Subjects /Indian Economy / Reserve Bank of India

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Introduction
27 Mar 2021

Reserve Bank of India

RBI was established on 1st April 1935, with capital of 5 crore, on the recommendations of Hilton Young Committee, under RBI Act, 1934.

  • It was nationalised on 1st January 1949.
  • It got the membership of Bank of International Settlement (BIS) in 1996.
  • RBI is managed by a group of 21 members, which comprises -
    • 1 Governor
    • 4 Deputy Governor
    • 2 Officials from Ministry of Finance
    • 10 Directors nominated by Government representing different sectors of Economy
    • 4 Directors of Local Boards situated in 4 Metropolitan Cities.
  • First Governor – Sir Osborne Smith
  • First Indian Governor – C.D. Deshmukh (1946 – 1948)
  • Present Governor – Shaktikanta Das
  • Accounting Year of RBI – At present 2021-22 (Starting from April 1)
  • Every year it represented its report – ‘The Annual Report on Currency and Finance’


Functions of RBI

As the Central Bank of the country, RBI performs the following functions:

  • Issue currency notes
  • Banker’s Bank and lender of the last resort
  • Government’s Banker, Advisor and Agent
  • Regulator of Monetary System
  • Regulator of Banking System
  • Central Bank of the Country
  • Manager of foreign currency reserve
  • Debt manager to the Government
  • Regulator of the exchange rate system
  • Publication of the Monetary data
  • Measurement of Money Supply
  • Credit control and Monetary policy, etc.


Issuing Currency Notes

It was started in 1938, RBI issue currency notes starting with Rupee 2 to higher value.

  • While the 1 rupee note and all the coins are issued in the name of Government of India under direction of RBI.
  • Since 1957, for issuing Currency notes RBI has been adopting ‘Minimum Reserve System’ or ‘Minimum Foreign Reserve System’, under which a minimum reserve equivalent to 200 crores is always maintained in 2 designated forms:
  1. 115 crores in form of Gold and Gold coins
  2. 85 crores in foreign currencies and securities.

Facts at a glance:

Old Minting Press:

  • Currency Note Press – Nasik
  • Bank Note Press – Dewas (Madhya Pradesh)

Modern Minting Press:

  • At Mysore (Karnataka)
  • At Salboni (West Bengal)

558 tonnes approx. is the Gold reserve at present in RBI.

Measurement of Money Supply

What is money?

‘Money is what money does.’

The main functions of Money are:

  • Medium of Exchange
  • Measurement of Value
  • Storage of Value

Liquidity – Quantity of Money available at particular time. (Cash/Money in any form)


Types of Money

  • Legal Money of Fiat Money
    • Issued by Government or RBI
  • Credit Money
    • Issued by Banks
    • E.g., Draft, Cheques etc
  • Near Money
    • Any type of security that could be converted into money
    • E.g., Bonds and Debentures
  • Hard Currency
    • Whose Demand is high but Supply is low
    • E.g., Dollar
  • Soft Currency
    • Whose Demand is low and Supply is High
    • E.g., Rupee
  • Cheap Money
    • Available at low rate of Interest
  • Dear Money
    • Available at high rate of interest
  • Standard Currency
    • Whose intrinsic value and printed value is same.
    • E.g., Coins
  • Token Currency
    • Intrinsic value is less than the printed value.
    • Eg Currency notes
  • Hot Money
    • It moves rapidly from one place to another according to the profit.
    • E.g. Investment made by foreign investors in share market.
  • Plastic Money
    • Debit Cards, Credit Cards, ATMs
  • Virtual Currency
    • Digital currency created virtually.
    • E.g., Bit coins

Method of Measurement of Money Supply by RBI

RBI uses following formula for monetary aggregate and for the measurement of Money supply to the economy.

          M1 = Currency with public

                              +

                    Demands Deposits with Bank

                              +

                    Other deposits with RBI

 

          M1 = C + DD + OD (RBI)

          M2 = M1 + POSD (Post Office Saving Deposits)

          M3 = M1 + TD (Banks) (TD = Time Deposits)

          M4 = M3 + TD (Post Office) (TD = Total Deposits)

                    Excluding National Saving Certificates (NSCs)

 

NOTE: M1 represents the most liquid form of money because it is always available in form of cash. And it is also known as Narrow Money.

Credit Control

(Credit = Loan)

Major function of RBI is to control the flow of credit among the banks.

There are several measures that are taken by the RBI to control flow of credit.

Credit Control by RBI

General

Or

Quantitative Credit Control

Selective

Or

Qualitative Credit Control

 

 

Direct Measures

Indirect Measures

CRR

SLR

LAF

OMO

Bank Rate

Repo rate

Reverse Repo Rate








  • LAF – Liquidity Adjustment Facility
  • OMO – Open Market Operation
  • CRR – Cash Reserve Ratio
  • SLR – Statuary Liquidity Ratio

Quantitative Credit Control

Direct Measures

CRR

Under CRR, every bank has to maintain a certain part of its total cash deposit with RBI.

  • At present it is 4%
  • Any increase or decrease in CRR will respectively increase or decrease the availability of funds/liquidity with the bank.
  • According to RBI amendment Act 2005, the Lower and Upper limit of CRR is 3% and 15% respectively, has been removed in order to enhance the autonomy of RBI, as well as the interest given by RBI on (CRR), this amount has also been removed.  

 

SLR

Statutory Liquidity Ratio

Under SLR, every bank has to maintain a certain part of its liquid assests with itself.

  • At present it is 22.5%
  • It is one of the basic norms of sound banking.
  • According to RBI Amendment Act, 2005, its lower limit of 25% has been removed, while the upper limit of 40% is still in practice.
  • SLR can not be available as loan to general public, but it could be used for extending loan to the Government.


Indirect Measures


Repo Rate

It is that rate of Interest at which RBI extends short term loan to other banks.

  • After any Increase in repo rate, loan become costlier and vice-versa.
  • At present it is: 4% (January 2021)
  • It generally increased in the time of inflation – to control the inflation.

 

Reverse Repo Rate

It is that rate of interest at which RBI borrows from other banks, with an intension to absorb their surplus funds.

  • Generally, it is 1% lesser than repo rate.

 

Open Market Operation

It is the mechanism of sale and purchase of Government’s securities in Money market.

  • Every sale of such securities, will reduce the liquidity in the system and vice-versa.
  • It is conducted by RBI from time to time.