Roles and Functions of RBI- Prachi Jain

1. ROLES AND FUNCTIONS OF RESERVE BANK OF INDIA (RBI) Made by :PRACHI JAIN

2. THEME • Role of Reserve Bank of India in the Indian Economy RESEARCH QUESTION • Why is RBI considered as “apex”for all financial institutions in India? • Why RBI takes an important role in determining foreign exchange sector of India? OBJECTIVES • To understand the composition and working of Reserve Bank Of India & to analyse the functions of RBI In The Indian Economy

3. INTRODUCTION The Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian rupee. RBI is the regulator of entire Banking in India. The RBI plays an important part in the Development Strategy of the Government of India. It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934. The original share capital was divided into shares of 100 each fully paid. Following India's independence on 15 August 1947, the RBI was nationalised on 1 January 1949.

5. OBJECTIVES OF RESERVE BANK OF INDIA • To manage the monetary and credit system of the country. • For balanced and systematic development of banking in the country. • For the development of organized money market in the country. • For proper arrangement of agriculture and industrial finance. • For proper management of public debts. • To establish monetary relations with other countries of the world and international financial institutions.

6. MONETARY AUTHORITY BANKER TO BANKS ISSUER OF CURRENCY BANKER TO THE GOVERNMENT 01. 02. 03. 04. FUNCTIONS OF RBI

7. MONETARY AUTHORITY CURRENCY ISSUER The main function of RBI is formulating and implementing the monetary policies of India. Creating a balance between “Price stability” and “future economic growth” is the main challenge of RBI as a monetary authority. It is in the responsibility of the RBI to print and issue new currency notes in India. It is also the RBI’s responsibility to exchange old or damaged notes for new ones. This way RBI can manage the availability of enough “good quality cash” needed in the market at a given point in time. Here, “cash” means both notes and coins.

8. BANKER TO THE GOVERNMENT Like retail and commercial banks gives service to common public, RBI is the retail bank for the Government of India (GOI). RBI also acts as a merchant banker for the GOI. RBI is obliged to do all banking transactions on behalf of Central and State Governments of India. Role as a banker: • RBI pays and receives money on behalf of the government. • Issue Advances to government (both interest and non-interest bearing).

9. BANKER TO BANKS As a Banker to Banks, the central bank functions as follows: • Custodian of Cash Reserves: All Banks in India maintains an account with the RBI. They keep their cash reserves and other deposits in this account. Hence, this way RBI also functions as banker to the banks. • Lender of the Last Resort: When commercial banks fail to meet their financial requirements, they approach the Central Bank to give loans and advances a lender of the last resort. • Clearing House: All commercial banks have their accounts with the commercial bank. Hence, it is RBI’s responsibility to ensure inter-bank transactions.

10. All foreign exchange transactions are overseen and managed by RBI. Traditionally, RBI manages the foreign exchange by controlling its demand in Indian economy. In the early days of Independent India, RBI was mainly regulating & deploying the inflow of foreign currency into India. RBI regulates the foreign exchange flow in the country under Foreign Exchange Management Act, 1999 (FEMA). ROLE OF RBI IN FOREIGN EXCHANGE MANAGEMENT

11. Current Account Transactions: RBI’s role in current account transactions are limited. They cannot impose any restrictions directly. It is only the GOI (Government Of India) which can do so (upon consultation with RBI). Capital Account Transaction: RBI specifies conditions of payments when transactions of capital account in nature take place (like FDI/ FII/FPI Investments, NRI Deposits etc).

12. MONETARY POLICY OF RBI The Reserve Bank of India is empowered to regulate the money supply in the economy through its “Monetary Policy”. It is the policy adopted by the Central Bank of an economy in the direction of credit control or money supply. As RBI has sole monopoly in currency issue, it controls credit and money supply through its monetary instruments.

13. QUANTITATIVE INSTRUMENTS OF MONETARY POLICY 1. REPO RATE AND REVERSE REPO RATE 2. BANK RATE 3. OPEN MARKET OPERATIONS 4. LEGAL RESERVE REQUIREMENTS(LRR)

14. REPO RATE REVERSE REPO RATE Repo 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 4%. An increase in repo rate reduces the ability of commercial banks to create credit. A decrease in repo rate will have opposite effect. 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 3.75%.An increase in reverse repo rate will have negative effect on lending capacity of commercial banks.

15. 3. BANK RATE Bank Rate is the interest rate at which RBI provides long term loans to commercial banks. 4. OPEN MARKET OPERATIONS The open market operations work by selling and buying of the government securities by the central bank of a nation. To increase money supply, the central purchases securities, while to reduce the money supply it sells securities to the commercial banks. 5. LEGAL RESERVE REQUIREMENTS (LRR) Commercial Banks are required to maintain Reserves on two accounts: • CASH RESERVE RATIO: It is the minimum amount of cash that commercial banks have to maintain with the Reserve Bank of India in the form of deposits.. The current CRR rate is 3%. • 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. The current SLR rate is 18.5%.

16. QUALITATIVE INSTRUMENTS OF MONETARY POLICY 01 02 03 MARGIN REQUIREMENTS MORAL SUASION SELECTIVE CREDIT CONTROLS

17. MARGIN REQUIREMENTS:Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. • MORAL SUASION:The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation.  • SELECTIVE CREDIT CONTROLS (RATIONING OF CREDIT): Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. 

18. FISCAL POLICY OF RBI The means by which the government adjust its spending levels along with tax rates to influence and monitor the nation's economy it is known as Fiscal Policy.

19. This theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between 2% and 3%), increases employment, and maintains a healthy value of money. Fiscal policy plays a very important role in managing a country's economy. • Unfortunately, the effects of any fiscal policy are not the same for everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class.

20. ROLE OF RBI IN THE ECONOMY As with all economies, the central bank plays a key role in managing and monitoring the monetary policies affecting both commercial and personal finance as well as the banking system. As GDP moves higher in the world rankings the RBI’s actions will become increasingly important.

21. In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to 6%.The rate cut was the second for 2019 and had impacted the borrowing rate across the credit market more substantially. As one of the fastest-growing emerging market countries in the world, India has several unique challenges ahead that will require active navigation from the RBI. India also has a diverse range of goods and services along with a rising inflation rate. With the Indian economy steadily accounting for a greater share of the global economy, it is expected that the RBI will gain greater attention from world leaders while also growing in stature as one of the world’s most-watched central banks.

22. STUDY- RBI v/s FEDERAL RESERVE RESERVE BANK OF INDIA FEDERAL RESERVE The Federal Reserve System (FRS) is the central bank of the United States and arguably the most powerful financial institution in the world. The Reserve Bank of India (RBI) is the central bank of India, which was established on Apr. 1, 1935, under the Reserve Bank of India Act.

23. ANALYSIS ON STUDY OF FED & RBI • Regarding the SIZE, US Federal Reserve deals with a $19 trillion US economy which is very much mature and capitalistic as compared to the India's $2.1 trillion economy. • RBI is an autonomous institution wholly owned by Indian government. US Fed has a structure of a private, it is not wholly owned by the US government. • POLICY RATE: In the Federal Reserve, the policy rate is known as Federal Fund Target Rate. Whereas, in India, the policy rate is known as Repo Rate.

24. ANALYSIS ON STUDY OF FED & RBI 4.PRIORITIES: US Fed is more concerned with the unemployment rate and the growth rate while deciding it's policy interest rate. The domestic priorities of RBI that guides the policy interest rate (repo in India) are quite different. India has large unmonitized and agricultural economy. RBI has been given the authority to take care of the inflation. 5. IMPACT OF POLICIES: US Fed’s policies and even its formal statements sends waves throughout the global markets. Its policies has more international impact than national. US Treasury is considered as a safe heaven for investors. RBI's policies on the other hand do not have such an impact on the international level.

25. ANALYSIS ON STUDY OF FED & RBI 6. MONETARY TOOLS: The US at this stage has exhausted most of its monetary instruments which are used time to time by the central banks to control inflation or economic growth-LRR, Repo, Reverse Repo, MSF rates etc. With near zero interest rates, it has come up with new ways to increase growth like quantitative easing, helicopter money etc. Whereas RBI has these tools exploitable and negative interest rates are a thing of far distant as of now.

26. STEPS TAKEN BY RBI TO TACKLE COVID 19 REPO & REVERSE REPO RATE CUT March 27 3 MONTHS LOAN MORATORIUM April 17 LIQUIDITY FACILITIES April 27 RBI announced that it was cutting the Repo rate by 0.75% to 4.4 and its Rev. Repo by 0.9% to 4. RBI announced that lenders could give a moratorium of 3 months on term loans. The RBI announced Rs 50,000 crore special liquidity facility for Mutual Funds and for NABARD.

27. STEPS TAKEN BY RBI TO TACKLE COVID 19 • The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 1% to 3. • A Three month Moratorium (temporary prohibition) on Working Capital Interest is also permitted to all lending institutions. • The RBI has further reduced the reverse repo rate to 3.75 per cent from 4.0 per cent by 25 basis points.

28. IMPACT OF THE STEPS TAKEN BY RBI DURING PANDEMIC The impact of all these announcements shall inject liquidity equal to almost 3.2% of GDP. The steps taken by RBI were to address the liquidity issue in the Indian Economy. But all the steps taken by the RBI in the aftermath of coronavirus crisis have resulted in liquidity surplus in the banking system, which means there is enough money in the banks but there are very few takers. As a result, banks have parked Rs 7.29 lakh crore worth of funds with the apex bank because in these times of crisis when all economic activities have come to standstill, no company and business are borrowing money from the bank.

29. CONCLUSION RBI is the apex banking institution in India. The RBI plays a key role in the management of the treasury foreign exchange movements and also the primary regulator for banking and non banking Financial Institutions. The RBI operates a number of government mints that produce currency and coins. RBI has been given a wide range of powers and all the functions of RBI are equally significant in context of the Indian economy. 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.

30. BIBLIOGRAPHY • Investopedia.com • VatGlobal.com • economictimes.indiatimes.com • Cleartax.com • rbi.org.in • Moneycontrol.com • Theexpress.com • www.quora.com