Introduction

• Central bank of the country

• Established on recommendation of Hilton Young Commission
• Body corporate under RBI Act 1934,which came into effect from 1
april 1935
• Apex institution of monetary system
• Organises ,runs ,supervises,regulates and develops monetary system
 Origin

Most central banks established in 20th century

Central bank should be an autonomous institution

In 1773 Warren Hastings recommended establishment of

general bank in bengal

Amalgamation of 3 presidency banks in 1921

Hilton young commission suggested establishment of

central bank,the RBI of india
A bill giving effect Introduced in
Legislative Assembly in Jan 1927

Fresh bill introduced in Indian

Legislative Assembly on September 8,
1933

Bank was inaugurated on april 1,

1935
Nationalisation of RBI
 Nationalised in 1948
 3 major reasons:

 Trend towards
nationalisation
 To control inflationary tendencies
 Instrument for economic development
Organisational structure of RBI
 1. Central board
 Direction in hands of central board of directors
 1 governor, 4 deputy governors and 15 directors
 Board delegates functions to committees
 Committee meets once a week generally on
Wednesday
 Discuss important affairs of the bank
2.Local board

 Headquarters at Mumbai ,Kolkata, New

Delhi and Chennai
 4 regional areas i.e western ,eastern ,
northern and southern
 5 members each
 Function: to advise central board on such
matters as may be generally referred to
them
 It performs such duties as central board
may delegate to them
Functions of RBI

Functions of
RBI

Traditional Developmental
functions functions

Central General
Prohibitory
banking banking
functions
functions functions
Central banking functions

Note issuing

Regulation of credit

Bank of banks

Banker of government

Regulation of exchange rate

6. Other functions

Export assistance

Clearing house facilities

Change of currency

Transfer of currency

Publication of information

Control over nationalised banks

Training in banking
B. General banking functions

Accepting deposits

Bills discounting

Advancing loans

Deal in foreign securities

Deal in costly metals

C. Prohibitory functions
Cannot participate in trade,commerce or
industrial activities

Cannot purchase its own shares or shares of

any other bank

Cannot give loan against security of any

immovable property

Cannot pay any interest on its deposits

Cannot advance loans without securities

Introduction
One of the important functions of RBI is to
formulate and administer monetary policy of
the country.
It controls:
 The supply of money
 The availability of money
 Cost of money ,i.e rate of interest
 Objectives of monetary policy
1. Controlled expansion of money supply
 expansion of money supply was needed to
meet the increased demand of funds
 RBI reorganised the need for expansion of
credit
 Needed to finance development process
 Essential for growth and stability
2. Sectoral allocation of funds
 Allocate funds to predetermined
sectors
 RBI has also determined the rates at
which these are made available
 Allocation is made according to
priorities
Monetary policy in 1990s

Basic goal was to neutralise the impact of fiscal

deficit

Decrease in incremental CRR and SLR

Tarapore committee: CRR reduced to 3 %

Abolition of ad-hoc treasury bills from April 1997

Replaced by Ways and Means advances(WMA)

Method of managing mis matches in receipts and

payments
Monetary policy of 2000-2001

Liquidity management through

open market operations

Reduction in bank rate, CRR

and repo rates

Reduction of cost of funds

Liberalisation of the cost of

funds
Aggressively reduce NPAs

Setting up of credit information bureau

Universal banking

Technology upgrading

Entry of banks into insurance business

Monetary and credit policy of
2001-2002
Changes in prime lending rates

Flexibility of holding CRR

Restriction on urban co-operative banks

deposit schemes for senior citizens

Review of liquidity adjustment facility

Interest rate foe export credit

 Monetary policy 2012-2013
 RBI governor , Dr D Subbarao announced
this policy on april 17 2012.
 Challenge to control inflation
 Policy intended to:
 Adjust policy rates to level consistent with
the current growth moderation
 Guard against risks of demand led
inflationary pressures re-emerging
 Provide greater liquidity cushion to
financial system
Monetary policy 2013-2014
 Dr D Subbarao announced this policy on
may 3, 2013
 Its aim was:

To continue address accentuated

risks to growth

Guard against risks of

inflationary pressures

Manage liquidity to ensure

adequate credit flow
Monetary policy 2015-2016
 Monetary and liquidity measures:
 Reduction in repo rate
 Cash reserve ratio unchanged at 4%
 Overnight repos
 Reverse repo rate
 Bank rate
Recommendations of CHAKRAVARTY
COMMITTEE (1985) TO REVIEW THE WORKING
OF MONETARY PLICY

Coordination between monetary and fiscal policies

Price stability

Matching between authority and responsibility

Strengthen credit delivery system to priority system

Need for monetary budget and credit budget

Monetary targeting

improve yield on treasury bills

Discourage use of treasury bills for
long term finance

Improve yield on dated govt

securities

Not more than 2 lending rated for

monetary sector

Facilitate use of bill finance

Minimise use of cash credit

Achievements of RBI

Flexible monetary policy

Stable structure of interest rates

Sound banking and credit structure

Cheap remittance facilities

Successful management of public debt

Foreign exchange stability

Increase in public confidence

Control over money market

Development of bill market

Rational allocation of credit

Monetary stability

Contribution to economic development

Meaning
 Main Function of the
central bank is to manage
and control the monetary
system.
Necessary to achieve and
maintain
growth rate.
The policy of credit
 “Credit Control refers to the
regulation of credit by the
Central Bank for achieving the
objective of economic growth
and development.”
Objectives of Credit
Control
Exchange Rate
Stability

Stabilization of
Price Stability
Money Market

Objectives

Control over Economic

Trade Cycles Stability

High level of
Employment
 Techniques of
Credit Control
 Central bank – Main body to
control credit.
 Control credit through its
MONETARY POLICY.
 Methods are:-
I. Quantitative or General
General Selective Credit
Methods
Methods Methods Control

II. Qualitative or Selective

A) Quantitative Or General
Techniques
Determine the total
money supply of the
country.
Objective is to control
the total volume of
bank credit and interest
rate.
General Techniques

Change in
SLR
Change in
CRR
Open
Market
Operations
Bank
Rate
Bank Rate
 Rate of interest charged on
loans & advances given by
RBI to commercial banks.
 “Bank rate is the standard
rate at which it is prepared
to buy or discounts bills of
exchange or other
commercial papers eligible
Bank Rate and Rate of Interest
 Rate of interest:- Rate at
which commercial banks
advance loans to public.
 Bank rate:- Rate at which
central bank advance loans
to other banks.
 Direct link between both
Bank Rate ----- Rate of
 Bank Rate Policy
 Policy by which central bank
controls the credit creation.
 Manipulation of bank rate to
influence the credit situation.
Contraction Expansion
of Credit of Credit
Open Market Operations
 The purchases and
sales of
government
securities by the
central bank in the
open market.
 Directly influence
Open Market Operation Policy
 Policy by which the central bank
contracts or expands the credit by
Contra
sale or purchase of securities in
open market. ction
of
Credit

Expans
ion of
Credit
Change In CRR
“ Variation in cash reserve
ratio implies changes in the
minimum percentage of the
deposits to be kept as
reserve funds by the banks
with the central bank.”
-- R.A. Young
 First
used by Federal Reserve
System in 1933.
Policy of Varying CRR
 Policyby which central bank
contracts or expands the credit
Contra
by increasing or reducing in the
ction
CRR.
of
Credit

Expans
ion of
Credit
Change In SLR
 Developed during Second World
War.
 According to Statutory Liquidity
Ratio the commercial banks have to
keep a certain percentage of their
assets in liquid form compulsorily.
Expansi
Policy Of ChangingContrac
SLR
on of tion of
Credit Credit
 B) Qualitative Or
Selective Techniques
 Meant to give the central
bank as ability to affect
particular segments of the
economy on selective
basis.
 Direct the flow of credit
into desired channels for a
 Selective Techniques

Change
Regulat in
ion of Margin Ration Moral
Public Direct
Consu al ing of Persua
ity Action
mer’s Require Credit sion
Credit ment of
loan
 Varying Margin
Requirement Method
 Initially used in America in 1929.
 Credit given for specific purpose is
controlled.
Marginal requirement = Value of
Security - Amount
advanced
 Banks keep margin while lending
For Example:-
 Ms Alice pledges goods worth
Rs.1000 with a bank and gets loan
of
Rs.800 , then the difference between
the
asset pledged and loan ,i.e., Rs.200 is
the marginal requirement.
 If marginal requirement is increased
to 40%, then the loan will be Rs.600
only
 If marginal requirement is reduced to
 Regulation Of Consumer’s
Credit
 Invented by the
Federal Reserve
System of the US.
 Regulated by the Cash Down
control of:- Payments Maximum
Maturities Period
Hire purchase
finance
Installment purchase
Sale of durable
Rationing Of Credit
 Central bank fix a
limit for the credit
facilities available
to commercial
bank. Fix Scale
down the
 Limited
limits of amount of
loans loans
accommodation by
way of Decline to Fix quota
rediscounting give loans of credit

facilities.
Direct Action
 Restrictions imposed by
the Central bank on
commercial banks
concerning lending &
lending.
 Direct dealings with bank
which adopt policies
against the policies of
Moral Persuasion
 Not a statutory obligation.
 Merely a request to commercial
banks not to apply fund for
speculative activities.
 Central bank persuades & seeks
the co-operation.
 Check & restrict non-essential
activities.
 Success depends on the
Publicity And Propaganda
 Excessively used to implement
credit control.
 Wide publicity of credit policy
through Media Publicity.
 Purpose is to bring the banking
community under the pressure
of public opinion.
 In the interest of the economy.
 Takes the form of
Advantages Of Selective
Credit Controls
Directive and
Strength to Effective
Monetary Flexible
Policy

Precise Wide Effect

Control

Removal Of Balanced
Sectorial Growth
Imbalances
Disadvantages Of Selective
Credit Controls
Applicab
le only
Leakage to
of credit Commer
cial Not
Reduced Banksuseful in
Effective Unorgani
ness zed
Purpose Sector
Purpose
of
of taking
lending
loan
loan
Difficulties In Credit
Control
Problem in Lack of
controlling Banking
all types of Traditions
credit

Uncontrolle
d Banking
sector

Unorganized
Banking Lack of Co-
System operation