shaktikanta Das 25th Governor of the RBI as on 13 Dec.
2018.

Deputy Governor of RBI

Shri M. K. Jain 22.06.2018 onwards.
Shri B.P. Kanungo 03.04.2017 onwards.
Dr. Viral V. Acharya 23.01.2017 onwards.
Shri N. S. Viswanathan 04.07.2016 onwards.

Governor of the Reserve Bank of India acts as the

Chairman of the Central Board of Directors of the Bank
and its chief executive authority. The Governor can
exercise all the powers, which can be exercised by the
Bank under the Act. However, his powers subject to
the regulations made by the Central Board of Directors
from time to time. In the performance of his duties,
the Deputy Governors and the Executive Directors
assist him. Each Deputy Governor is responsible for
certain specific operations of the Bank. The Governor
and the Deputy Governors are appointed by the
Central Government for a period not exceeding 5
years. They are eligible for reappointment. They are
full-time officers of the Bank.
The 10 directors who are nominated by the Central
Government hold office for a period of 4 years. The Act
provides for their retirement by rotation and every
year two directors shall retire. However, the retiring
director is eligible for re-election.
There are Local Boards for four regions of the country
such as Western, Eastern, Northern and Southern
regions. The headquarters of the Local Hoards are
situated at Mumbai, Kolkata, Chennai and New Delhi.
Each Local Board consists of five members. All the
members are appointed by the Central Government.
The members should represent, as far as possible,
territorial and economic interests and the interests of
cooperative and indigenous banks.
The members of the Local Board are appointed for a
period of four years. They are eligible for
reappointment. They elect from among themselves
one person as the Chairman of the Board.
Departments of RBI
 The various departments of the Reserve Bank of India
are listed below:
Information Technology.
Economic Analysis and Policy.
Statistical Analysis and Computer Services.
Monetary Policy.
Premises Department.
Secretary’s Department.
Press Relations.
Exchange Control.
Rural Planning and Credit.
Financial Institutions Division.
Banking Supervision.
Banking Operations and Development.
Financial Companies.
Non-banking Supervision. 15. Administration and
Personnel Management.
Human Resources Development.
Deposit Insurance and Credit Guarantee Corporation.
Inspection.
Urban Banks.
Currency Management.
External Investments and Operations.
Expenditure and Budgetary Control.
Government and Bank Accounts.
Internal Debt Management Cell.
Industrial and Export Credit.
Legal.
There is a department which is only run by Reserve
Bank of India Agriculture Credit Department for
the development of Agriculture sector in India
and provide long term lone for the Agriculture
sector.

Subsidiaries of RBI
Deposit Insurance and Credit Guarantee
Corporation of India (DICGC)
It was established on established on 15 July 1978 under
Deposit Insurance and Credit Guarantee Corporation
Act, 1961.
Its functions are governed by RBI under the provisions
of ‘The Deposit Insurance and Credit Guarantee
Corporation General Regulations, 1961’ and ‘The
Deposit Insurance and Credit
Guarantee Corporation Act, 1961’ (DICGC Act).
The Head Office is at Mumbai.
It insures all bank deposits, such as saving, fixed, current,
recurring, etc.

National Housing Bank (NHB)

It was established on 9 July 1988 under the National
Housing Bank Act, 1987.
The Head Office is at New Delhi.
It is the Apex level institution for housing.

Bhartiya Reserve Bank Note

Mudran Private Limited
(BRBNMPL)

It was established on 3rd February 1995.

It designs, print and supply banknotes for the Reserve
Bank of India (RBI) to meet the demand of the
banknotes in the country.
The headquarter is at Bangalore, Karnataka.
BRBNMPL has two bank note presses in Mysore and
Salboni.
As the name suggests, it is a Private Limited
company, i.e., not listed on Stock market exchange.
It was registered as the Private Limited Company under
the Companies Act 1956.

WHAT IS AUTONOMY
The right or condition of self-government.
Freedom from external control or influence,
Independence
Autonomous organizations or institutions are
independent or self-governing. Autonomy can also be
defined from human resource perspective and it
means a level of discretion granted to an employee in
his or her work. In such cases, autonomy is known to
bring some sense of job satisfaction among the
employees.

WHY AUTONOMY SHOULD NOT BE

INTERVEL
Ensuring low and stable inflation
Ensure low and stable inflation via the autonomous
conduct of monetary policy.
Once the target is laid down by the central government,
the central bank must ensure that it meets those
targets with complete operational autonomy.
Debt management
The RBI is the government’s debt manager
This function has been proposed to be hived out to an
independent debt management agency but resisted
by the central bank.
Regulation of the banking system
Government plays a separate role in the banking
sector as the owner of public sector banks which
control nearly 70 per cent of all lending.
Pros and cons of RBI autonomy
First, the most prominent argument for central bank
independence is based on the time inconsistency
problem. Time inconsistency arises when the best
plan currently made for some future period is no
longer optimal when that period actually starts. In
the context of monetary policy, the time
inconsistency problem arises because there are
incentives for
 a politically motivated policymaker to try to exploit
the short-run trade-off between employment and
inflation. Expansionary monetary policy may
produce higher growth and employment in the short
run, and, therefore, policymakers may be tempted
to pursue this policy, even in the short run although
there is no guarantee that there would be a
favourable output impact. In the long run, however,
such an expansionary monetary policy will
necessarily lead to higher inflation with deleterious
consequences for the economy. In order to solve the
time inconsistency problem, two distinct approaches
have been advanced.
Second, the political business cycle theory studies
the interaction between economic policy decisions
and political considerations. The best known
prediction of the theory is that the business cycle
mirrors the timetable of the election cycle. Incumbent
governments, in general, will use restrictive policies
early in their elected tenure raising unemployment to
reduce inflation, as the election approaches. The
theory highlights the tendencies of incumbent
governments to generate pre-election booms through
expansionary fiscal policies. Once the incumbents get
re-elected, the policy priorities
 could change towards inflation control rather than
employment generation.
Finally, the fusion of politics and economics over the
last thirty years has resulted in the theory of public
choice, establishing itself as an important proponent
of central bank independence. In the context of
reducing budget deficit, the primary solution offered
in public choice theory is a constitutional
amendment for a pre-specified stipulation on central
bank credit to government. Nevertheless, in recent
years, as a secondary solution to the deficit problem,
some public choice theorists put forward the case
of an independent central bank.
CONS:-
First, detractors of autonomy argue that an
independent central bank lacks democratic
legitimacy. Curiously, such detractors derive
strength from Milton Friedman’s statement that
money is too important an issue to be left to the whims
of central bankers.
Secondly, independence may lead to frictions between
the fiscal and the monetary authorities and the
resulting costs of these frictions between monetary
and fiscal policy may be somewhat
 costly for society, thus inhibiting the development
process.
Thirdly, there may be significant divergence in the
preference pattern of independent central banks and
the society at large. A strong central bank may impose
its outlook on society resulting in a sub- optimal state
in terms of economic welfare. Adequate sources of
accountability can, however, counteract and
circumvent these problems. In fact, the opinions in
this context differ widely on the relative importance
between growth vis-à-
vis inflation as objectives of monetary policy.
CHALLENGES TO RBI
Rising Inflation
Demonetised Currency
Bad Loans
GDP Growth
Global Trade
Criticism
United Forum of RBI Officers in a letter to RBI Governor
had said employees were feeling “humiliated” by
events since demonetisation
They alleged that the government has been impinging on
the central bank’s autonomy
 by appointing an official for currency coordination.
Three former governors and deputy governors flagged
concerns about the central bank’s functioning.
Why autonomy has been affected?
As per RBI Act, the Central Government may from time to
time give such directions to the Bank as it may, after
consultation with the Governor of the Bank, consider
necessary in the public interest
The reason behind this clause is so that any major
decisions are made by the government which is elected
and hence accountable to the people.
The decision to demonetise high-denomination currency
was taken by the government in public interest after
consultation with the RBI
The RBI board simply performed its duty by
implementing the decision.
The separation of debt management from the RBI is not
an assault on the RBI’s independence by the
government.
Instead, it is to remove the conflict of interest that exists
in the RBI’s functions of setting interest rates, and
management of the
government’s debt.
 There has not been any assault on the RBI’s autonomy
— in the setting of interest rates or in the regulation of
banks or in other operational spheres.
As government is the owner of PSBs, government's
interference is justified in case of disbursal of loans
from PSBs.
Consultations between the government and the RBI are
undertaken on various matters of public importance
wherever such consultation is mandated by law or
has evolved as a practice.

In 2018, the RBI and the government

developed differences over at least six
major issues which turned into a full-
fledged battle culminating in Urjit Patel's
resignation:

Interest rates
The spat began with the government unhappy with the
inflation-focused RBI for not cutting interest rates –
and even raising them. However, it spilled over into
regulation, something the central bank believes is its
exclusive domain. What followed was a host of issues
related to regulation where both the parties asserted
against each other.
NPA classification
RBI’s February 12 circular on classification of non-
performing assets (NPAs) and norms of loan
restructuring was the next flashpoint. The government
saw it as overly harsh, and indeed it drove all but two
state-run lenders into the red.

Nirav Modi scam

Around the same time, as the Nirav Modi scam broke,
the government hit out at the RBI on supervision,
drawing an almost-immediate rebuttal with Patel
seeking more powers to oversee public sector banks so
that they are at par with their private sector peers.
NBFCs
The government has been insisting that RBI step in to
provide relief to non-banking finance companies
(NBFCs), which are grappling with a cash crunch after
IL&FS defaulted on repayments. The central bank has
refused to play ball.
Mor's removal
In September, Nachiket Mor was removed from the RBI
board more than two years before his term was to end
without formally informing him. This irked the central
bank brass. His removal was seen to be linked to his
vocal opposition to the government's demand for a
higher dividend.
Payments regulator
A separate payments regulator has been another
friction point with RBI stating its position publicly on
why it did not support the move. In fact, it went to the
extent of releasing its dissent note on a separate
regulator on its website.
RBI
VS GOVERNMENT

The Reserve Bank of India (RBI) Friday reinforced the

importance of central bank autonomy and warned that
the administration’s focus on short-term goals could be
harmful to the economy, linking the achievement of
long-term financial stability to the regulator’s
conservative approach.
Undermining the regulator’s independence
could be “catastrophic,” RBI deputy governor Viral
Acharya said, citing the examples Argentina’s former
central bank chief, who quit in a dispute over the
transfer of reserves, and the recent criticism of their
central banks’ actions by the US and Turkish
presidents.
“A government’s horizon of decision-making is
rendered short, like the duration of a T20 match, by
several considerations. There are always upcoming
elections of some sort — national, state, mid-term,
etc,’’ Acharya told an audience at the AD Shroff
Memorial Lecture in Mumbai. Acharya’s speech follows
the central bank’s unprecedented act of publicly
posting its dissent note against a proposal to amend
the Payment & Settlements Systems Act that would
take away the regulation of payments from it.
Furthermore, the sudden tightness in the financial
market for non-banking finance companies (NBFCs)
and the strict implementation of the defaulter rule
even if a company misses payments for a day, have put
the regulator and the government on a potential
collision course. “Setting up parallel regulatory
agencies with weaker statutory powers and/or
encouraging development of unregulated (or lightly
regulated) entities that perform financial
intermediation functions outside the purview of the
central bank’’ undermines its independence, said
Acharya. Acharya defended the central bank’s
restrictions on banks whose capital has eroded and are
under the so-called prompt corrective action (PCA)
regime of the RBI, which the government wants to
ease for better funding of the economy.
“When the government is seen often making efforts to
dilute the central bank’s policies and effectively
coercing the central bank into such dilutions, banks
and private sector spend more time lobbying for
policies that suit them individually, at the cost of
collective good, rather than investing in value creation
and growth,’’ he said. Although the government and
the RBI have been differing over issues ranging from
PCA to transfer of excess reserves, the central bank
seems to be appreciative of the independence given to
the Monetary Policy Committee. “The government
deserves much credit for its far-sightedness in
legislating the required changes to strengthen this
aspect of central bank’s independence and distancing
itself in the process from monetary decision-making
(other than through the appointment of external
members on the MPC),” said the former New York
University professor. With the markets becoming key to
national economies, governments that do not
honour central bank independence face tough times,
he said.
 “Governments that do not respect central bank
independence will sooner or later incur the wrath of
financial markets, ignite economic fire, and come to
rue the day they undermined an important regulatory
institution,’’ said Acharya. “Their wiser counterparts
who invest in central bank independence will enjoy
lower costs of borrowing, the love of international
investors, and longer life spans.”

Conclusion
Government while demonetising the currency notes was
acting within the norms of the law and did not assault
the autonomy of the central bank.
In a democracy, the final responsibility of all policy
decisions must lie with Government
Therefore, there should be mutual cooperation and
coordination between RBI and Government in large at
public interest for an efficient and sustainable
economy.