UNIVERSITY OF MUMBAI

PROJECT REPORT ON:

“ROLE OF RBI ON INDIAN BANKING SECTOR”

TYBMS
SEMESTER Vl

UNDEE RHE GUIDANCE OF

PROF. KARISHMA MEGHANI

SUBMITTED BY
GAUTAMI SHANKAR POTE
ROLE NO: 41
SATHAYE COLLEGE
VILE PARLE (east) MUMBAI

March 2020
 DECLARATION

I GAUTAMI SHANKAR POTE, TYBMS (BACHELOR OF

MANAGEMENT STUDIES) hereby declare that I have successfully
completed the project on “ROLE OF RBI IN INDIAN BANKING
SECTOR” under the guidance of PROF. KARISHMA MEGHANI for
the academic year 2019-2020 as a part of the degree of BACHELOR OF
MANAGEMENT STUDIES AND FINANCE.

I hereby further declare that all the information provided in the project
has been obtained and presented in accordance with academic rules and
ethical conduct.

Date : SIGNATURE OF STUDENT

Place: (GAUTAMI SHANKAR POTE)

CERTIFIED BY:
PROF: KARISHMA MEGHANI

2
 CERTIFICATE

This is to certify that MS. GAUTAMI SHANKAR POTE, TYBMS

(BACHELOR OF MANAGEMENT STUDIES) , Semester VI (2019-
2020) has successfully completed the project on “ROLE OF RBI IN
INDIAN BANKING SECTOR” under the guidance of PROF.
KARISHMA

(PROF: SHASHANK PAI)

CO-ORDINATOR

PROF(KARISHMA MEGHANI). EXTERNAL

PROJECT GUIDE

3
 ACKNOWLEDGEMENT

I would like to take this opportunity to acknowledge all people who have
helped me directly or indirectly in making “Role of RBI in Indian
Banking Sector” project and to turn it into a successful price of work.

I think University of Mumbai for giving me an opportunity to submit

this project.

I would like to express my gratitude towards my project guide Prof.

Karishma, whose constant review and guidance helped me complete this
project successfully.

4
 RESEARCH METHODOLOGY

Being and explanatory research, it is based on secondary data of

journals, articles, newspaper, books and magazines. Considering the
objectives of study descriptive type research design is adopted to have
more accuracy and rigorous analysis of research study. The accessible
secondary data is intensively used for research study.

5
 EXECUTIVE SUMMARY

Central Bank is an apex financial institution of a country. It is needed to

regulate and control the monetary system of an economy. The need for a
Central Bank in India’s was felt during 18th century. The earliest
attempts to setup a central bank dates back to 1773 when Warren
Hastings recommended time establish the “General Bank of Bengal and
Bihar” as Central Bank of India. In 1913 Lord Keynes also
recommended to set up a central bank. Later on in 9121, by
amalgamating three presidency banks (Presidency Bank of Bengal,
Presidency Bank of Madras and Presidency Bank of Bombay), Imperial
Bank of India was set up. Though Imperial Bank of India performed
certain central banking function, but the right of Note issue was not
given to Imperial Bank of India and Government of India performed
the function of credit control. The establishment of Central Bank that
would issue notes and at the same time function as banker to the
Government was recommended in 1926 by the Royal Commission in a
Indian Currency and Finance (known as the Hilton Young
Commission). In 1931, Central Banking inquiry Committee also
recommended for setting up of a Central Bank of India. In 1933, the
“Round Table Conference” also suggested to set up a Central Bank free
from political influence. As a result of all these recommendations and
suggestions, a fresh bill was passed by the assembly on December 22,
1933 and got Governor General Ascent in March 6, 1934. Thus, the
Reserve Bank of India started working since, 1 st April, 1935 in
accordance with the provision of the Reserve Bank of India Act, 1934.

6
 INDEX

CHAPTER 1: INTRODUCTION TO RBI

1:1 RESERVE BANK OF INDIA (RBI)
1:2 HISTORY
1:3 NATIONALISATION OF RBI
1:4 OBJECTIVES AND REASONS FOR THE ESTABLISHMENT OF
RBI
1:5 BRANCHES AND SUPPORT BODIES OF RBI
CHAPTER 2: LITERATURE REVIEW
CHAPTER 3: RESEARCH METHODOLOGY
3:1 DEPARTMENTS OF RBI
3:2 CHALLENGES OF RBI
3:3 ORGANISATIONAL AND MANAGEMENT STRUCTURE OF RBI
3:4 MANAGEMENT AND STRUCTURE OF RBI
3:5 HIERARCHY OF RBI
3:6 CURRENT GOVERNOR OF RBI
3:7 ORGANISATIONS OF RBI
3:8 ROLE AND FUNCTIONS OF RBI
3:9 PROMOTIONAL DEVELOPMENTAL ROLE AND FUNCTION OF
RBI
3:10 SUPERVISORY ROLE AND FUNCTIONS OF RBI
3.11 PROHIBITORY ROLE AND FUNCTIONS OF RBI
3:12 PREAMBLE OF RBI
3:13 THE RBI LOGO
3:14 THE RBI ROLE IN CURRENT SCENARIO
3.15 RBI’s ROLE IN ECONOMIC DEVELOPMENT
3.16 RBI’s ROLE IN PROMOTING SCHEME AND POLICIES
3.17 PRIMARY DATA
CHAPTER 4: TOPIC RELATED
4:1 ISSUER OF CURRENCY
4:2 BANKERS AGENT AND ADVISOR TO GOVERNMENT
4:3 BANKERS BANK
4:4 ROLE OF FOREIGN EXCHANGE RESERVES

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4:5 REGULATION OF BANKING SYSTEM
4:6 FINANCIAL MARKET
4:7 CLEARING HOUSE FUNCTIONS
4:8 CREDIT CONTROL
4:9 CONSUMER EDUCATION AND PROTECTION
4:10 MONETARY POLICY
4:11 PAYMENT AND SETTLEMENT SYSTEM
4:12 FINANCIAL INCLUSION AND DEVELOPMENT
4:13 RESEARCH AND DATA
4:14 OTHER FUNCTIONS
CHAPTER 5: CONCLUSION
CASE STUDY
BIBLIOGRAPHY

8
CHAPTER:1 INTRODUCTION TO RBI

9
1:1Reserve Bank of India (RBI):

Reserve Bank of India (RBI) is the central bank of India entrusted with a
multidimensional role which includes implementation of monetary policy and
maintaining monetary stability in the country. RBI was established on 1st April 1935
under the Reserve Bank of India Act, 1934. RBI was set up after the recommendations of
Hilton young Commission which had submitted its report in the year 1926. Later on, in
1931 the Indian Central banking enquiry committee had also recommended for the
establishment of the central bank in India.

Initially, Reserve Bank of India was established as a private shareholders bank, but it was
nationalised after independence in the year 1949 through the Reserve Bank (Transfer of
public ownership) act, 1948.

As per the Preamble of Reserve Bank of India, the role and functions of RBI are
described as 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.

The central bank was an independent apex monetary authority which regulates banks and
provides important financial services like storing of foreign exchange reserves, control of
inflation and monetary policy report till August 2016. a central bank is known by
different names in different countries. The functions of a central bank vary from country
to country and are autonomous or quasi-autonomous body and perform or through
another agency vital monetary functions in the country. A central banks may differ from
country to country still they perform activities and functions with the goal of maintaining
economic stability and growth of an economy.

1:2History:

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A 2010 stamp dedicated to the 75th anniversary of the Reserve Bank of India
The Reserve Bank of India was established following the Reserve Bank of India Act of
1934. Though privately owned initially, it was nationalised in 1949 and since then fully
owned by Government of India (GoI).

1935–1949:

Reserve Bank of India-10 Rupees (1938), first year of banknote issue.

The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles
after the First World War.The Reserve Bank of India was conceptualised based on the
guidelines presented by the Central Legislative Assembly which passed these guidelines
as the RBI Act 1934. RBI was conceptualised as per the guidelines, working style and
outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee –
Its origin and its solution” and presented to the Hilton Young Commission.The bank was
set up based on the recommendations of the 1926 Royal Commission on Indian Currency
and Finance, also known as the Hilton–Young Commission. The original choice for the
seal of RBI was the East India Company Double Mohur, with the sketch of the Lion and
Palm Tree. However, it was decided to replace the lion with the tiger, the national animal
of India. The Preamble of the RBI describes its basic functions to regulate the issue of
bank notes, keep reserves to secure monetary stability in India, and generally to operate
the currency and credit system in the best interests of the country. The Central Office of
the RBI was established in Calcutta (now Kolkata) but was moved to Bombay (now
Mumbai) in 1937. The RBI also acted as Burma's (now Myanmar) central bank until
April 1947 (except during the years of Japanese occupation (1942–45)), even though
Burma seceded from the Indian Union in 1937. After the Partition of India in August
1947, the bank served as the central bank for Pakistan until June 1948 when the State
Bank of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI
has been fully owned by the Government of India since its nationalisation in 1949. RBI
has monopoly of note issue.

1950–1960:

11
In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru,
developed a centrally planned economic policy that focused on the agricultural sector.
The administration nationalised commercial banks and established, based on the Banking
Companies Act, 1949 (later called the Banking Regulation Act), a central bank regulation
as part of the RBI. Furthermore, the central bank was ordered to support economic plan
with loans.

1961–1968:

As a result of bank crashes, the RBI was requested to establish and monitor a deposit
insurance system. Meant to restore the trust in the national bank system, it was initialised
on 7 December 1961. The Indian government founded funds to promote the economy,
and used the slogan "Developing Banking". The government of India restructured the
national bank market and nationalised a lot of institutes. As a result, the RBI had to play
the central part in controlling and supporting this public banking sector.

1969–1984:

In 1969, the Indira Gandhi-headed government nationalised 14 major commercial banks.

Upon Indira Gandhi's return to power in 1980, a further six banks were nationalised.The
regulation of the economy and especially the financial sector was reinforced by the
Government of India in the 1970s and 1980s.The central bank became the central player
and increased its policies a lot for various tasks like interests, reserve ratio and visible
deposits. These measures aimed at better economic development and had a huge effect on
the company policy of the institutes. The banks lend money in selected sectors, like
agricultural business and small trade companies. The Banking Commission was
established on Wednesday, 29 January 1969, to analyse banking costs, effects of
legislations and banking procedures, including non banking financial intermediaries and
indigenous banking on Government of India economy; with Mr. R.G. Saraiya as the
chairman.

The branch was forced to establish two new offices in the country for every newly
established office in a town.The oil crises in 1973 resulted in increasing inflation, and the
RBI restricted monetary policy to reduce the effects.

1985–1990:

12
A lot of committees analysed the Indian economy between 1985 and 1991. Their results
had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the
Indira Gandhi Institute of Development Research and the Security & Exchange Board of
India investigated the national economy as a whole, and the security and exchange board
proposed better methods for more effective markets and the protection of investor
interests. The Indian financial market was a leading example for so-called "financial
repression" (Mckinnon and Shaw). The Discount and Finance House of India began its
operations in the monetary market in April 1988; the National Housing Bank, founded in
July 1988, was forced to invest in the property market and a new financial law improved
the versatility of direct deposit by more security measures and liberalisation.

1991–1999:

The national economy contracted in July 1991 as the Indian rupee was devalued. The
currency lost 18% of its value relative to the US dollar, and the Narsimham Committee
advised restructuring the financial sector by a temporal reduced reserve ratio as well as
the statutory liquidity ratio. New guidelines were published in 1993 to establish a private
banking sector. This turning point was meant to reinforce the market and was often called
neo-liberal. The central bank deregulated bank interests and some sectors of the financial
market like the trust and property markets. This first phase was a success and the central
government forced a diversity liberalisation to diversify owner structures in 1998.

The National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalised banks in July to interact with the capital market to reinforce their
capital base. The central bank founded a subsidiary company—the Bharatiya Reserve
Bank Note Mudran Private Limited—on 3 February 1995 to produce banknotes.

Since 2000:

The Foreign Exchange Management Act, 1999 came into force in June 2000. It should
improve the item in 2004–2005 (National Electronic Fund Transfer). The Security
Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded
in 2006 and produces banknotes and coins.

The national economy's growth rate came down to 5.8% in the last quarter of 2008–
2009[38] and the central bank promotes the economic development.

In 2016, the Government of India amended the RBI Act to establish the Monetary Policy
Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the
MPC membership is evenly divided between members of the RBI (including the RBI

13
governor) and independent members appointed by the government. However, in the event
of a tie, the vote of the RBI governor is decisive.

1:3Nationalisation of RBI:

The issue of central bank autonomy in India dates back to the time of its nationalisation
in 1949 after being converted from a shareholder’s bank. The Times of India, in a report
in March 1948, when the proposal of central bank’s nationalisation was in its final stages,
reported that the “The government of India’s desire to nationalise the Reserve Bank is not
shared by the Board of the Bank.” The coverage was essentially a reportage of the speech
by Sir Chintaman Deshmukh, the then governor of the Reserve Bank of India.

It quoted Sir Deshmukh as saying the central bank’s board held the view that such a step
was both premature and logically unnecessary in the present stage of the economic
development of the country. He had, however, said even then in the event of the
government’s decision to nationalise the central bank proving irrevocable, the authorities
would co-operate with the government in evolving a scheme of nationalisation. More
important than the theoretical constitution of the bank, in his opinion, was the need for
close co-operation between the finance department of the government and the Reserve
Bank.

Sir Deshmukh was then speaking at the Founder’s Day celebration of the Gokhale School
of Economics and Politics in Pune. In the course of his remarks, Sir Deshmukh referred
to the International Monetary Fund and the International Bank for Reconstruction and
Development, of which India was now a prominent member. During that year, there was
a possibility of India availing herself of the facilities which the Fund and the Bank
offered its members. India’s sterling balances and the connected problem of inflation in
the country engaged the attention of the Reserve Bank soon after the commencement of
the War.

1:4Objectives And Reasons For The Establishment Of RBI:

The main objective for establishment of RBI as the Central Bank of India were as
follows:

• To manage the monetary and credit system of the country.

• To establish internal and external value of rupee.
• For balanced and systematic development of banking in the country.
• For the development of organised money market in the country.
• For proper arrangement of agriculture finance.

14
• For proper arrangement of industrial finance.
• For proper management of public debts.
• To establish monetary relations with other countries of the world and international
finance institutions.
• For centralization of cash reserves of commercial bank.
• To maintain balance between the demand and supply of currency.

According to the Reserve Bank of India Act, the aim of RBI is, “to regulate the issue of
bank notes and keeping of reserve with a view to secure system of the country to its
advantage.

1:5Branches and Support Bodies Of RBI:

The RBI has four regional representations: North in New Delhi, South in Chennai, East in
Kolkata and West in Mumbai. The representations are formed by five members,
appointed for four years by the central government and with the advice of the central
board of directors serve as a forum for regional banks and to deal with delegated tasks
from the Central Board. It has two training colleges for its officers, viz. Reserve Bank
Staff College, Chennai and College of Agricultural Banking, Pune. There are three
autonomous institutions run by RBI namely National Institute of Bank Management
(NIBM), Indira Gandhi Institute of Development Research (IGIDR), Institute for
Development and Research in Banking Technology (IDRBT). There are also four zonal
training centres at Mumbai, Chennai, Kolkata, and New Delhi.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a

CCBD committee to control the financial institutions. It has four members, appointed for
two years, and takes measures to strength the role of statutory auditors in the financial
sector, external monitoring, and internal controlling systems.

The Tarapore committee was set up by the Reserve Bank of India under the chairmanship
of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account
convertibility. The five-member committee recommended a three-year time frame for
complete convertibility by 1999–2000.
THE Reserve Bank of India is India's Central banking institution, which controls the
monetary policy of the Indian Ecomomy. It commenced its operation on 1 April 1935
during the British Rule. The bank is often referred to by the name Mint Street. It regulates
the flow of money in Indian Economy.

On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of

India, said RBI will open an office in the north-eastern state of Arunachal Pradesh.

15
CHAPTER:2 LITERATURE REVIEW

16
The contributions made by various scholars and experts in the field of Credit Policy and
Monetary Policy are really praiseworthy. Although various studies have been reviewed,
only those works which are closely related to the present study are included here. A
number of studies have been conducted in India and abroad to study the various aspects
of performance measurement in the banking sector. These studies have been reviewed
critically with a view to understand the objectives of these studies, research methodology,
research findings, etc. and to identify the gap that exists in the literature in this area.
These studies have been placed in a chronological order and category-wise.

1) SBI Chairman Pratip Chaudhuri (2012) in his interview with Gopika Gopakumar
on CNBC-TV 18 Says that Banks are making a new demand on the CRR front Banks in
general and SBI in particular have been demanding lower CRR first and then interest to
be paid on cash reserves maintained with RBI as CRR. SBI has taken the debate one step
forward. It believes that the Reserve Bank is over- calculating the CRR in terms of the
principle amount. Chaudhuri has stressed that RBI should allow banks to calculate CRR
on the deposits that 16 have been kept with the banks. Say for instance a depositor keeps
Rs 1,000 of deposits with the bank. The CRR currently is now being calculated on the
accrued interest on these deposits. That is a huge amount of money for the bank. Pratip
Chaudhuri’s argument is that the CRR should be calculated on the deposited amount
which is Rs 1,000 kept with the bank. "If you see the way the CRR is calculated,
there are two kinds of deposits. One in which the depositor collects the interest
periodically, maybe monthly and quarterly at the most preferred frequencies. Also there
are people who keep it in what is called a reinvestment plan or a compounded fixed
deposit. He also had a discussion on this matter, but one needs to wait and see whether
RBI will concede to this demand of his. But clearly his argument being that the CRR
calculated on the accrued interest is clearly causing a big disadvantage to the banks. That
is being seen in terms of depositors’ demand being shifted to NBFCs, because they are
obviously charging higher interest rate on their deposits. The Reserve Bank of India
(RBI) in its mid-quarter monetary policy review kept the repo rate unchanged but cut the
Cash Reserve Ratio (CRR) by 25 basis points (bps), a move that will likely infuse Rs
17,000 crore into the economy. The RBI will continue to target inflation in its credit
policy.

2) Kulkarni and Yuan (2006) in his paper “Demand for Money in an Open Economy
Setting: A Case of India” made a summary of Keynesian and Monetarists explanations of
money demand
determination. The main contrasting argument between these two camps is the
importance of interest rates in determining the demand for money. While Keynesians are
seen to be in firm belief that interest rate is quite crucial in determining money demand (a
la liquidity trap), the monetarists hold a view that the real GDP and general price level
(P) are the only significant determinants of it. We also carried out a thorough survey of

17
demand for money studies applied to many economies in general and to India in
particular. By using the modern times data in case of India, we find that the influence of
interest rate on demand for money is small in magnitude and statistically insignificant in
both cases, and that of real GDP is significant in the first case and insignificant in the
second case. Inflation rate shows strong negative effect on money demand and
statistically significant in both cases. Hence it appears that the monetarist belief that the
interest rate is not very crucial determinant of the demand for money is supported. Since
foreign reserve exhibits abnormal effect when it comes into play, it is dropped throughout
the co integration tests and the following vector error correction model. Another point is
that the positive (but insignificant) effect of exchange rate 17 on money demand is seen
to be the test of monetary policy makers’ ability to sterilize the domestic money demand.
All in all the demand for money function for India does not have changed behavior
because of her newly found love for openness. The demand for money in India is still
significantly determined by real GDP and inflation rate alone, and exchange rate and
foreign reserves do not make drastic changes in it. Transactions demand for money is
mainly determined by National Income and the speculative demand for money is
primarily determined by Interest rate. Hence according to Keynes the main determined of
demand for money are interest rate and the national income.

3) Reserve Bank of India (2010) in his discussion paper “Deregulation of Savings bank
Interest rates: A Discussion paper” try to put the pros and cons of deregulation of savings
deposits interest rates in India. Regulation of interest rates imparts rigidity to the
instrument/product as rates are either not changed in response to changing market
conditions or changed slowly. This adversely affects the attractiveness of a
product/instrument. In the case of savings bank deposits, its interest rate has remained
unchanged at 3.5 per cent since March 1, 2003 even as the Reserve Bank’s policy rates
and call rates (representing a proxy for operative policy rate as at a time, only one rate –
either the repo rate or the reverse repo rate – is operative depending on liquidity
conditions) moved significantly in either direction. Regulation of savings deposits
interest rate has not only reduced its relative attractiveness but has also adversely affected
the transmission of monetary policy. For transmission of monetary policy to be effective,
it is necessary that all rates move in tandem with the policy rates. This suggests that
regulation of the interest rate on savings deposits has impeded the monetary transmission
and that deregulation of interest rate will help improve the transmission of monetary
policy. In sum, deregulation of savings deposit interest rates has both pros and cons.
Savings deposit interest rate cannot be regulated for all times to come when all other
interest rates have already been deregulated as it creates distortions in the system.
International experience suggests that in most of the countries, interest rates on savings
bank accounts are set by the commercial banks based on market interest rates.

18
4) Deepak Mohanty (2012) in his paper “Evidence of Interest Rate Channel of Monetary
Policy Transmission in India” provides empirical evidence of interest rate channel of
monetary policy in India. With the development of domestic financial markets and
gradual deregulation of interest rates, monetary policy operating procedure in India in the
recent 18 years has evolved towards greater reliance on interest rates to signal the stance
of monetary policy. Author has find evidence that policy rate increases have a negative
effect on output growth with a lag of two quarters and a moderating impact on inflation
with a lag of three quarters. Changes in interest rates by the monetary authorities could
also induce movements in asset prices to generate wealth effects in terms of market
valuations of financial assets and liabilities. Higher interest rates
can induce an appreciation of the domestic currency, which in turn, can influence net
exports and, hence, aggregate demand and output. At the same time, policy actions and
announcements affect expectations about the future course of the economy and the degree
of confidence with which these expectations are held. On the output side, these changes
affect the spending, saving and investment behavior of individuals and firms in the
economy. In a simplistic view, other things being equal, higher interest rates tend to
encourage saving rather than spending.

5)Dr. RupaRege Nitsure (2009) attemptedtoanalyzeinherpaper“SubprimeCrisisandthe

Liquidity Crunch” the situation of Sub-prime in the U.S. Country with reference to the
Liquidity and Credit crunch in the Global banking system as a consequences of the global
liquidity squeeze overseas sources of funds dried up for Indian banks and corporate
forcing corporate to shift their credit demand to the domestic banking sector. Liquidity or
credit crunch following the outbreak of subprime crisis primarily reflected the crisis of
confidence in the global financial system. It occurred because risk management and
supervisory practices in the U.S. and many other developed nations could not keep pace
with new financial innovations and business models. The subprime crisis has proved that
the current global financial system is not sustainable and there is a need to strengthen its
capital and liquidity rules and improve prudential regulation. The policy response to the
crisis has to balance the country’s short-term needs with its long-term macroeconomic
plan and a plan for financial and regulatory reforms. This alone can revive the confidence
of all economic agents and banks in the economic system and ensure a path for long-term
sustainable growth.

6) Deepak Mohanty (2011) in his address at IIT under the title “Monetary Policy
Response to Recent Inflation in India” trying to prove the relation between the Policy
framed by the reserve bank of India and the Inflation situation in the country. India,
though initially somewhat insulated from the global developments, was eventually
impacted significantly by the global shocks through all the channels – trade, finance and
expectations channels. In 19 response, the Reserve Bank swiftly introduced a
comprehensive range of measures to limit the impact of the adverse global developments

19
on the domestic financial system and the economy. The Reserve Bank, like most central
banks, took a number of conventional and unconventional measures to augment domestic
and foreign currency liquidity, and sharply reduced the policy rates. In a span of seven
months between October 2008 and April 2009, there was unprecedented policy activism.
For example: (i) the repo rate was reduced by 425 basis points to 4.75 per cent, (ii) the
reverse repo rate was reduced by 275 basis points to 3.25 per cent, (iii) the cash reserve
ratio (CRR) of banks was reduced by a cumulative 400 basis points of their net demand
and time liabilities (NDTL) to 5.0 percent, and (iv) the total amount of primary liquidity
potentially made available to the financial system was over 5.6 trillion or over 10 per cent
of GDP. As growth took hold and inflation became more generalized, monetary policy
response was strengthened. Initially, monetary transmission was weak as systemic
liquidity was in surplus. But once liquidity turned into deficit in July 2010, monetary
transmission improved.

7) Saibal Ghosh in his paper “Monetary policy and bank behavior: Empirical evidence
from India” put out the role of bank play in influencing the monetary transmission
process. A vast literature has developed in recent years on the effectiveness of monetary
policy and the channels through which such policy operates. This renewed interest in
monetary transmission needs to be viewed within the context of a revival of theories that
stress the impact of the financial system on aggregate economic activity. Generally
speaking, banks can play different roles in the transmission process. The traditional
money view focuses on the liability side of the banks’ balance sheets, where the
aggregated amounts of deposit constitute the largest part of the money supply. The study
presents empirical evidence on the lending channel in India, using annual bank-level data
covering the period 1992-2004. The analysis focuses on the differential response of loan
supply to monetary policy changes across bank categorized in terms of their size,
capitalization and liquidity. The analysis indicates that for banks classified according to
size and capitalization, a monetary contraction lowers bank lending, although large and
well-capitalized banks are able to shield their loan portfolio from monetary shocks.

8)Giorgio Calcagnini and Fabio Farabullini in his paper “The impact of the recent
financial crisis on bank loan interest rates and guarantees” trying to analyze the role of
guarantees on loan interest rates before and during the recent financial crisis in Italian
firm financing. This paper aims at analyzing the role played by collateral and personal
guarantees on bank loan interest rates granted to Italian firms by means of a large dataset
drawn from the Central Credit Register for the period 2006-2009. In addition, it tried to
understand bank behavior before and during the recent financial crisis. The Central Credit
Register is an information system regarding the debt of the customers of the banks and
financial companies supervised by the Bank of Italy. Collateral helps reduce loan interest
rates charged to firms, once we control for borrower and loan riskiness, before and during
the financial crisis. 28

20
9) Sayuri Shirai in her paper entitled “Assessment of India’s Banking Sector Reforms
from the Perspective of the Governance of the Banking System” has put the need to
Strengthening the financial systems has been one of the central issues facing emerging
markets and developing economies. This is because sound financial systems serve as an
important channel for achieving economic growth through the mobilization of financial
savings, putting them to productive use and transforming various risks. Many countries
adopted a series of financial sector liberalization measures in the late 1980s and early
1990s that included interest rate liberalization, entry deregulations, reduction of reserve
requirements and removal of credit allocation. The second unique feature of India’s
banking sector is that the Reserve Bank of India has permitted commercial banks to
engage in diverse activities such as securities related transactions (for example,
underwriting, dealing and brokerage), foreign exchange transactions and leasing
activities. The 1991 reforms lowered the CRR and SLR, enabling banks to diversify their
activities. Given that public- sector banks have scale advantages, the current approach of
improving their performance without rationalizing them may not produce further benefits
for India’s banking sector. As 10 years have passed since the reforms were initiated and
public-sector banks have been exposed to the new regulatory environment, it may be time
for the government to take a further step by promoting mergers and acquisitions and
closing unviable banks. A further reduction of SLR and more encouragement for non-
traditional activities (under the bank subsidiary form) may also make the banking sector
more resilient to various adverse shocks.

10) Dr. Duvvuri Subbarao in his comment on “Policy Discipline and Spillovers in an
Inter- connected Global Economy” at the SNB‐IMF Conference on the International
Monetary System, Zurich that first we need to consider ways in which countries can
impose policy discipline on one another’s behavior to minimize the risks that their
policies could pose for others. Second, we need to move toward a new consensus on
economic policies, that is to say new norms against which country behavior can be
assessed. We have made considerable progress - though still not enough - on financial
regulation. But we have only just started developing a new framework for
macroeconomic policy, and defining the proper relationship between macro, growth, and
financial policies.

11)Rajesh Chakrabarti in his paper “Banking in India – Reforms and Reorganization”

elaborated the process of reforms and reorganization in the banking sector and what is the
29 effect of that process to the banking sector in India. Arguably the most far-reaching
impact of banking liberalization in India has involved the deregulation of the interest rate.
From a completely government-determined interest rate structure, Indian banks have now
gradually moved to an almost entirely market-driven interest rate system. During this
period interest rates have declined somewhat – the development with arguably the largest

21
direct impact on common people. Regardless of the actual movement of the rates, what is
truly significant is the fact that the rates are now determined largely by competitive
market forces rather than the government. This means that lending rates are determined
by forces of demand and supply for such funds rather than by government policies.
Nevertheless, the corporate loan market does not appear to have fully equilibrated over
time.

12) Meghna Patel in her article “Systemic liquidity deficit – Causes & Concerns”
point out the causes for maintain of Liquidity for the Banking sector in India. Since
systemic liquidity in more than one way influences every aspect of economic growth, this
variable has always managed to gain significant importance. Money supply in the
economy, credit off-take, deposit growth, inflation, GDP growth as a whole, just to name
a few, are all a function of the systemic liquidity. Government bond yields and the overall
interest rate structure too are dependent on the funds available in the system. On the
domestic front, the current fiscal year has marked persistent liquidity concerns post
quarter one with expectations increasingly coalescing for the deficit to continue. The
liquidity deficit remains a puzzle and several measures have been suggested that can be
taken to aid the current situation. In the year 2010, the LAF window has seen significant
volatility with respect to both the quantity and the direction of the fund flow between the
Central Bank and the system as a whole. The beginning of the fiscal year marked surplus
liquidity to the tune of Rs.1,00,000 Cr while the current times mark a deficit of around
Rs.1,00,000 Cr. The current scenario demands the Central Bank’s keen attention. Going
into December, the liquidity scenario will tighten further with the advance tax outflows.
Another outflow of around Rs.45, 000 Cr from the system would take the deficit to as
high as Rs.1,50,000 Cr. The Central Bank has been closely monitoring the liquidity
situation and acted accordingly at every step. Announcing the second LAF window on
several instances, waiving off the interest on incremental access of LAF funds up to 1%
of NDTL, OMO purchases, etc have been several efforts in this direction. The markets
have started mulling several options that the RBI has at the given juncture, viz. CRR
reduction by around 50bps, further waiver on the SLR up to 1%, reduction in T-Bill
auction size, postponing the borrowing calendar to January-February, etc. While some
may argue that a reduction in CRR would indirectly imply the reversal of the withdrawal
process started in October 2009, the current situation seeks immediate measures. The RBI
could announce a CRR cut for a limited period of time, till the system rides the advance
tax outflow.

13) Meghna Patel in her report “Analysis of SLR (Statutory Liquidity Ratio) Investment
in Current Fiscal Year 2011-12” studies the yield movement in light of the investments in
SLR securities by banks. It analyses the bank buying pattern in comparison to last year
amidst the evolving macroeconomic conditions. The rationale for having SLR is that it
has worked as a macro prudential tool. SLR makes banks invest in government bonds

22
which are risk-free assets and reduces the overall systemic risk in the banking sector. The
SLR has been gradually brought down by the RBI over the years. The deposit growth in
the current fiscal has been robust tracking the higher interest rate scenario that attracted
huge deposits. The incremental rise in aggregate deposits in the current FY so far has
been Rs.2,09,275 Cr as against Rs.1,03,899 Cr seen in the same period last year. The G-
Sec market has received a huge support from the bank buying in the current fiscal. The
yields have been contained to a reasonable extent despite the aggressive rate tightening.
This can be primarily traced to the slowdown in credit growth as compared to same
period last year. The scheduled Government borrowing could sail through smoothly in
case the robust buying by banks continues. The buying of Government securities and
other securities would depend on the pan out of credit off-take. It is likely that the
aggressive pace of resource rising by banks which has been seen in the past would be
consciously reduced in the absence of good credit opportunities. Further an increase in
the borrowing programme cannot be ruled out as the subsidy burden on the fiscal
increases with elevated crude and food prices. The yields could rise further in case rate
tightening is carried on by the RBI to bring inflation to its target level. We are of the view
that systemic SLR has peaked and would not touch the 30% mark. Thus an upward
pressure on yields during the second half of the fiscal year remains possible.

CHAPTER-3: RESEARCH METHODOLOGY

3.1 Departments of RBI:

1.Issue Department:

This department is concerned with the activities related to the issuing of money. So, for
the proper conduct of the monetary transactions in the country, there are 14 circles which

23
have been given the task of issuing. Besides this, each of these branches has the cash
department and the general department.

2.Banking Department:

This department handles the various bank’s service for the government as well as the
other banks. Thus, there are 4 sub-divisions to this department.

3.Currency Management Department:

This department is responsible for forecasting the long-term requirements of the currency
and subsequently allocating it to the various other branches. Thus, it takes into account
the storage facilities, demand pattern, etc. The Chief officer heads this department.

4.Government and Bank Accounts Department:

The main task of this department is to handle and maintain the various bank’s accounts in
the banking and issuing departments. Thus, it compiles weekly statements and the
balance and annual profit and loss account and the chief accountant head this department.

5.Budgetary Control and Expenditure Department:

Under this department, the bank’s budget and various expenditures are monitored for the
different units. Also, this department is headed by the financial controller.

6.Department of Exchange Control:

This department is responsible for maintaining the exchange rate and controlling the
foreign exchange. Also, they try to stabilise the exchange rate.

7.Department for Industrial Credit:

This department as the name suggests is related to the credit-related activities of the
industries. So, their primary task is to provide various credit guarantee schemes for the
small-scale industries and looking after their administration.

8.Banking Operations and Development Department:

24
This department looks after the commercial banks in India. They control, supervise,
develop these banks. Earlier it was also related to bank credit and lead bank scheme for
the priority sectors.

9.Agriculture Credit Department:

Under this department, the care is taken for various credit schemes in rural financing,
providing financial resources to various co-operative banks. It also provides the required
financial assistance to the state governments to improve their financial structure. Further,
it formulates the policies for commercial banks and coordinates with the long-term
activities for the state land development banks.

10.Non-banking Companies Department:

The primary task of this department is to regulate the deposits related to non-banking
financial companies. Further, it also controls and administers companies.

11.Credit and Rural Planning Department:

This is one of the oldest departments in the RBI. Also, it was established in the year 1982
and is concerned with the issues like lead bank scheme, credit plans for the district,
provision for the expert assistance, processing the credit line for short-term loans the
NABARD, and putting forward the policies for reserve bank regarding rural India.

12.Economic Policy and Analysis Department:

This department handles the economic reviews and research for banking and financial
conditions of the country. Also, it comprises majorly of 5 units, international financial
unit, internal finance unit, general unit, analysis of national economic parameters unit,
and prices, general, and production unit.

13.Computer Services and Statistical Analysis Department:

This department as the name suggests collects, generates, process, and compiles the
statistical data related to the financial and banking sectors. Thus, it collects the data from
the operational point of view of the RBI.

14.Legal and Inspection Department:

25
The inspection department carries out the inspections of the various departments and
offices of the RBI. For the legal advice on various issues referred by the RBI, the legal
department is responsible.

15.Department of Administration and Personnel:

It looks after the general administration and personnel policy, such as recruitment,
training, placements, promotions, transfers, discipline, appeals, service conditions, wage
structure, etc.

16.Premises Department:

It is mainly concerned with the construction of buildings for the Bank’s offices, training
institutions and staff quarters.

17.Management Services Department:

It is basically concerned with organisational analysis, systems research and development,

work procedure studies and codification, manpower planning, costing studies, etc.

18.Reserve Bank of India Service Board:

Its functions involve conducting of examinations/interviews for the selection and

promotion of staff in the Reserve Bank.

19.Central Records and Documentation Centre:

It is meant for the preservation of non-current records of the Bank. It provides

arrangement for the scientific preservation of records, retrieval service to the enquirer
departments, tools of reference such as catalogues, indices, etc.

20.Secretary’s Department:

It attends to the secretarial work connected with the meetings of the Central Board and its
committee and of the Administrators of the RBI Employee’s Provident Fund and RBI
Employees’ Co-operative Guarantee Fund.

21.Training Establishments:

26
The Reserve Bank has set-up three prominent training institutions for imparting training
in different areas of banking.
These are:
(i) the Banker’s Training College, Bombay.
(ii) the College of Agricultural Banking, Pune.
(iii) the Reserve Bank Staff College, Madras.

There are also Zonal Training Centres situated in Bombay, Calcutta, Madras and New
Delhi for conducting induction, functional and short-term preparatory courses for the
clerical staff.

3.2 Challenges of RBI:

Rising inflation: One of the key factors mentioned in the report is related to rising
inflation. The report indicated that headline inflation may face upside risks in the
remaining portion of the year. The apex bank mentioned in its report that headline
inflation, which clocked an average of 4.8 per cent in Q1 2018-19, is likely to rise amid
rising in global commodity prices such as crude oil, weakening rupee which hit a new
low against the dollar today and other developments around financial markets in the
world.

Demonetised currency: The RBI report also revealed that 99.30 per cent of the
demonetised Rs 500 and Rs 1,000 notes have come back. The top bank said: “The value
of banknotes in circulation increased by 37.7 per cent over the year to Rs 18,037 billion
as at end-March 2018.
The volume of banknotes, however, increased by 2.1 per cent.” It may be noted that
before November 8, 2016, Rs 500 and Rs 1,000 rupee notes worth Rs 15.41 lakh were in
circulation and out of that, Rs 15.31 lakh crore was returned to the RBI.

Bad loans: The RBI has also warned against rising bad loans. The latest report predicts
that the number of bad loans may rise in 2018-19. As of now, the bad loans in the
banking sector is at around 11.5 per cent. “Going forward, the stress tests carried out by
the Reserve Bank suggest that under the baseline assumption of the current economic
situation prevailing, the gross NPA ratio of scheduled commercial banks may increase
further in 2018-19,” the report highlighted
GDP growth: The annual report has also projected the GDP growth for the year 2018-19
at a robust 7.4 per cent. While this remains unchanged from the August monetary policy,
the growth will be driven by foreign investments, consumption and exports. However, for
the real GDP growth to inch higher, there is a need to boost industrial production and also

27
to reduce overall borrowing. Thus, the economic growth on GDP terms will be dictated
by policy reforms.

Global trade environment & crude oil price: Another factor that may affect the Indian
economy in future is the worsening global trade scenario, triggered by a series of
protectionist policies. Not to forget the rising price of crude oil and increased demand,
which has led to a sharp spike in India’s import bill.
"With India being a net energy importer, the changing demand-supply dynamics in the
international crude oil market may impact heavily on India’s trade deficit," the apex bank
said.
Other than that, the RBI spoke about its roadmap to improve the banking sector and
revive the economy further. The report also gave insights about how the government
plans to resolve the issue of widening current account deficit through higher foreign
direct investment inflows.
Despite all the risks, the report suggested that India is currently poised to grow robustly if
structural reforms are implemented to address the banking sector mess, taxation woes and
also strengthen the business environment.

3:3Organisational and Management structure of Reserve Bank of India:

The supervision and general affairs of RBI are governed by the central board of directors.
The Government of India appoints the central board of directors for a tenure of 4 years.

The Central Board of directors consists of full-time officials which include the Governor
and not more than four Deputy Governors.
The government nominates ten directors from different fields and two government
officials. Other four directors one each from the local boards are also appointed.
The current Reserve Bank of India governor is Dr. Urjit R. Patel. The current 4 Deputy
Governors are Shri M. K. Jain, Shri B.P Kanungo, Dr. Viral V. Acharya, and Shri N.S.
Vishwanathan.
The Deputy Governor and director attend the meetings of the Central Board, however,
they are not entitled to vote.

3:4MANAGEMENT AND STRUCTURE OF RBI:

STRUCTURE OF RBI:

RBI runs a monetary museum in Mumbai. The central board of directors is the main
committee of the central bank. The Government of India appoints the directors for a four-
year term. The board consists of a governor, and not more than four deputy governors;

28
four directors to represent the regional boards; two — usually the Economic Affairs
Secretary and the Financial Services Secretary — from the Ministry of Finance and ten
other directors from various fields. The Reserve Bank — under Raghuram Rajan's
governorship — wanted to create a post of a chief operating officer (COO), in the rank of
deputy governor and wanted to re-allocate work between the five of them (four deputy
governor and COO).The bank is headed by the governor, currently Shaktikanta Das.

There are four deputy governors B. P. Kanungo, N. S. Vishwanathan, Mahesh Kumar

Jain, and Michael Patra.
Two of the four deputy governors are traditionally from RBI ranks and are selected from
the bank's executive directors. One is nominated from among the chairpersons of public
sector banks and the other is an economist. An Indian Administrative Service officer can
also be appointed as deputy governor of RBI and later as the governor of RBI as with the
case of Y. Venugopal Reddy and Duvvuri Subbarao. Other persons forming part of the
central board of directors of the RBI are Dr. Nachiket Mor, Y. C. Deveshwar, Prof
Damodar Acharya, Ajay Tyagi and Anjuly Duggal. Uma Shankar, chief general manager
(CGM) in charge of the Reserve Bank of India's financial inclusion and development
department has taken over as executive director (ED) in the central bank.[citation
needed]. Sudha Balakrishnan, a former vice-president at National Securities Depository
Limited, assumed charge as the first chief financial officer (CFO) of the Reserve Bank on
15 May 2018; she was given the rank of an executive director.

3:5HIERARCHY OF RBI:

29
3:6 CURRENT GOVERNOR OF RBI:

Shri Shaktikanta Das, IAS Retd; former Secretary, Department of Revenue and
Department of Economic Affairs, Ministry of Finance, Government of India assumed
charge as the 25th Governor of the Reserve Bank of India effective December 12, 2018.
Immediately prior to his current assignment, he was acting as Member, 15th Finance
Commission and G20 Sherpa of India.

30
Shri Shaktikanta Das has vast experience in various areas of governance is the last 38
years. Shri Das has held important positions in the Central and State Governments in the
areas of Finance, Taxation, Industries, Infrastructure, etc.
During his long tenure in the Ministry of Finance, Government of India, he was directly
associated with the preparation of as many as 8 Union Budgets. Shri Das has also served
as India's Alternate Governor in the World Bank, Asian Development Bank (ADB), New
Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB). He has
represented India in international for a like the IMF, G20. BRICS, SAARC, etc. Shri
Shaktikanta Das is a postgraduate from St. Stephen's College, Delhi University.

SHRI. MAHESH KUMAR JAIN:

The government appointed IDBI Bank MD and CEO, M.K. Jain, as Deputy Governor of
the Reserve Bank of India in place of S.S. Mundra, who had completed his three-year
term in July. Mahesh Kumar Jain began his career in Punjab National Bank and later
moved to Syndicate Bank before becoming an ED, and later head of Indian Bank

Significantly, in 2016-17, when most public sector banks were facing the heat of rising
bad loans, leading to investors dumping stocks, Indian Bank was a notable exception. The
Chennai-headquartered bank was then headed by Mr. Jain and the performance of the
bank did not go unnoticed by investors and the government. Indian Bank's bad loans were
(and continue to be ) among the lowest among PSBs.

SHRI B.P KANUNGO:

31
Shri B.P. Kanungo took over as the Deputy Governor of the Reserve Bank of India today.
The Governemnt of India, on March 11, 2017 or until further orders, whichever is earlier.
Shri Kanungo was Executive Director of the Reserve Bank before being elevated to the
post of Deputy Governore. As Deputy Governor, Shri Kanungo will look after the
Department of Currency Management, (DCM), Department of External Investment &
Operations, (DEIO), Department of Government & Bank Accounts (DGBA), Department
of Information Technology (DIT), Department of Payment & Settlement System (DPSS),
Foreign Exchange Department (FED), Internal Debt Management Department (IDMD),
Legal Department (LD) and Premises Department (PD). Born on May 5, 1959, Shri
Kanungo holds a Master’s degree in humanities from Utkal University, besides holding a
Bachelor’s degree in Law.

Dr. VIRAL V.ACHARYA:

Viral V.Acharya (born 1 March 1974) is an India economist who has been appointed as
Deputy Governor of Reserve Bank of India (RBI). He also serves as a member of the
advisory council of the National Institute of Securities Markets (NSIM) , Securities and
Exchange Board of India (SEBI) since 2014. As of 20January 2017, he is serving a three-
year term as a Deputy Governor of the Reserve Bank of India. He was born on March 1,
1974. He is B.Tech from Indian Institute of technology and Bombay and done his
Doctorate (PHD) from New York University.

32
N S VISHWANATHAN:

N S Vishwanathan is the deputy governor of Reserve Bank of India. He was appointed

on June 28, 2016, by the appointments committee of the Cabinet Governemnt of India.
He replaced H R Khan, whoes term ended on July 3, 2016. He was born on June 27, 1958
and completed Master’s in Economics from Bangalore University. Indian Institute of
Technology Bombay.

3:7 ORGANISATIONS OF RBI:

The organisation of RBI can be divided into three parts:

 Central Board of Directors.
 Local Boards.
 Offices of RBI.

1.Central Board of Directors:

The organisation and management of RBI is vested on Central Board of Directors. It is
responsible for the management of RBI. Central Board of Directors consist of 11
members. It is constituted as follows.

a)Governor: It is the highest authority or RBI. He is appointed by the government of

India for a term of 5 years. He can be re-appointed for another term.

b)Deputy Governors: Four Deputy Governor are nominated by the Central Government
for a term of 5 years.

c)Directors: Other member of the Central Board are appointed by the Central
Government. Out of these, four directors, one each from the four local boards are
nominated by the government separately by the Central Government. Ten directors
nominated by the Central Government are among the experts of commerce, industries,
finance, economics and cooperation. The finance secretary of Government of India is also

33
nominated as Government officer in the board. Ten directors are nominated for a period
of 4years. The Governor acts as the Chief Executive Officer and Chairman of the Central
Board of Directors. In he absence The Deputy Governor nominated by the Governor, acts
as the Chairman of the Central Board. The Deputy Governors and government’s officer
nominee are not entitled to vote at the meetings of the Board. The governor and the four
deputy governor are full time officers of the Bank.

Profile of Central Board Directors:

1)Shri Natarajan Chandrasekaran

2)Shri Bharat Narotam Doshi
3)Shri Sudhir Mankad
4)Dr. Ashok Gulati
5)Shri Manish Sabharwal
6)Shri Rajiv Kumar
7)Dr. Prasanna Kumar Mohanty
8)Shri Dilip S. Shanghvi
9)Shri Satish Kashinath Marathe
10)Prof. Sachin Chaturvedi

2.Local Boards:
Besides the Central Board, there are local boards for four regional areas of the country
with their head-quarters at Mumbai, Kolkata, Chennai, New Delhi. Local Boards consist
of five members each, appointed by the central governemnet for a term of 4 years to
represent territorial and economic interest and the interest of co-operatives and
indigenous bank. The function of the local boards is to advise the central board on
general and specific issues.
Referred to them and to perform duties which the central board delegates.

3.Offices of RBI:
The Head office of the bank is situated in Mumbai and the offices of the local board are
situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of
banking system, RBI has opened local offices or branches in Ahmedabad, Bangalore,
Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur,
Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI
can open its offices with the permission of the governemnt of the India. In places where
there are no offices of the bank, it is represented by the State Bank of India and its
associate banks as the agents of RBI.

3:8 Role and functions of RBI:

34
Traditional functions:

Traditional role and functions of RBI refer to those functions which every Central Bank
of a country has to perform all over the world. Traditional functions are mainly the basic
and fundamental functions of RBI.

Issue currency notes: RBI has the sole authority to issue currency notes in India. Earlier
all currency notes except one rupee note and coins of smaller denomination were issued
by RBI. However, Reserve Bank of India in New Mahatma Gandhi series has issued
notes in the denominations of Rs 10 and above. Reserve Bank of India has been given
these exclusive powers under the provisions of section 22 of Reserve Bank of India Act,
1934. This system of issuing currency notes is known as minimum reserve system. The
currency notes issued by RBI is a legal tender throughout the territory of India without
any limitations. It issues these currency notes against the security of gold bullion, gold
coins, promissory notes, exchange bills and government of India bonds etc.

Banker to other banks: Reserve Bank of India is the apex monetary body in the country
and it controls the volume of bank reserves. It helps and regulates other banks to create
credit in the right proportion. It has obligatory powers to regulate, guide, help and direct
other banks of the country, and hence it acts as the guardian of commercial banks in
India. Every commercial bank has to maintain a certain part of the Reserves with RBI.
Reserve Bank of India acts as the lender of last resort and banks can approach RBI when
they need funds. Under the Banking Regulation Act, 1949 RBI has extensive powers to
supervise and control the banking system of the country.
Banker, agent and financial advisor of the government: under section 20 of Reserve Bank
of India act, it acts as the banker and agent to the government. Section 21 and 21A gives
powers to RBI to conduct transactions of Central and state governments. It has the duty to
make payments, taxes, and deposits on behalf of the government. It represents
Government of India at International levels. It gives financial advice to the government
and maintains government accounts. It has a responsibility to manage public debt and
maintain the foreign exchange reserves. It provides overdraft facilities to Central and
state governments.

Exchange rate management and the custodian of Foreign Exchange Reserves: Reserve
Bank of India has the responsibility to stabilise the external value of Indian currency. It
keeps gold bullions and foreign currency reserves etc. against currency note issue and has
the responsibility to meet the adverse balance of payment with other nations. RBI has the
responsibility to maintain exchange rate stability and for this, it has to bring demand and

35
supply of foreign currency (usually US Dollar) to similar levels. It maintains this stability
through buying and selling of foreign currency etc.

RBI as the bank of Central clearance, settlement, and transfer: RBI provides the facility
of clearing house for settling banking transactions. This allows other banks to settle their
interbank claims smoothly and economically. At places where RBI does not have its own
office, this function is carried out in the premises of State Bank of India. This facility is
provided by Reserve Bank of India through a cell called as the National Clearing Cell.

Credit control function: RBI tries to maintain price stability in the country which is
essential for economic development. It regulates money supply in the economy according
to the changing circumstances of the economy. It uses various measures such as
qualitative and quantitative techniques to regulate credit in the economy. It uses
quantitative controls such as bank rate policy, cash reserve ratio, open market operations
etc. Qualitative controls include selective credit control, rationing of credit etc.

3:9Promotional and developmental Role and Functions of RBI:

Every Central Bank has to perform numerous promotional and development functions
which vary from country to country. This is truer in a developing country like India were
RBI has been performing the functions of the promoter of financial system along with
several special functions and non-monetary functions.

Promotion of Banking habits and expansion of banking system: It performs several

functions to promote banking habits among different sections of the society and promotes
the territorial and functional expansion of banking system. For this purpose, RBI has set
several Institutions such as Deposit and Insurance Corporation 1962, the agricultural
refinance Corporation in 1963, the IDBI in 1964, the UTI in 1964, the Investment
Corporation of India in 1972, the NABARD in 1982, and national housing Bank in 1988
etc.

Export promotion through refinance facility: RBI promotes export through the Export
Credit and Guarantee Corporation (ECGC) and EXIM Bank. It provides refinance facility
for export credit given by the scheduled commercial banks. The interest rate charged for
this purpose is comparatively lower. ECGC provides insurance on export receivables
whereas EXIM banks provide long-term finance to project exporters etc.

Development of financial system: RBI promotes and encourages the development of

Financial Institutions, financial markets and the financial instruments which is necessary

36
for the faster economic development of the country. It encourages all the banking and
non-banking financial institutions to maintain a sound and healthy financial system.

Support for Industrial finance: RBI supports industrial development and has taken several
initiatives for its promotion. It has played an important role in the establishment of
industrial finance institutions such as ICICI Limited, IDBI, SIDBI etc. It supports small
scale industries by ensuring increased credit supply. Reserve Bank of India directed the
commercial banks to provide adequate financial and technical assistance through
specialised Small Scale Industries (SSI) branches.

Support to the Cooperative sector: RBI supports the Cooperative sector by extending
indirect finance to the state cooperative banks. It routes this finance mostly via the
NABARD. Support for the agricultural sector: RBI provides financial facilities to the
agricultural sector through NABARD and regional rural banks. NABARD provides short
term and long term credit facilities to the agricultural sector. RBI provides indirect
financial assistance to NABARD by providing large amount of money through General
Line of Credit at lower rates.

Training provision to banking staff: RBI provides training to the staff of banking industry
by setting up banker s training college at many places. Institutes like National Institute of
Bank management (NIBM), Bank Staff College (BSC) etc. provide training to the
Banking staff.

Data collection and publication of reports: RBI collects data about interest rates, inflation,
deflation, savings, investment etc. which is very helpful for researchers and
policymakers. It publishes data on different sectors of the economy through its
Publication division. It publishes weekly reports, annual reports, reports on trend and
progress of commercial bank etc.

3:10Supervisory Role and Functions of RBI:

RBI performs certain non-monetary functions for the supervision of banks and promotion
of sound banking system in India. Supervisory functions ensure improvement in the
methods of operation of Banking in India. It controls and administers the entire financial
and banking system of India through these functions.

Giving licence to banks: RBI has the authority to grant licence to the banks for carrying
out business. It provides licence for the opening of new branches, opening extension
counters, and also for closing down existing branches. Reserve Bank of India through this

37
power avoids unnecessary competition among different banks at any particular location.
It helps RBI to remove undesirable people from entering into the banking business.

Bank inspection and enquiry: RBI has the power to inspect and enquire banks in various
matters under the Banking Regulation Act, and the Reserve Bank of India act. It can
inspect loans and advances, deposits, investment functions etc. which helps to ensure that
financial Institutions and banks carry out their operations in a proper manner. It carries
out periodical inspection once or twice a year and banks have to take remedial measures
pointed out during an inspection. It also asks for periodical information regarding certain
Assets and liabilities of banks.

Implementation of deposit Insurance Scheme: RBI has the responsibility to implement

the deposit Insurance Scheme to ensure the protection of deposits of small depositors.
Under this scheme, deposits below Rs 1 lakh are insured with the Deposit Insurance
Guarantee Corporation set up by Reserve Bank of India. It implements the deposit
Insurance Scheme in case of failure of any Bank. Deposits made in the accounts of
commercial banks, cooperative banks and RRBs are covered under this scheme. The
fixed deposits with Institutions such as ICICI, IDBI etc are not covered under this
scheme.

Control over Non-Banking Financial Institutions: The monetary policy of RBI does not
influence the Non-Banking Financial Institutions. However, it gives directions to the
Non-Banking Financial Institutions and also conducts enquiry and inspection to exercise
control over these institutions. For example, it requires permission from the Reserve
Bank of India for deposit-taking operations by Non-Banking Financial Institutions.

Periodic review of the working of commercial banks: the supervisory functions of RBI
also includes periodic review of the working of commercial banks. It takes necessary
steps to increase the efficiency of the commercial banks, and for the implementation of
policy changes and schemes for the improvement of the banking system.

3:11Prohibitory Role and Functions of RBI:

RBI cannot purchase the shares of any industrial undertaking or even its own share.
It cannot provide direct monetary or financial assistance to any commercial undertaking
or trade etc. RBI does not have the power to buy any immovable property. RBI does not
have the authority to give loans on the security of property or shares. Instruments of
monetary policy of Reserve Bank of India (RBI).

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The monetary policy committee of RBI has the responsibility to fix the benchmark policy
interest, also known as a repo rate for the controlling inflation rate. One of the major
objectives of monetary policy is to contain inflation rate at 4%, with maximum standard
deviation of 2%.

Quantitative measures:

It refers to those measures of RBI in which affects the overall money supply in the
economy. Various instruments of quantitative measures are:

Bank rate: it is the interest rate at which RBI provides long term loan to commercial
banks. The present bank rate is 6.5%. It controls the money supply in long term lending
through this instrument. When RBI increases bank rate the interest rate charged by
commercial banks also increases. This, in turn, reduces demand for credit in the
economy. The reverse happens when RBI reduces the bank rate.

Liquidity adjustment facility: it allows banks to adjust their daily liquidity mismatches.
It includes a Repo and reverse repo operations.

Repo rate: Repo repurchase agreement rate is the interest rate at which the Reserve Bank
provides short term loans to commercial banks against securities. At present, the repo rate
is 6.25%.

Reverse repo rate: It is the opposite of Repo, in which banks lend money to RBI by
purchasing government securities and earn interest on that amount. Presently the reverse
repo rate is 6%.

Marginal Standing Facility (MSF): It was introduced in 2011-12 through which the
commercial banks can borrow money from RBI by pledging government securities which
are within the limits of the statutory liquidity ratio (SLR). Presently the Marginal
Standing Facility rate is 6.5%. Varying reserve ratios Reserve Bank of India uses the
tools of varying the reserve requirements that banks have to maintain with RBI.

Cash reserve ratio (CRR): It is the minimum amount of cash that commercial banks
have to maintain with the Reserve Bank of India in the form of deposits. An increase in
CRR decreases money supply in the economy whereas a decrease in CRR increases the
money supply. The current CRR rate is 4%.

Statutory liquidity ratio (SLR): It is the minimum percentage of non-cash assets to be

kept with RBI. It includes government securities, bonds, gold etc. An increase in SLR

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reduces the capacity of banks to give loans to its customers. The reverse happens when
SLR is reduced. The current SLR rate is 19.5%.

Open market operations (OMOs): open market operations include the sale and
purchase of government securities for either injecting or absorbing liquidity from the
economy.

Market stabilisation scheme (MSS): this instrument is used to absorb the surplus
liquidity from the economy through the sale of short-dated government securities. The
cash collected through this instrument is held in a separate account with the Reserve
Bank. It was introduced in 2004. RBI had raised the ceiling of the market stabilisation
scheme after demonetisation in 2016.

3.12 Preamble Of The RBI:

The Preamble of the Reserve Bank of India describes the basic Functions of Reserve
Bank of India as: “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.”

The RBI has four zonal offices at:

Chennai
Delhi
Kolkata
Mumbai
It has 20 regional offices and 11 Sub-offices.

3:13 THE RBI LOGO:

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The symbol contains, one inner circle , Bengal Tiger Palm Tree and Devanagari and
English Words, Which may represent,

1. Circle: Circle don’t have beginning or End , They are infinite , Which represents the
free movement of Energy and power. This free movement can protect what’s inside their
boundires and denotes defense, endurance and safety or femininity and the womb.

2. Royal Bengal Tiger: Bengal Tiger plays vital rule in Indian Tradition, It was used in
Indus Valley Civilization. Later this was the symbol of the Chola Empire from 300 CE
and is now the official animal of India. The combination of grace, strength, ability and
enormous power has earned the tiger its pride of place. Thoughit has been adapted from a
sculpture, it is executed using wood engraving technique which was prevalent in 18th
century.

3. Palm Tree: The head of the palm is visually comparable to glowing sun-star and with
symbolic meanings such as honour, truth, value, vitality, warmth, fertile, expansion,
protection, aspiration, attainment, unification, resurrection and singleness of purpose.

Devanagari and English : These two language scripts were used to write RBI
abbreviation. The emblem of Reserve Bank of India has Royal Bengal Tiger standing in
front of the plam tree. The tiger was referred from the statue at the gate of Belvedere,
Kolkata. These are ensconced by भारतीय रिझर्व बँक on top and RESERVE BANK OF
INDIA at the bottom. This has been completed by two concentric circles with thin and
thick lines. Obviously this design is very formal and emphasizer the Government status
of the bank with India motiv which resemnles heraldry. Indeed, it complied with the then
requirements of mono color reproduction and stamping and embossing functions when
used at elite stationery. The name of the central bank in Devanagari and English is
written using rounded bevel serif typefaces. This typeface closely resembles Cooper Old
Style Bold by Linotype, which was designed in 1919 by Ozwald Bruce Cooper, an
American.

3:14 The RBI’s Role In Current Scenario:

The role of RBI in Indian economy has changed according to the scenario in the country.
In April 2019 the RBI took the monetary policy decision to lower its borrowing rate to
6%. This was the second rate cut for 2019 and is expected to have a positive impact on
the borrowing rate across the credit market more substantially. Prior to April, credit rates
in the country have remained relatively high, despite the central bank’s positioning,
which has been limiting borrowing across the economy. The central bank must also

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grapple with a slightly volatile inflation rate that is projected at 2.4% in 2019, 2.9% to
3% in the first half of 2020, and 3.5% to 3.8% in the latter half of 2020.

3:15 RBI’s Role in Economic Development:

RBI’s role in the economy is pivotal as it makes or breaks the economy. Below
mentioned are the areas where RBI plays an important role

Development of banking system

Development of financial institutions
Development of backward areas
Bringing Economic stability
Facilitating Economic growth
Preparing Proper interest rate structure

3:16 RBI’s Role in Promoting Schemes And Policies:

Introducing schemes and policies which benefit the public as well as the government is
one of the important function of RBI. Below mentioned are the sector RBI prioritise for
economic development

Promotion of commercial banking

Promotion of cooperative banking
Promotion of industrial finance
Promotion of export finance
Promotion of credit guarantees
Promotion of differential rate of interest scheme
Promotion of credit to priority sections including rural & agricultural sector.

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3:17 Primary Data:

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 CHAPTER:4 TOPIC RELATED

The Reserve Bank of India is the central bank of India. Therefore, it performs all those
functions which are essentially being performed by the central bank of a country. The
important function of the Reserve Bank of India are as follows:

4.1 Issuer of Currency:

The Reserve Bank of India enjoys monopoly in the issue of currency notes as Central
Bank of the country. All the currency notes except one rupee note are issued by RBI. One
rupee note and all coins of small magnitude are issued by the Government of India and
are circulated through the Reserve Bank of India. The RBI act permits RBI to issue notes
in the denominations of Rs.2, Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.200, Rs.500,
Rs.1000, Rs.5000, Rs.10,000. Although the RBI has issued all these denominations, but
at present notes of all denominations except Rs.5,000 and Rs.10,000 are being issued in
circulation. The RBI has established a separate department for this purpose known as
issuing department. The basis of note issue is minimum Reserve system. The RBI has
been issuing issuing currency notes on the principle of banking system, in which cent per
gold/precious metals reserves of Rs.200 crore as security against note issue. In which a
minimum reserve of Rs.115 crore has been maintain in gold and remaining Rs.85 crore
reserve in foreign securities. The value of gold reserve held by the issue department has
not been less than Rs.85 crore at the time of an emergency. In the year of 2006-07 reserve
bank has allotted Rs.2020 crore you security press for printing of notes and the number of
units printed in this year stands at Rs.1248.4 crore. Against it in the year of 2007-08
(June-July) it has allocated Rs.2026 crore and the number of units printed is 1393.
Despite increasing price of paper reserve bank has able to decrease the per unit printing
price from Rs.1.62 in 2006-07 to Rs.1.46 in the year 2007-08. The Reserve Bank is the
nationals sole note issuing authority. Along with the Government of India, we are
responsible for the design, production and overall management of the nations currency,
with the goal of ensuring an adequate supply of clean and genuine notes.

 Along with Government of India, we are responsible for the design, production
and overall management of the nations currency, with the goal of ensuring an
adequate supply of clean and genuine notes.
 The government of insider is the issuing authority of coins and supplies coins to
the Reserve Bank if India on demand. The reserve bank puts the coins into
circulation with the Government of India, we work towards maintaining
confidence in the currency by constantly end to enhance integrity of bank notes
through new design and security features.

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  The Department if Currency Management at Central Office, Mumbai, in
cooperation with the Issue Department of the Reserve Bank’s Regional Offices
across India oversees currency management. The functions includes suppling and
distributing adequate quantity of currency throughout the country and ensuring
the quality of bank notes in circulation by continuous supply of clean notes and
timely withdrawal of soiled notes.
 This is achieved though a wide network of more than 4000 currency chests of
commercial banks. Currency chests are extends arms of the Reserve Bank Issue
Department and are responsible for meeting the currency requirements of their
respective regions.
 Four printing presses print and supply banknotes. These are at dewas in Madhya
Pradesh, Nashik in Maharashtra, Mysore in Karnataka, and Salboni in West
Bengal.
 The presses in Madhya Pradesh and Maharashtra are owned by the security
printing and minting corporation of India, a wholly owned company of the
Government of India. The presses in Karnataka and West Bengal are owned by
the Bharatiya reserve bank note mudran private limited, a wholly owned
subsidiary of the Reserve Banks.
 Coins are minted by the Government of India. The Reserve Bank is the agent if
the Government for distribution, issue and handling of coins. Four mints are in
operation: Mumbai in Maharashtra, Noida in Uttar Pradesh, Kolkata, and
Hyderabad.

4.2 Banker, Agent and Advisor to Government:

The Reserve Bank of India acts as the banker, agent and advisor to the government of
India. It accepts payments for the account of the union and a state government and also
makes payment on behalf of the government. On behalf of the Government, RBI carries
remittances, managing foreign exchange reserves and public debts and other banking
operations. It also makes way and means advances to the country central and state
government repayable within three months. The reserve bank of India carries out agency
functions of the government as the commercial banks carries out on behalf of their
customers. The State Bank of India works as an agent of the RBI where it’s offices do not
exist.

The RBI does not charge any fee for its operation from the Central and State
governments. It also does not pay any interest on the deposits of the Central and State
government accounts. The Reserve Bank, act as the agent of the Government, issued
government securities to the public and collect money on behalf of the government. It
also manages public debts to the central and state governments. The RBI pays interest in
the securities and redeemed at the time of maturity and also maintain accounts of this

51
effect. The RBU also issues treasury bills of governor three months. The RBI is also
authorised to make to the central and state government, ways and means advances which
are repayable in three months. It not only advises government on all monetary and
banking issues but also on a wide range of economic issues including those in the field of
planning and resource mobilisation. It also manages foreign exchange reserves to meet
the important requirement. This RBI, acts as the custodian public debts. It also advises
government in the matters of agriculture credit cooperation, banking and credit and invest
of funds.

The issue, management and administration of the public debt of the government is a
major function of the RBI for which it charges a commission. The objective of the debt
management policy is to raiser sources form the market at the minimum cost, while
containing there finance risk and maintaining consistency with the monetary policy
objectives, to bridge temporary mismatches in the cash flows (i.e. temporary gaps
between receipts and payments), the RBI provides way and means advances (WAMAs).
The maximum period of these advances is three months. The WAMAs yo the state
governments are of three types1) Normal advances, that us advances without any
collateral security; (2) Secured advances, which are secured against the pledge of central
governments securities and (3) Special advances granted by the RBI at its direction. In
addition to WAMAs, the state government make heavy use of overdraft from the RBI, in
excess of the credit limits (WAMAs) granted by the RBI. Overdrafts are, in a way,
unauthorised WAMAs drawn by the state governments, on the RBI. In fact, the
management of these overdraws is one of the major responsibilities of the RBI these
days. The interest charged by the RBI ON THE WAMAs is related to a graduated scale
of the interest banded units duration. Overdrafts up at 7 days are charged at the bank rate
and an interest if 3 percent above the bank rate is charged from the 8th day onwards.

4.3 Bankers Bank:

As an apex bank the RBI acts as bankers if the bank lender of the last resort. Under the
RBI Act, the bank has been vested with extensive powers of supervision and control over
all scheduled commercial and cooperative banks. Once the named a bank is incorporated
in the second schedule of the RBI Act, it becomes entitled to refinance facility from the
RBI. Under the act, every schedule bank is required to keep with the RBI a cash balance
5% of its total demand and time liabilities as cash reserve ratio. Now, CRR has reduced
from 5% to 4.75% with effect from 16 November, 2002. The cash reserve ratio may be
between 3% to 15% as decide by the Reserve Bank. This provision is also applicable on
non-scheduled banks. This provision of cash reserve enables the reserve bank to control
credit which is created by commercial banks. In case of need of funds, commercial banks
can borrow funds from Reserve Bank on the basis of eligible securities or financial

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accommodations in times of need or stringency by rediscounting their bills of exchange.
Therefore, commercial banks always look upon the Reserve Bank at the Time of financial
crisis. From the dad below it is clear that George in deposits, issuances of fresh capital
and internal generation funds by banks in the one hand, and moderation in credit growth
in the other, enabled bank to deploy their funds in growth and other approved securities,
which increased by 25.7%.

Like individual consumers, businesses and organisations of all kinds, banks need their
own mechanism to transfer funds and settle inter-bank transaction such as borrowing
from lending to other banks and customer transactions.

As the banker to banks, the Reserve Bank fulfills this role:

Banks are required to maintain a portion of their demand and time liabilities as cash
reserves with the Reserve Bank. For this purpose, they need to maintain a counts with the
Reserve Bank. They also need to keep accounts with the Reserve Bank for settling inter
bank obligations such as clearing transactions of individual bank customers who have
their accounts with different banks or clearing money market transactions between two
banks, buying and selling securities and foreign currencies. In order to facilitate a smooth
inter bank transfer of funds, or to make payments and to receive funds on their behalf,
banks need a common banker. By providing the facility of opening accounts for banks
the Reserve Bank becomes this common banker, know. As ‘Banker to Bank’ function.
The function is performed through the Deposit Accounts Department (DAD) at the
Reserve Bank’s Regional offices. The Department of government and Bank accounts
oversees this functions and formulates policy and issues operational instructions to DAD.

Banker to the Central Government:

Under the administrative arrangements, the central government is required to maintain a

minimum cash balance with the Reserve Bank. Currently, this amount is Rs.10 crore on a
daily basis and Rs.100 crore in Fridays, as also to the annual account closing day of the
centre and the Reserve Bank (end of March and June).

Uber a scheme introduced in 1976, every ministry and department of the central
government has been allotted a specific public sector bank for handling its transactions.
Hence, the Reserve Bank does not handle governments day to day transactions as before,
except where it has been nominated as banker to a particular ministry or department.

As banker to the Government, the Reserve Bank worlds out the overall funds position
and sends daily advice showing the balances in its books, Ways and Means Advances

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granted to the government and investments made from the surplus fund. The daily
advices are followed up with monthly statements.

Banker to State Government:

All the state governments are required to maintain a minimum balance with the Reserve
Bank, which varies from the state depending on the relative size of the state budget and
economic activity. To tide over temporary mismatched in the cash flow of receipts and
payment, the Reserve Bank provides Ways and Means Advances/Overdraft to the State
Governments. The WMA scheme for the state government has provision for Special
Drawing Facility (SDF) and normal WMA. The SDF is extended against the collateral of
the government securities held by the state government. To encourage the State’s
participation to the consolidated Sinking Fund and Guarantee Redemption Fund,
incremental investments in these funds are also eligible to avail SDF. After the SDF limit
is exhausted, the state government is provided a normal WMA. The normal WMA limits
are based on three-year average of actual revenue and capital expenditure of the state.
The withdrawal beyond the WMA limit is considered in overdraft. A state government
account can be in overdraft for a maximum 14 consecutive working days with a limit of
36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus
balances of state governments are invested in governments of India 14 day Intermediate
Treasury Bills automatically in accordance with the instructions.

Reserve Bank as Banker to Banks:

The Reserve Bank continuously monitors operations of there accounts to ensure that
defaults do not take place. Among other provisions, the Reserve Bank stipulates
minimum balance to be maintained by banks in these accounts. Since banks need to settle
transactions with each other occurring at various places in India, they are allowed to open
accounts with different regional offices of the Reserve Bank. The Reserve Bank also
facilitated remittance of funds from a Bank’s surplus account at one location to its deficit
account at another. Such transfers are electronically routed through a computerised
system called e-Kuber. The computerisation of accounts at the Reserve Bank has greatly
facilitated banks monitoring of their funds position in various accounts across different
locations in a real time basis.

I’m addition, the Reserve Bank has also introduced the Centralized Funds Management
System (CFMS) to facilitate centralized funds enquiry and transfer of funds across
DADs. This helps banks in their fund management as they can access information in their
balances maintained across different DADs from a single location. Currently, 75 banks
are using the system and all DADs are connected to the system. As Banker to Banks, the

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Reserve Bank provides short term loans and advances to select banks, when necessary, to
facilitate lending to specific sectors and for special purposes. These loans are provided
against promissory notes and other collateral given by the banks.

4:4Role of the Foreign Exchange Reserves:

One of the important functions performed by the Reserve Bank is that of external value
of the rupee. Apart from adopting appropriate monetary policies for the economic
stability in the country and thereby exchange stank in the long term, the Reserve Bank
has to ensure that the normal short term fluctuations in trade do not affect the exchange
rate. This is secured by the centralisation of the entire foreign exchange reserves of the
country with the Reserve Bank of India. In order to maintain stability in exchange rates,
the Reserve Bank enter into foreign exchange transactions. It also administers foreign
currency for the central government, state government and India embassies in foreign
countries. There is a separate department for this purpose in RBI known as “exchange
control currencies and tried to maintain balance between the demand and supply of
foreign exchange. The Reserve Bank is also authorised to buy and sell foreign exchange
from and to scheduled banks.

For a long time, foreign exchange in India was treated as a controlled commodity because
of its limited availability. The early stages of foreign exchange management in the
country focused on control of foreign exchange by regulating the demand due to its
limited supply. Exchange control was introduced in India under the Defence of India
Rules on September 3, 1939 on temporary basis. The statutory power for exchange
control was provided by the Foreign Exchange Regulation Act (FERA) of 1947, which
was subsequent replaced by a more comprehensive Foreign Exchange Regulation Act,
1973. This Act empowered the Reserve Bank, and I’m certain cases the Central
Government, to control and regulate dealings in forge exchange payments outside India,
export and import of currency notes and bullion, transfer of securities between resident
and non-residents, acquisition of foreign securities, and acquisition of immovable
property in and outside India, among other transactions.

Extensive relaxation’s in the rules governing foreign exchange were initiated, prompted
by the liberalisation measures introduced since 1991 and the Cat was amended as a new
Foreign Exchange Regulation (Amendment) Act 1993. Significant developments in the
external sector, such as, substantial increase in foreign exchange reserves, growth in
foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of
Indian investments abroad, increased access to external commercial borrowings by Indian
corporates and participation of foreign institutional investors in Indian stock market,
resulted in a changed environment. Keeping in view the changes environment, the

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Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA.
FEMA became effective from June 1, 2000.

Foreign Investment:

Foreign Investment comes into India in various forms. Following the reforms path, the
Reserve Bank has liberalised the provisions relating to such investments. The Reserve
Bank has permitted foreign investment in almost all sectors, with a few exceptions. In
many sectors, no prior approval from government or the Reserve Bank is required for
non-resident investing in India. Foreign institutional investors are allowed to invest in all
equity securities traded in the primary and secondary markets. Foreign institutional
investors have also been permitted to invest in government of India treasury bills and
dated securities, corporate debt instruments and mutual funds. The NRIs have the
flexibility of investing under the options of repatriation and non-repatriation.

Similarly, Indian entities can also make investment in an overseas joint venture or in a
wholly-owned subsidiary abroad up to a certain limit.

Exchange Rate Policy:

India’s Exchange rate policy has evolved in tandem with the domestic as well as
international developments. The period after independence was marked by a fixed
exchange rate regime, which was in line with the Bretton Woods system prevalent then.
The Indian a rupee was pegged to the Pound Sterling ok account of historic links with
Britain. After the breakdown of Bretton Woods System in the early seventies, most of the
countries moved towards a system of flexible/managed exchange rates. With the decline
in the share of Britain in India’s trade, increased diversification of India international
transactions together with the weaknesses of pegging to a single currency, the Indian
Rupee was de-linked from the Pound Sterling in September 1975.

The exchange rate subsequently came to be determined with reference to the daily
exchange rate movements of an undisclosed basket of currencies of India’s major trading
partners. As the basket-linked manages my if the exchange rate of the Rupee did not
capture the market dynamics and the development in the exchange rates of competing
countries fully, the Rupee’s external value was allowed to be determined by market
forces in a phased manner following the balance of payment difficulties in the nineties.

A significant two-step downward adjustment in the exchange rate of the Dupee was made
in 1991. In March 1992, Liberalized Exchange Rate Managesmnt System (LERMS)
involving the dual exchange rate was instituted. A unified single market-determined

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exchange rate system based on the demand for and supper of foreign exchange replaced
the LERMS effective March 1, 1993.

The Reserve Bank’s Exchange rate policy focused on ensuring orderly conditions in the
foreign exchange market. For the purpose, it closely monitors the developments in the
financial markets at home and abroad. When necessary, it intervenes in the market by
buying or selling foreign currencies. The market operations are undertaken either directly
or through public sector banks.

In addition to the traditional instruments like forward and swap contracts, the Reserve
Bank has facilitated increased availability of derivative instruments in the foreign
exchange market. It has allowed trading in Rupee foreign currency swaps, foreign current
Rupee options, cross currency options, interest rate swaps and currency swaps, forward
rate agreements and currency futures.

Foreign Exchange Reserve Management:

The Reserve Bank of India, is the custodian of the countries foreign exchange reserves
and is vested with the responsibility of managing their investment. The legal provisions
governing management of foreign exchange reserves are laid down in the Reserve Bank
of India Act, 1934.

The Reserve Bank’s respects management functions has in recent years grown both in
terms of importance and sophistication for two main reasons. First, the share of foreign
currency assets in the balance sheet of the Reserve Bank has substantially increased.
Second, with the increased volatility in exchange and interest rates in the global market,
the task of preserving the value of reserves and obtaining a reasonable return in theme
has become challenging.

The basic parameters of Reserve Bank’s policies from foreign exchange reserves
management are safety, liquidity and returns. The Reserve Bank of Indian Act permits
the Reserve Bank to invest the reserves in the following types of instruments:

 Deposits with Bank for International Settlements and other central banks.
 Deposits with foreign commercial banks.
 Debt instruments representing sovereign or sovereign-guaranteed liability of not
more than 10 year of residual maturity.
 Other instruments and institutions as approved by the Central Board of the
Reserve Bank in accordance with the provisions of the Act.
 Certain types of derivatives.

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While safety and liquidity continue to be the twin-pillars of reserves management, return
optimisation has become an embedded strategy within this framework. The Reserve Bank
has framed policy guidelines stipulating stringent eligibility criteria for issuers, counter
parties, and investments to be made with them to enhance the safety and liquidity of
reserves. The Reserve Bank, in consultation with the government, continuously reviews
the reviews the reserves management strategies.

4:5 Regulation of Banking System:

The prime duty of the Reserve Bank is to regulate the banking systems of our country in
such a way that the people of the country can trust in the banking up to perform its duty.
The Reserve Bank has following powers in this regard:

 Licensing: According to the section 22 of the Banking Regulation Act, every

Bank has to obtain license from the Reserve Bank. The Reserve Bank issues such
license only to those banks which fulfill condition of the bank should be strong.
The RBI is also empowered to cancel the license granted to a Bank works against
the interests of the depositors.
 Management: Section 10 of Banking Regulation Act embowered they Reserve
Bank to change manager or director of any Bank of it considers it necessary or
desirable.
 BRANCH Expansion: Section 23 requires every bank to take prior permission
from Reserve Bank to iron new places of business in India or Abroad change the
location of an existing place of business in India or Abroad.
 Power of Inspection of Bank: Under section 35, the Reserve Bank may inspect
any bank and its books and accounts either at its own initiative or at the instance
of the Central Government. If, I’m the basis of the inspection report submitted by
the Reserve Bank. Central Government is of the opinion that the affairs of the
bank are being conducted to the detriment of the interests of depositors, it may
direct to the Reserve Bank to apply for the winding up of such bank.
 Power to Issue Directions: Section 35(A) of IBR confers powers to RBI to issue
direction or to prevent the affairs of being conducted in manner detriment to the
interests of the depositors or in a manner prejudicial to the interests of the Bank or
to secure proper management of the bank. Section 36 confers powers on the RBI
to caution or prohibit banks against entering into any particular transaction and
generally give advice to any bank. It may pass orders requiring the bank to carry
out the specified instructions. I’m order to develop a strong banking structure in
the country the RBI promotes amalgamation or merger of weak banks so that they

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 can develop as a strong bank. Section 38 of the Act, empowered RBI to request to
High Court to windup the bank which has no hopes of improvement.

Regulation of Commercial Banking:

Banks are fundamental to the nation’s financial system. The Central Bank has a critical
role to la in ensuring the safety and soundness of the banking system and in maintain in g
financial stability and public confidence in this system.
 Mandate/Goals: Regulation aimed to protecting depositors interests, orderl
development and conduct of banking operations and fostering of the overall
health of the banking system and financial stability.
 Perimeter: Commercial Banks, Small Finance Banks, Payments Bank, Alk Indian
Financial Institutions, Credit Information Companies, Regional Rural Banks and
Local Area Banks.
 Evolution: Regulator functions have evolved with the development of the Indian
banking systems and adoption of prudential norms based on international best
practices.

Regulation of Co-operative Banking:

The rural co-operative credit system in India is primarily mandated to ensure flow of
credit to the agriculture sector. It comprises short term and long term co-operative credit
structures. The short term co-operative credit structure operates with a three tier system –
Primary Agricultural Credit Societies (PACS) at the village level, Central Cooperative
Banks (CCBs) at the district level and State Cooperative Banks (SCBs) at the State level.
PACS are outside the purview of the Banking Regulation Act, 1949 and hence not
regulated by the Reserve Bank of India. SCBs/DCCBs are registered under the provisions
of State Cooperative Societies Act is the State concerned and are regulated by the
Reserve Bank. Powers have been delegated you National Bank for Agricultural and Rutal
Development (NABARD) under section 35 A of the Banking Regulation Act (As
Applicable yo Cooperative Societies) to conduct inspection of State and Central
Cooperative Banks.
Primary Cooperative Bank (PCBs), also reffered to as Urban Cooperative Banks (YCBs),
cater to the financial needs of customers in urban and semi-urban areas. UCBs are
primarily registered as cooperative societies under the provisions of either the State
Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies
Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state.
The sector is heterogeneous in character with uneven geographic spread of the banks.
While many of them are unit banks without any branch network, some of them are large
in size and operate in more than one state.

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Regulation of Non Banking:

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among
the most critical. This includes ensuring credit availability to the productive sectors of the
economy, establishing institutions designed to build the country's financial infracture,
expanding access to afordable financial services and promoting financial education and
literacy.

 India has financial institutions which are not banks but which accept deposits and
extend credit like banks. These are called Non-Banking Financial Companies
(NBFCs) in India.
 NBFCs in India include not just the finance companies that the general public is
largely familiar with; the term also entails wider group of companies that are
engaged in investment business, insurance, chit fund, nidhi, merchant banking,
stock broking, alternative investments, etc, as their principal business. All are
though not under the regulatory purview of the Reserve Bank.
 At end-March 2017, there were 11,522 NBFCs registered with the Reserve Bank,
of which 178 were NBFCs-D and 220 were NBFCs-ND-SI. The share of NBFCs
in terms of assets in total financial sector is 8.3 percent as on 2016-17.

Regulating NBFC:

In the wake of failure of several banks in the late 1950s and early 1960s in India, large
number of ordinary depositions lost their money. At this time, the Reserve Bank did not
that there were deposit taking activities undertaken by non-banking companies. Though
they were not systemically as important as the banks. The Reserve Bank initiated
regulating them, as they had the potential to cause pain to their depositors. These
institutions have thus been under the regulatory oversight of the Reserve Bank of India
since 1963. Since then regulation has generally kept pace with the dynamism displayed
by the sector. Later in 1996, in the wake of the failure of a big NBDF, the Reserve Bank
tightened the regulatory structure over the NBFCs, with rigorous registration
requirements, enhanced reposting and supervision. The Reserve Bank also decided that
no additional NBFC will be permitted to raise deposits from the public. Further, in 1999
capital requirement for fresh registration was enhanced from 25 lakh to 200 lakh. Later
when the NBFCs sources their funding heavily from the banking system, it raised
systemic risk issues. At the same time, their fairing size and interconnectedness also raise
concerns on financial stability. Sensing this, the Reserve Bank brought asset side
prudential regulations onto the NBFCs. The Reserve Bank’s endeavour has been to
streamline NBDC regulation, address the risks posed by them to financial stability,

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address depositors and customers interest, address regulatory arbitrage and help the sector
heir in a healthy and efficient manner.

Some of the regulatory measures include indentifying systemically important non-deposit

taking NBFCs as those with asset size of 100 crore and above in the year 2006 and
bringing them under stricter prudential norms (CRAR and exposure norms), issuing
guidelines in Fair Practices Code, aligning the guidelines on restructuring and
securitisation with that if banks, permitting NBFCs-ND-SI to issue perpetual debt
instruments etc. Recently, in November 2014, the entire regulatory framework was
reviewed with a view to transitioning, over time, to an activity based regulation of
NBFCs. As a first step in this direction, certain changes to the regulatory framework are
sought to be made to a) address risked wherever they exist, b) address regulatory gaps
and arbitrage arising from differential regulations, both within the sector as well as vis-à-
vis other financial institutions, c) harmonise and simplify regulations to facilitate a
smoother compliance culture among NBFCs, and d) strengthen governance standards.
Threshold for systemic significance has been redefined as Rs.500 crore from the extant
Rs.100 crore in assets. Systemically important NBFCs along with deposit taking
NBFCswould be subject to inter alia, higher minimum Tier 1 capital, high r corporate
governance standards and also stricter asset classification norms.

4:6 Financial Market:

Well-functioning, liquid and resilient financial markets help monetary policy

transmission as well as in allocation and absorption of risk entailed in financing India’s
growth.

 Major market segments under the regulatory ambit of the Reserve Bank are
interest rate markets, including Government Securities market and money
markets; foreign exchange markets; derivatives in interest rates/prices, Repo,
foreign exchange rates as well as credit derivatives.

 The Reserve Bank derives statutory power to regulate market segments from
specific provisions of the Reserve Bank of India Act, 1934. The prudential
guidelines issued to eligible market participants form the board regulatory
framework for government securities, money market and interest rate derivatives.

 Government Securities Market: The Government Securities Market, which

trades securities issued by central and state governments, has seen significant
growth in the last two decades. It has a sizeable primary and an active secondary
segment. Trading largely takes place on the Negotiated Dealing System Order

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 Matching (NDS-OM), an anonymous order-marching trading platform. The
average daily trading volume in government securities market has shown
significant growth from Rs.32.15 billion in 2005-06 to Rs.433.12 billion in 2014-
15. All the secondary market transactions in government securities are settled
through a central counterparts mechanism under Delivery Versus Payment mode.
Multilateral netting is achieved with a single funds settlement obligation for each
member for a particular settlement date. The settlement is achieved in the RTGS
(Real Time Gross Settlement) settlement/current account maintained by the
member in the Reserve Bank.

 Call Money Market: Uncollaterised call money market is restricted to banks and
primary Dealers subject to prudential limits. The cillaterised segments include
collaterised borrowing and lending facility (CBLO) and market repo transactions
between banks and financial institutions. The money market also includes
Commercial Paper issuances by corporates, PDs and financial institutions and
certificates of deposit issued by banks to institutional investors. Detailed
guidelines on each segment of the money market are available under the section
master circulars for financial markets in this website.

 Foreign Exchange Market: Im the foreign exchange market, the Foreign

Exchange Management Act, 1999 (Act 42 of 1999), better known as FEMA,
1999, provides the statutory framework for the regulation of Foreign Exchange
derivatives contracts. Residents can hedge their foreign exchange exposures
through various products, such as forward contracts, portions involving rupee and
foreign currencies, currency swaps and cost reduction option structure in the OTC
market. Foreign investors can also hedge their investments in equality and/or
debt in India through forwards and options.
In addition, trading within specified position limits in permitted in exchange trade
currency futures in four currency pairs and in USD for currency options.
Residents are also permitted to hedge their commodity price risk, as per specific
guidelines, in the overseas OTC markets and exchanges.
Over the years, the foreign exchange spot as well as forward market has expanded
quite significantly. The average daily market turnover has grown from
approximately USD 16 billion in 2005-06 to nearly US$ 55 billion in 2014-15.
The average daily trading volume in the inter-bank USD/INR forwards was at
USD 6.43 billion and that if the USD/INR futures was at USD 2.64 billion during
the financial year 2014-15.

 Derivatives: In the OTC interest rates derivatives segments, interest rate swaps
and forward rate agreements are permitted in various benchmarks where banks

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 and primary dealers take hedging and trading positions. Other regulated entities
like insurance companies, mutual funds, non-banking financial companies can
participate in IRD for the purpose of hedging. The activity in IRS market has
shown impressive growth with the average daily inter-bank trading volume
(notional principal) in Rupee IRS at Rs.88.60 billion in financial year 2014-15. In
addition, there are exchange traded interest rate futures which are also open to
Foreign Portfolio Investirs (FPI). Trading activity in the IRF market has picked up
in the recent period with average daily trading volume of Rs.19.18 billion during
the financial year 2014-15.

4:7 Clearing House Functions:

The RBI operates clearing houses to settle banking transactions. The RBI manages 14
major clearing houses of the country situated in different major cities. The State Bank
of India and its associates look after clearing houses function in other parts of the
country as an agent of RBI.

4:8 Credit Control:

Credit control is very important function of RBI as the Central Bank of India. Fir
smooth functioning of the economy RBI controls credit through quantitative and
qualitative methods. Thus, the RBI exercise control over the credit granted by the
commercial bank. Details of this have been discussed as a separate heading. The
Reserve Bank is the most appropriate body to control the creation of credit in view if
its functions as the bank of note issue and the custodian of cash reserves of the
member banks. Unwarranted fluctuations in the volume of credit by causing wide
fluctuations in the value of money cause great social and economic unrest in the
country. Thus, RBU controls credit in such a manner, so as to bring ‘Economic
Development with Stability’. It means, banks will accelerate economic growth in one
side and in other side it will control inflationary trends in the economy. It leads to
increase in real national income of the country and desirable stability in the economy.

Objectives of credit control:

 To obtain stability in the internal price level.

 To attain stability in exchange rate.
 To stabilise money market of a country.
 To eliminate business cycles-inflation and depression by controlling supply of
credit.

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  To maximise income, employment and output in a country.
 To meet the financial requirements of an economy not only during normal times
but also during emergency or war.
 To help the colonic growth of a country within specified period of time. This
objective has become particularly necessary for the less developed countries of
present day world.

Methods and instruments of credit control:

There are many methods of credit control. These methods can be broadly divided into
two categories:
 Quantitative or General Methods.
 Qualitative or Selective Methods.

Quantitative Methods or Credit Control:

 Bank Rate:
Bank Rate is the rate at which central bank grant loans to the commercial banks
against the security of government and other approved first class securities.
According to section 49 of RBI Act, “Bank Rate is the standard rate in which RBI
purchase or discount such exchange bills or commercial papers which can be
purchased under this act”. Reserve Bank of India controls credit by affecting quantity
and cost of credit money through its bank rate policy. But this method of credit
control would be effective only when there is organised money market and
commercial banks depend on Reserve Bank for their credit. Reserve Bank adopts
cheap or Dear Monetary Policy according to the economic conditions of the country.
RBI decreases bank rate to increase the quantity of the credit. This is call cheap
monetary policy. Decrease in bank rate decrease cost of credit i.e. decrease in interest
rate. As a result of this quantity of credit increases. According to CRAR monetary
policy of RBI increases bank rate to decrease quantity of credit in the country.
Increase in the bank rate increases cost of credit i.e. interest rate and this will result in
decrease in quantity of credit.

 Open Market Operations:

The term ‘Open Market Operation’ implies the purchase and sale by the central bank
not only the government securities but also of other eligible papers. Like Bills and
securities of private concerns section 17(8) of RBI Act. Empowers Reserve Bank to
purchase the securities of central government, state government and other
autonomous institutions. Apart from this section 17(2A) Empower Reserve Bank to
purchase it sell of short term bills. Open Market Operations are used as supporting
instrument of bank rate. This method is used to influence the flow of credit. Sale and

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purchase of government securities influence the cash reserve ratio with the
commercial banks and hence these operations control their credit creation power.
These operations will have both anti-inflationary and anti-deflationary effects. When
the economy is faced with the inflationary pressures, the central bank would like the
commercial banks to contract the supply of credit. To achieve this objective the
central bank would sell the government securities to the commercial banks. The
banks would transfer a part of their cash reserve to the central bank towards the
payment for these securities. Consequently the cash reserve with the commercial
banks will be reduced. It would lead to contraction in the credit creation power if the
commercial banks. Similarly, open market operations can also be used as anti-
deflationary measures. In this situation, the central bank will purchase securities from
the commercial banks. In the process, the cash reserves with the commercial banks
will increase and they would be enabled to cash reserves with the commercial banks
will increase and they would be enabled to create more credit. The open market
operations in India are limited by Reserve Bank. The bank has used this policy only
to make successful government debt policy and to maintain price stability of
government securities. It is used to fulfill seasonal credit requirements of commercial
banks.

 Cash Reserve Ratio (CRR):

The RBI controls credit through change in cash reserve ratio of commercial banks.
According to section 42(1) of RBI Act every schedule bank has to maintain a certain
percentage reserve if its time and demand deposits. This ratio can be varied from 3%
to 15% as directed by the Reserve Bank. Reserve Bank itself changed this ratio
according to the credit requirement of the economy. It has been change really times in
the history of Reserve Bank of India. The cash reserve ration affects lendable funds of
commercial banks. If this ratio increases the credit creation capacity of commercial
banks decreases. On the other hand if this ratio decreases the credit creation capacity
of commercial banks increases.

 Statutory Liquidity Ratio (SLR):

According to section 24 of Banking Regulations Act, every schedule bank has to
maintain a minimum of 25% as cash of its total deposits. The Reserve Bank of India
is empowered to change this ratio. As on 21, 1997, it was fixed to 25% of the total
deposits of banks. It also influences the credit creation capacity of the banks. The
effect of both cash reserve ratio and statutory liquidity ratio on credit expansion is
similar. Penalties are levied by RBI for not maintaining these ratios from scheduled
banks.

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 Repo rate and Reverse Repo Rate:

There are two kinds of repo rate:

 Inter Bank Repo:

Such repos are now permitted only under regulated conditions. Repos are misused
by banks/brokers during the 1992 securities scam. They were banned
subsequently. With the lifting of the ban in 1995, repos were permitted for
restricted, eligible participants and instruments. Initially, repo deals were allowed
in T-bills and five dated securities on the NSE. With gradual liberalisation over
the years, all central government dated securities, state government security and
T-bills of all maturities have been made eligible for repo. Banks and PDs can
undertake repo deals if they are routed through the SGL, accounts maintained by
the RBI. Repos are allowed to develop a secondary market in PSU bonds, FIs
bonds, corporate bonds and private debt securities if they are held in demat form
and the deals are done through recognised stock exchange. There are no
restrictions regarding a minimum period for inter bank repo deals. Non bank
participants (i.e. FIs and other specified participants) are allowed to participate
only in the reserve repo that means they can only lend money to other eligible
participants. The non bank entities holding SGL accounts with the RBI can enter
into reverse repo transactions with banks/PDs, in all government securities.

 RBI Repos:
The RBI undertakes repo/reverse repo operations with banks and PDs as part of
its OMOs, to absorb/inject liquidity. With the introduction of the LAF, the RBI
has been injecting liquidity into the system through repo on a daily basis. The
repo auctions are conducted on a uniform price basis, i.e. there was a single repo
rate for all successful bidders. Multiple price auction was introduced
subsequently. The weighted average cut off yield in case of multiple price auction
is released top of the public. This, along with the cut off price, provides a band for
call money to operate. The RBI conducts repo auctions to provide banks with an
outlet for managing short term liquidity; even out short term liquidity fluctuations
in the money market; and optimise returns on short term surplus liquid funds. The
RBU has switched over from discriminatory price auction repo to the daily fixed
rate repos auction system. Fixed rate repos are single money market rates, bring
about orderly conditions in the forex market and impart stability to short term
interest rates by setting a floor for call money rates. The RBU participants
actively in the call money market with LAF repos operations conducted through
the year to modulate the surplus liquidity in the market. It also conducts reverse
repo operations under the LAF to prevent sudden spurts in the call rates. Both

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 repos and reverse repo operations play an effective role in imparting stability to
the market. The repo date has become akin to a singling rate, together with the
B/R. The repo rate serve the purpose of a floor and the B/R that of a cap for the
money market to operate within an interest corridor. With the introduction of
variable repo rates and daily repo auctions, a market determined benchmark is
expected to emerge for the call (overnight) rate. As a result of the diversion of the
call/money market into a pure inter-bank call/notice money market, the repo rate,
along with the B/R and CRR, emerged as an important tool of liquidity and
monetary management.

Qualitative Method Of Credit Control:

Under section 21 of RBU Act, Reserve Bank is empowered to regulate control and direct
the commercial banks regarding their loans and advances. Qualitative methods are used
to effect the use, distribution and direction of credit. It is used to encourage such
economic authorities as desirable and to discourage those which are injurious for the
economy. Reserve Bank of India from time to time adopted the following qualitative
methods of credit control.

 Selective Credit Control:

Section 36(1A) of the Banking Regulation Act, empowers the RBI to contain it
prohibit banking companies generally it any banking company. The objective of these
controls is to discourage some firms of activities while encouraging others. Such
controls are used in respect of agriculture commodities, which are subject to
speculative hoarding and wide price fluctuations. Under section 21 of the Banking
Regulation Act, 1949, the Reserve Bank is empowered to issue directives to banking
companies regarding making of advances. These directions may be as follows:

The purpose for which advances may or may now be made.

 Fixing the margin requirements for advances against each commodity.
 Fixing of maximum limit to be advanced by banks to a particular borrower.
 Fixing of rate of interest and other terms for making advances.
 Fixing of maximum guarantees may be given by the banks in behalf of any
firm or company.
 Prohibition on grant of credit against book debts and clean credits.

 Rationing of Credit:
In this method the RBI seems to limit the maximum or ceiling of loans and advances
and also in certain cases, fixed ceiling for specific categories of loans and advances. If
the rationing if credit is done with reference to the total amount, it is quantitative

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control, but if it is done with reference to specific types of credit, it assumes a
qualitative control. Reserve Bank can also prescribe the minimum ratio between
capital and total assets.

 Moral Persuasion:
Moral persuasion refers to those cases where the Reserve Bank endeavours to achieve
its object by making suitable representations to the banking institutions concerned
and relying on its moral influence and power of persuasions. Being an apex
institutions and lender of the last resort, the RBI can use its more pressure and
persuade the commercial bank to follow its policy.

4:9 Consumer Education and Protection:

The Reserve Bank’s approach to customer service focused on protection of customers

rights, enhancing the quality of customer service, spreading awareness and
strengthening the grievance redress always mechanism in banks and also in the
Reserve Bank.

 The Reserve Bank’s initiatives in the field of consumer protection include the
setting up of a Customer Redressal Cell, creation of a Customer Service
Department in 2006 which was recently rechristened as Consumer Education
and Protection Department. Further, the setting up of the Banking Codes and
Standards Board of India (BCSBI), an autonomous body for promoting
adherence to self-imposed codes by banks for committed customer service.

 In order to strengthen the institutional mechanism for dispute resolution, the

Reserve Bank in the year 1995 introduced the Banking Ombudsman (BO)
scheme. The BO is an Alternate Dispute Redressal mechanism for resolution
of disputes between a bank and its customers. There are 20 Banking
Ombudsman offices in the country at present. The scheme covers grievance of
the customers against Commercial Banks, Scheduled Primary Cooperative
Banks and Regional Rural Banks. In 2006, the Reserve Bank revised the BO
scheme. Under the revised scheme. The BO and the staff in the offices of the
BO are drawn from the serving employees of the Reserve Bank. The new
scheme is fully funded by the Reserve Bank and virtually covers all banking
transactions related grievance expect their business decisions like sanctioning
of credit etc.

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Some recent initiatives of the Reserve Bank in consumer educations and protection
are:

 The RBI has formulated a “Charter of Customer Rights” for the banks
based in global best practices in the area of consumer protection.

 The Charter enshrines broad, overarching principles for protection of bank

customers and enunciates the five basic rights of bank customer.

 Right to fair treatment.

 Right to transparency, fair and honest dealing.
 Right to suitability.
 Right to privacy.
 Right to grievance redress and compensation.

Banks are required to prepare their own board approved policy, incorporating the five
right of the Charter, or suitably integrate their existing Customer Service Police with the
“Model Customer Rights Policy” formulated by IBA/BCSBI.

 Internal Ombudsman in Banks: All Public Sector Banks Armand select Private
Sector and Foreign Banks are mandated to appoint the Internal Ombudsman for
final examination of all rejected partially accepted complaints before conveying
the final decision to the complainant.

 Setting up of Consumer Education and Protection Cells at all Regional Offices of

RBU for handling of complaints not covered under Banking Ombudsman scheme.

Other steps recently initiated for customer protection are:

 Effective from July 1, 2017 the scope of Banking Ombudsman Scheme 2006 was
widened to include, inter alia, deficiencies arising out of sale of insurance/ Mutual
fund / other third party investment products by banks and non adherence to RBI
instructions with regard to Mobile Banking / Electronic Banking as grounds of
complaint. Abolition of fire closure charges / per-payment penalties in all floating
rate home loans / all floating rate loans.

 Levying SMS charges in actual usage basis.

 Abolition of penal charges on non-maintenance of minimum balances in

inoperative accounts.

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  Streamlining penal charges levied for non-maintenance if minimum balances in
savings bank account.

 Uniformity in inter-sol charges.

 Limiting liability of customers in unauthorised electronic banking transactions.

4:10 Monetary Policy:

Monetary Policy refers to the use of monetary instruments under the control of the central
bank to regulate magnitudes such as interest rates. Money supply and availability of
credit with a view to achieve IGN the ultimate objective of economic policy.

 Monetary Policy refers to the policy of the central bank with regard to the use of
monetary instruments under its control to achieve the goals specified in the Act.

 The Reserve Bank of India is vested with the responsibility of conducting

monetary policy. This responsibility is explicitly mandated under the Reserve
Bank of India Act, 1934.

The goals of monetary policy:

 The primary objective of monetary policy is to maintain price stability while

keeping in mind the objective of growth. Price stability is a necessary
precondition to sustainable growth.

 In May 2016, the Reserve Bank of India Act, 1934 was amended to provide a
statutory basis for the implementation of the flexible inflation targeting
framework.

 The amended Act also provides for the inflation target to be set by the
government of India, in consultation with the Reserve Bank, once in every
five years. Accordingly, the Central Government has notified in the Official
Gazette 4% Consumer Price Index (CPI) inflation as the target for the period
from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6%
and the lower tolerance limit of 2%.

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 The Central Government notified the following as factors that constitute
failure to achieve the inflation target: a) the average inflation is more than the
upper tolerance level of the inflation target for an three consecutive quarters or
b) the average inflation is less than the lower tolerance level for an three
consecutive quarters.

 Prior to the amendment in the RBI Act in May 2016, the flexible inflation
targeting framework was governed by an agreement on Monetary Policy
Framework between the Government and the Reserve Bank of India in
February 20, 2015.

The Monetary Policy Framework:

 The amended RBI Act explicitly provides the legislative mandate to the
Reserve Bank to operate the monetary policy framework of the country.

 The framework t setting the policy rate based on an assessment of the

current and evolving macroeconomic situation; and modulation of
liquidity conditions to anchor money market rates at or around the repo
rate. Repo rate changes transmit through the money market to the entire
the financial system, which in turns influences aggregate demand – a key
determinant if inflation and growth.

 Once the repo rate is announced, the operating framework designed by the
Reserve Bank envisages liquidity management in a day to day basis
thought appropriate actions, which aim at anchoring the operating target –
The Weighted Average Call Rate (WACR) — around the repo rate.

 The operating framework is fined tuned and revised depending on the

evolving financial market and monetary conditions, while ensuring
consistency with the monetary policy stance. The liquidity management
framework was last revised significantly in April 2016.

The Monetary Policy Process:

Section 45ZB of the amended RBI Act. 1934 also provides for an empowered
six member monetary policy committee (MPC) to be constituted by the
Central Government by notification in the Official Gazette. Accordingly, the
Central Government in September 2016 constituted the MPC as under:

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  Governor of the Reserve Bank of India — Chairperson, ex officio.

 Deputy Governor if the Reserve Bank of India, in charge of Monetary

Policy — Member, ex officio.

 One officer of the Reserve Bank of India to be nominated by the

Cnetrak Board — Member, ex officio.

 Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) —

Member.

 Professor Pami Dua, Director, Delhi School of Economics — Member.

 Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management,

Ahmadabad member (Members referred time at 4 to 6 above, will hold
office for a period of four years or until further orders, whichever is
earlier.

 The MPC determined the policy interest rate required to achieve the inflation
target. The first meeting of the MPC was held on October 3 and 4, 2016 in the run
up to the Fourth Bi-monthly Monetary Policy Statement, 2016-17.

 The Reserve Bank’s Monetary Policy Department assists the MPC in formulating
the Monetary Policy. Views of key stakeholders in the economy, and analytical
work of the Reserve Bank contribute to the process for arriving at the decision on
the policy repo rate.

 The financial markets operations department operationalises the monetary policy,

mainly through day to day liquidity management operations. The financial market
committee meets daily to review the liquidity conditions so as to ensure that the
operating target of the sighted average call money rate.

 Before the constitution of the MPC, a Technical Advusory Committee on

monetary policy with experts from monetary economics, central banking,
financial markets and public finance advised the Reserve Bank in the stance of
monetary policy. However, it’s role was only advisory in nature. With the
formation of MPC, the TAC on monetary policy ceased to exist.

The monetary policy committee constituted by the central government under section
45ZB determines policy interest rate required to achieve the inflation target.

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The Reserve Bank’s monetary policy department assists the MPC in formulating the
monetary policy. Views of keys stakeholders in the economy, and analytical work of
the Reserve Bank contribute to the process for arriving at the decision on the policy
repo rate.

The Financial Market Committee meets daily to review the liquidity conditions so as
to ensure that the operating target of monetary policy (weighted average lending rate)
is kept close to the policy repo rate.

4:11 Payment and Settlement System:

Payment and settlement systems play an important role in improving overall

economic efficiency. They consist of all the diverse arrangements that we use to
systematically transfer money currency, paper instruments such as cheques and
various electronic channels.

 The central bank of any country is usually the driving force in the
development of national payment systems. The Reserve Bank of India as the
central bank of India has been playing this development role and has taken
several initiatives for safe, secure, sound, efficient, accessible and authorised
payment systems in the country. The board for regulation and supervision of
payment and settlement system, a sub committee of the central board of the
Reserve Bank of india is the highest olive making body in payment systems in
the country. The BPSS is empowered fir authorising, describing ologies and
setting standards for regulating and supervising all the payment and settlement
systems in the country. The department of payment and settlement system of
the Reserve Bank of India serves as the secretariat to the Board and executes
its directions. In India, the payment and settlement systems are regulated by
the payment and settlement systems Act, 2007 which was legislated in
December 2007. The PSS Act as well as the payment and settlement system
regulations, 2008 framed there under cane into effect from August 12, 2008.
In terms of section 4 of the PSS Act, no person other than the Reserve Bank of
India can commence or operate a payment system in India unless authorised
by the RBI. The Reserve Bank has since authorised payment system operators
of pre paid payments instruments, card schemes, cross board in bound money
transfers, automated teller machine networks and centralised clearing
arrangements.

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Paper-Based Payments:

 Use of paper based instruments (like cheque’s, drafts) accounts for nearly
60% of the volume of total non cash transactions in the country. In value
terms, the share is presently around 11% . This share has been steadily
decreasing over a period of time and electronic mode gained popularity due to
the concerted efforts to the Reserve Bank of India to popularise the electronic
payment products in preference to cash and cheque’s.

 Since paper based payment occupy an important place in the country, Reserve
Bank had introduced Magnetic Ink Character Recognition (MICR) technology
for speeding up and bringing in efficiency in processing of cheque’s.

 Later A separate height cake clearing was introduced for clearing cheque’s if
value rupees one Kai and above. This clearing was available to select large
Centres in the country (since discontinued). Resent developments in paper
based instruments include launch of speed clearing (for local clearance of out
station cheque’s drawn on core baking enabled branches of banks),
introduction of cheque truncation system (to restrict physical movement of
cheque’s and enable use of images for payment processing), framing CTS-
2010 Standards (for enhancing the security features in cheque’s forms) and
the like.

 While the overall thrust is to rude the use of paper for transactions, given the
facts that it would take some time to completely move to electronic mode, the
international is to reduce the movement of paper — both for local and out
station clearance of cheque’s.

Electronic Payments:

The initiatives takes by the Reserve Bank in the mid eighties and early nineties, focused
on technology based solutions for the improvement of the payment and settlement system
infrastructure, coupled with the introduction of new payment products by taking
advantage of the technological advancements in banks. The continued increase in the
volume of cheques added pressure in the existing set up, thus necessitating a cost
effective alternative system.

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Electronic Funds Transfer (EFT):

This retain funds transfer system introduced in the late 1990 enabled an account holder of
a bank to electronically transfer funds to another account holder with any other
participating bank. Available across 15 major Centres in the country, this system is no
longer available for use by the general public, for whose benefit a feature rich and more
efficient system is now in place, which is the National Electronic Funds Transfer (NEFT)
system.

National Electronic Funds Transfer (NEFT) System:

In November 2005, a more secure system was introduced for facilitating one to one funds
transfer requirements of individuals / corporates. Available across a longe time window,
the NEFT system provides for batch settlements at hourly intervals, thus enabling near
real time transfer of funds. Certain other unique feature viz. accepting cash fir originating
transactions, initiating transfer requests without any minimum or maximum amount
limitations, facilitating one way transfers to Nepal, receiving confirmation of the date /
time if credit to the account of the beneficiaries etc, are available in the system.

Real Time Gross Settlement (RTGS) System:

RTGS is a funds transfer system where transfer of money takes place from one bank to
another on a ready time and I’m gross basis. Settlement in real time means payment
transaction is not subjected to any waiting period. Gross settlement means the transaction
is settled in one ti one basis without bunching or netting with any other transaction. Once
processed, payments are final and irrevocable. This was introduced in 2004 and settles all
inter bank payments and customer transactions above 2 lakh.

Other Payment Systems:

 Pre-paid payment system.

 Pre-paid instruments aren’t payment instruments that facilitate purchase of good

and services against the value stored on these instruments. The value stored in
such instruments represents the value paid for by the holders by cash, by debit to a
bank account, or by credit card. The pre paid payment instruments can be issued
in the form of smart cards, magnetic stripe cards, Internet accounts, Internet
wallets, mobile accounts, mobile wallets, paper vouchers, etc.

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  Subsequent to the notification of the PSS Act, policy guidelines for issuance and
operations of prepaid instruments in India were issued in the public interest to
regulate the issue of prepaid payment instruments in the country.

 The use of pre paid payment instruments for cross border transactions has not
been permitted, expect for the payment instruments approved under foreign
exchange management act, 1999.

 Mobile banking system.

 Mobile phones as a medium for providing banking services have been straining
increased importance. Reserve Bank brought out a set of operating guidelines in
minibar banking for banks in October 2008, according to which only banks
which are licensed and supervised in India and have physical presence in India are
promoted to offer mobile banking after obtaining necessary permission from
Reserve Bank. The guidelines focus on systems for security and inter bank
transfer arrangements through Reserve Bank’s authorised systems. On the
technology front the objective is to enable the development of inter operable
standards so as to facilitate funds transfer from one account to any other account
in the same or any other bank in a real time basis irrespective of the mobile
network a customer has subscribed to.

4:12 Financial Inclusion and Development:

This role encapsulates the essence of renewed national focus on financial inclusion,
promoting financial education and literacy and making credit available to productive
sector of the economy including the rural and MSME sector.

 Credit flow to priority sectors: Macro policy formulation to strengthen credit flow
to the priority sectors. Ensuring priority sector lending becomes a tool for bank
for capturing untapped business opportunities among the financially excluded
sections of society.

 Financial inclusion and financial literacy: Help expand Prime Minister’s Jan Dhan
Yojana (PMJDY) to become a sustainable and scalable financial inclusion
initiative.

 Credit flow to MSME: Stepping up credit flow to micro, small and medium
enterprises (MSME) sector, rehabilitation of sick units through timely credit
support.

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  Institutions: Strengthening institutional arrangements, such as State Level Banker
Committees, Lead Bank scheme etc, to facilitate achievement of above objectives.

4:13 Research and Date:

The Reserve Bank has a rich tradition of generating sound, policy oriented economic
research, data compilation and knowledge sharing.

The Reserve Bank’s economic research work is designed to:

 Provide reliable, data driven information from policy and decision making.

 Supply accurate and timely data for academic research as well as to the general
public.

 Provide support for collaborative research to research institutions/universities.

 To develop and maintain statistical data reporting systems.

 To conduct forward looking surveys for monetary policy.

 Educate the public.

 The Reserve Bank’s economic research focuses on study and analysis of domestic
and international macroeconomic issues. This is mainly done by the department of
economic and policy research and the department of statistics and information
management.

 The Reserve Bank has over time established a sound and rich tradition of policy
oriented research and an effective mechanism for disseminating data and
information. Like other major central banks, the Reserve Bank has also developed
its own research capabilities in the field of economics, finance and statistics,
which contribute to a better understanding of the functioning of the economy and
the ongoing changes in the policy transmission mechanism.

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Internal Research:

 The research undertaken at the Reserve Bank revolves around issues and
problems arising in the current environment at national and international levels,
which have critical implications for the Indian economy. The primary data
compiled by the Reserve Bank becomes an important source of information for
further research by the outside world. The Reserve Bank also disseminated data
and information regularly in the form of several publications and through its
website.

 The Reserve Bank has made focused efforts to provide quality data to the public,
which had emanated from its internal economic research and robust statistical
system, established and strengthened over the years. It endeavours to provide
credible statistics and information to users across the spectrum of market
participants, businesses, the media, professionals and the academics. This is done
through various tools such as website, press releases and weekly, monthly,
quarterly and annual publications. India is among the first few signatories of the
Special Data Dissemination Standards (SDDS) as defined by the international
monetary funds for the purpose of releasing data and the Reserve Bank
contributed to SDDS in a significant manner.

Data Research and Communication:

The Reserve Bank releases several periodical publications that contain a comprehensive
account of its operations as well as information of the trends and developments
oerrauning to various areas of the Indian economy. Besides, there are periodical
statements on monetary policy, official press releases and speeches and interviews given
by the top management which articulate the Reserve Bank’s assessment of the economy
and its policies.

Database on Indian Economy:

 The Reserve Bank also has an enterprise wide data warehouse called database of
Indian economy through which data is made available in downloadable and
reusable formats. Users can access a much larger database in the Indian economy
through the reReserve Bank’s website. This site has a user friendly interface and
enables easy retrieval of data through ore formatted reports. It also has the facility
for simple and advanced queries.

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  The Reserve Bank provides analytical research in various aspects of the Indian
economy through its two research departments – Department of Economic and
Policy Research and Development of Statistics and Information Management.

4:14 Other Functions:

The RBI performs following other functions:

 Agriculture Credit: All matters relating to agriculture credit are looked after by
RBI before the establishment of NABARD in 1982. Now all functions relating to
agriculture and rural development are performed by NABARD.

 Industrial Finance: The RBI has contributed in the share capital of industrial
finance institutions such as industrial finance corporation of India, Industrial
Development Bank of India, State Finance Corporations etc. thus RBI indirectly
contributed in the field of industrial finance.

 Publication of Data: The RBI published statistics regarding money, price, finance,
etc, in its periodicals. This provides valuable information for government,
business and industries. These information are helpful to take decisions. The
important publications of RBI are the Reserve Bank of India Annual Report,
currency and finance, treats and progress of banking etc. At present, there are
more than 199 publications of RBI.

 Banking Education and Training: The RBI has been organising various educations
and training programs for bank employees and officers. ‘Banker Training
College’ Mumbai has been setup by RBI for the training of bank officers. Other
important training institutes such as “College of Agriculture Banking (Pune),
Reserve Bank staff Training College (Chennai) etc.” had been setup by the RBI.
RBI has also setup regional training Centres at Mumbai, Kolkata, Chennai and
Delhi.

 Remitting Facility: Reserve Bank provides remitting facilities to the central

government, state government and semi government institutions free of cost. It
also provides this facility to cooperative banks free of cost.

 Conversion of Currency.

 The RBI converts spoiled currency in to fresh currency. It also provides facility to
convert current notes into small denominating coins.

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 To accept Deposits: The RBI accept deposits from central and state government’s
institution and individuals persons without paying interest.

 Transactions with International Institutions: All international economic transitions

are being made through RBI. RBI opens its accounts in the central bank of
member countries of IMF. It also deals with IMF, World Bank and other
international financial institutions.

 Transactions in Precious Metals: In order to fulfill its obligations, RBI buys and
sells precious metals, gold coins etc. RBI can borrow find by mortgaging there’s
precious metals.

 Expansions of Banking Facilities: RBI has played an important role in expansion

of banking facilities in the rural areas of the country. At the end of home, 2001,
there are 65,931 bank branches are situated in country, out of which more than
half of the branches are situated in rural areas. At the end of 2000, on an average
there was only one bank branch at a population of 5.000 in the country.

 Supply of Development Finance: The RBI provides development finance for the
different parts of the economy. It leads economic development of the country as a
whole.

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 CHAPTER:5 CONCLUSION

Reserve Bank of India is apex bank of India it as wide powers to control the banking
system in India. It has great functions of controlling, supervising, etc. RBI has shown
remarkable achievements from its formation. It has made Nations economy at good
sound. RBI plays an important role in stabilising the Indian economy. RBI is an
autonomous body promoted by the government of India as is headquartered at Mumbai.
The RBI plays a key role in the management of the treasury foreign exchange movements
and is also the primary regulator for banking and non-banking institutions. The RBI a
number of government mints that produce currency and coins.

The RBI has been one of the most successful central banks around the world in
preventing the effects of subprime crisis to the Indian economy. Particularly this adds a
lot of credibility to every decision that is taken by them. Further, as a large proportion of
the Indian population is impacted by inflation, it was necessary for the RBI to think about
the majority and try to curb inflation.

All the role/function of RBI monitory, non-monitory or promotional are equally

significant in context of the Indian Economy. Under the RBI regulation Act, RBI has
been given a wide range of power. Under the supervision and inspection of RBI, the
working of banks has greatly improved. RBI has been responsible for strong financial
support to industrial and agricultural development in the country.

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 CASE STUDY

Abstract

The case discusses the role of the monetary policy under the leadership of the Reserve
Bank of India (RBI) Governor, Raghuram Rajan, to bring India out of the economic and
financial crises in which it found itself. In the fiscal 2013, India was faced with slowing
economic growth, high inflation, a record high current count deficit, and the rupee hitting
record lows. On August 28, 2013 the value of the Indian rupee via-à-vis the US dollar
plummeted to a record low of INR Rs 68.80.

In the first quarter (April-June) of the fiscal year 2013-14, India’s economy grew at its
lowest in the previous four years and recorded a growth rate of 4.4%. In October 2013,
the World Bank revised India’s economic growth forecast for the fiscal year 2014 to
4.7% against the earlier estimate of 6.1%. Experts pointed out that the India’s economic
condition in 2013 was the worst since 1991.

At a tune when India was facing its worst financial and economic crises in decades, with
slowing economic growth, high inflation, a record high current account deficit, and the
rupee hitting record lows, Raghuram Rajan was appointed as the 23rd governor of the
RBI on September 04, 2013, for a period of three years. The day after he was appointed,
the rupee strengthened, winning accolades for him from around the world. Raghuram
Rajan was labelde as a rock tar governor.

The analysis the history of the RBI and the major monetary policy actions taken till date.
It also studies the performance of the recent four governors of the RBI and the monetary
policy stance adopted by them. Further the case discusses Raghuram Rajan’s capacity to
bring India out of its economic crisis, give that he had control over only the monetary
policy. Economists and Analyst keep a keen watch on his moves to see if he could
contain the crisis in India and bring it back on the growth path. The biggest challenge
before Raghuram Rajan was not to get labelled on India’s savior, because the country’s
economic further was largely in the hands of its government and not its central bank.

The cas has the following objectives:

Ø Analyse the history of the Reserve Bank of India (RBI) and its Governors.
Ø Study the monetary policy adopted by the RBI.
Ø Examine the role of monetary policy and its governor in containing a crisis in
county like India.

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Study the agenda of RBI governor Raghuram Rajan and the monetary policy stance
adopted by him.

Case(2012-2013)

On August 28, 2013, the value of the Indian rupee vis-à-vis the US dollar in the first
quarter (April-June) of the fiscal year 2013-14, India’s economy grew at its slowest in the
previous four years and recorded a growth rate of 4.4%. In October 2013 the World Bank
revised India’s economic growth forecast for the fiscal year 2014 to 4.7% against the
earlier estimate of 6.1%. Experts pointed out that the Indian economics condition in 2013
was the worst since 1991.
Questions were, however, raised about Rajan’s capacity to bring India out of its
economic crisis, given that he had control over only the monetary policy economist and
analysts kept a keen watch on Rajan’s moves to see if he could contain the crisis in India
and bring it back on growth path. The answer the this question was expected to matter not
just to India but also to other emerging economies embroiled in a similar crisis.

At a time when India was facing its worst financial and economic crisis in decades, with
slowing economic growth, high inflation, a record high current account deficit, and the
rupee record lows, Raghuram Rajan was appointed as the 23rd governor of the Reserve
Bank of India (RBI) on September 4, 2013, for a period of three years. The day after he
was appointed, Rajan outlines a reform plan focusing on Boosting investor confidence
and stabilising the falling rupee. As a result, the rupee and stocks strengthened.
Plummeted to a record low of INR 68.80. The stock market took a plunge and on the
same day, the BSE SENSEX touched an intra-day low of 17, l720, down a whopping
13.6% from January 2013, high of 20,500. Foreign investors pulled out an staggering
INR 620 billion (USD10.5 billion) from the Indian capital market during June-July 2013
amid concerns over the depreciation rupee. Inflation he India had be running high at
above 7% since December 2009; current account deficit had expanded to record levels
(4.8% of GDP in 2012); and several projects were reportedly stalled due to policy
bottleneck.

In the first quarter (April-June) of the fiscal year 2013-14, India’s economy grew at its
slowest in the previous four years and recorded a growth rate of 4.4%. In October 2013,
the World Bank revised India’s economic growth forecast for the fiscal 2014 to 4.7%
against the earlier estimate of 6.1% . Experts pointed out that the Indian economic
condition in 2013 was the worst since 1991.

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 BIBLIOGRAPHY

www.google.com
www.wikipedia.com
http://www.rbi.org.in
http://www.scribd.com
www.banknetindia.com

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