What is RBI, Structure of RBI, Function of RBI(Traditional/Promotional/Supervisory), Economic Policies, Monetary Policies, CRR, SLR, RRR, LAF, MSF, OMOS

1. RBI AND
MONETARY
POLICY
Mufaddal Nullwala - MIM - 131
MIM - 2nd Yr. 3rd Sem
Subj- Business
Environment.
Prof- Dr. Anil Pandey.
Batch - 2015-2018.

2. RESERVE BANK OF
INDIA(RBI)
- India’s central banking institution.
- Controls monetary policy of Indian rupee.
- Commenced operation on 1st April 1935.
- Nationalised on 1st January 1949.
- Head quarter in Mumbai.
- Regional headquarter at Mumbai, Chennai,
Kolkata and New Delhi.

3. RBI STRUCTURE
GOVERNOR
4 DEPUTY
GOVERNORS
2 FINANCE
MINISTRY
REPRESENTATI
VE
10
GOVERNMENT
NOMINATED
MEMBERS
4 LOCAL
HEADQUARTE
R DIRECTOR

4. FUNCTIONS OF RBI
1. Issue of Bank Notes
2. Banker to Government
3. Custodian of Cash Reserves of Commercial Banks
4. Custodian of Country’s Foreign Currency Reserves
5. Lender of Last Resort
6. Central Clearance and Accounts Settlement
7. Controller of Credit

5. FUNCTIONS OF RBI
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the
power to influence the volume of credit created by banks in India. It
can do so through changing the Bank rate or through open market
operations.
Controller of money market
The Reserve Bank of India is armed with many more powers to
control the Indian money market
Custodian of foreign exchange reserves
Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India's reserve of international
currencies.

6. A) TRADITIONAL FUNCTIONS
1. Monopoly of currency notes issue
2. Banker to the Government(both the central and state)
3. Agent and advisor to the Government
4. Banker’s Bank
5. Acts as the clearing house of the country
6. Lender of the last resort (B R P)
7. Custodian of the foreign exchange reserves
8. Maintaining the external value of domestic currency
9. Controller of forex and credit (Credit Policy)
10. Ensures the internal value of the currency
11. Publishes the Economic statistical data
12. Fight against economic crisis and ensures stability of
Economy.

7. B) PROMOTIONAL FUNCTIONS
1. Promotion of banking habit and expansion of banking systems.
2. Provides refinance for export promotion. (E P C G)
3. Expansion of the facilities for the provision of the agricultural
credit through NABARD.
4. Extension of the facilities for the small scale industries.
5. Helping the Co-operative sectors.
6. Prescribe the minimum statutory requirement. (SLR)
7. Innovating the new banking business transactions.

8. C) SUPERVISORY FUNCTIONS
1. Granting license to Banks.
2. Inspecting and making enquiry or determining position in
respect of matters under various sections of RBI and Banking
regulations.
3. Periodical review of the work of the commercial banks.
4. Giving directives to commercial banks.
5. Control the non-banking finance corporations.
6. Ensuring the health of financial system through on-site and
off-site verification.

9. ECONOMIC POLICIES FOR
STABILIZATION
 Economic Policy
 Fiscal Policy
 Monetary Policy

10. MONETARY POLICY
OVERVIEW
The monetary authority, typically the central bank of a country, is
vested with the responsibility of conducting monetary policy.
Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
use of money and credit.

11. OBJECTIVES OF MONETARY
POLICY:
• Maximum feasible output.
• High rate of growth.
• Fuller employment.
• Price stability.
• Greater equality in the distribution of income and
wealth.
• Healthy balance in balance of payments(BOP).

12. INSTRUMENTS / TOOLS OF
MONETARY POLICY:
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Refinance facilities
• Liquidity Adjustment Facility (LAF)
• Marginal Standing Facility (MSF)
• Open Market Operations (OMOs)
• Bank Rate

13. 1. CASH RESERVE RATIO
(CRR) 4 %
All commercial banks are required to keep a certain amount of its
deposits in cash with RBI. This percentage is called the Cash
Reserve Ratio.
 To prevent shortage of cash
 To control Money supply
 In Contractionary policy the bank raises the CRR
 In Expansionary policy bank reduces the CRR
 A hike in CRR will lead to high interest rate, credit rationing,
huge decline in investment and large reduction in National
Income and Employment

14. 2. STATUTORY LIQUIDITY
RATIO (SLR)
• Statutory Liquidity Requirement ( SLR).
• Another kind of reserve, in addition to CRR.
• It’s the proportion of the total deposits which commercial banks
are required to maintain with the central bank in the form of
liquid assets - Cash reserve, Gold, Government Bonds.
• This measure was undertaken to prevent the commercial bank
to liquidate their liquid assets when CRR is raised.
21 %

15. 3. REFINANCE FACILITIES
• Sector-specific refinance facilities aim at achieving sector
specific objectives through provision of liquidity at a cost linked
to the policy repo rate.
• The Reserve Bank has, however, been progressively de-
emphasising sector specific policies as they interfere with the
transmission mechanism.

16. 4. LIQUIDITY ADJUSTMENT
FACILITY (LAF)
• Consists of overnight and term repo/reverse repo auctions.
Progressively, the Reserve Bank has increased the proportion
of liquidity injected in the LAF through term-repos.

17. 6. MARGINAL STANDING
FACILITY (MSF)
• A facility under which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve Bank
by dipping into their SLR portfolio up to a limit (currently two per
cent of their net demand and time liabilities deposits) at a penal
rate of interest (currently 100 basis points above the repo rate).
• This provides a safety valve against unanticipated liquidity
shocks to the banking system. MSF rate and reverse repo rate
determine the corridor for the daily movement in short term
money market interest rates.

18. 7. OPEN MARKET
OPERATIONS (OMOS)
• RBI sells or buys government securities in open market depend upon - it
wants to increase the liquidity or reduce it.
• RBI sells government securities: It reduces liquidity (stock of money) in
the economy. So overall it reduces the money supply available with
banks, Reduces the capital available for lending and interest rate goes
up.
• RBI buys securities: Increases the money supply available with banks,
so interest rate moves down and business activities like new
investments, capacity expansion goes up.

19. 8. BANK RATE
- Bank rate is the minimum rate at which the central bank provides loans to the
commercial banks.
- It is also called the discount rate.
OR
Its the interest rate charged on borrowings ( Loans and Advances) made by the
commercial bank from the central bank.
 Central Bank can change this rate
• Depending upon Expansion or Contraction of credit flow.
• A fall in Bank Rate– Expansionary Monetary Policy
• A rise in Bank Rate – Contractionary Monetary Policy
- The action of the Central Bank effects the flow of credit :
 Rise or fall in rate of Central Bank raises its rate leads to rate change of
commercial bank. So demand for funds by borrowers get effected.
 Bankers lending rates get adjusted to deposit rates. Rise in deposit rate turns
borrowers into depositors.
 Rise in in Bank rate reduces the net worth of Govt. Bonds against which
commercial banks borrow funds from the central bank. They find it difficult to
maintain high cash reserve.
6. 75%

20. OTHER METHODS
1. REPO - RATE
6.25
%
 Whenever the banks have any shortage of funds they can
borrow it from RBI.
 Repo rate is the rate at which our banks borrow rupees from
RBI.
 A reduction in the repo rate will help banks to get money at a
cheaper rate.
 When the repo rate increases borrowing from RBI becomes
more expensive.
 The repo rate transactions are for very short duration.
 It denotes injection of liquidity.`

21. OTHER METHODS
2. REVERSE REPO - RATE
5.75
%
 A reverse repo rate is the interest rate earned by a bank for lending
money to the RBI in exchange for Government securities.
 Reverse repo is an arrangement where RBI sells the securities to
the bank for a short term on a specified date.
 RBI us his tool when there is to much liquidity in the banking
system.
 Reverse repo-rate means absorption of liquidity.

22. MONETARY POLICY TO CONTROL
RECESSION PROBLEM:
RECESSION MEASURES
• Central Banks buy securities through OMO.
• Lowers Bank Rate.
• Reduces CRR
• Money Supply Increases
• Interest Rate Falls
• Investment Increases
• Aggregate Demand Increases
• Aggregate Output increases

23. MONETARY POLICY TO CONTROL
INFLATION PROBLEM
• Central Banks sells securities through OMO.
• Increases Bank Rate.
• Raises CRR
• Money Supply Decreases
• Interest Rate Rises
• Investment Declines
• Aggregate Demand Declines
• Price Level Falls