Indian Economy / Banking and Insurance
The Reserve Bank of India ( RBI ) remains the Central Bank of our country. The powers and functions of RBI include issuing currency notes, controlling the
credit through its monetary policy, custodian of foreign exchange, etc. Oiginally, RBI was established in the year of 1935 in Kolkata but was moved to Mumbai
in 1937. It has four zonal offices located at Mumbai, Delhi, Kolkata and Chennai.
Functions of Reserve Bank of India
The traditional functions of RBI are
- Issuing of Currency Notes - The RBI has exclusive right to issue banknotes, which bear the signature of RBI Governor except the one rupee note. The one
rupee note contains the signature of Finance Secretary and is being issued by the Ministry of Finance.
- Banker to the Banks - RBI guides and directs all the commercial banks and Non-Banking Finance Companies in the country. Every commercial bank will have to
maintain a part of their reserves in the form liquid cash with the RBI. The commercial banks approach the RBI in times of exigency to survive from financial
difficulties and the RBI comes to their rescue and hence called Lender of the Last Resort.
- Custodian of Foreign Exchange Reserves - The RBI has the custody of India's foreign exchange reserves and through these reserves RBI acts when there
is a depreciation in Rupee value and when there exists crisis in balance of payments position.
- Banker to the Government - The RBI handles the banking requirements of the Government of India by operating and maintaining the Government's deposit
accounts. It makes payments and receives funds on behalf of the Government. It is represented as Government's agent at the World Bank and the International
Monetary Fund ( IMF ).
- Controller of Credit - Credit plays an important role in supply of money, which in turn impacts the economic stability of the country. So, control of
credit is an important activity in any Economy. Credit is controlled by the Reserve Bank of India through its Monetary and Credit Policy in accordance with
the economic precedences of the Government.
RBI Monetary and Credit Policy
- RBI announces the annual monetary and credit policy every year during the last week of April. It also reviews the implementation of the policy for every
two months and revises the rates and ratios like Statutory Liquidity Ratio ( SLR ), Cash Reserve Ratio ( CRR ), Repo Rate and Reverse Repo Rate and also
initiates suitable measures for sound economic growth and for containing the inflation.
- The major objectives of the policy are -
- Ensuring macroeconomic and financial stability
- Containing inflation for sustaining growth momentum
- Regulating the credit by taking into consideration of the money supply and inflationary pressure
- Statutory Liquidity Ratio - Statutory Liquidity Ratio ( SLR ) is the percentage of time and demand liabilities ( deposits ) of commercial banks to be
maintained in liquid assets like government securities, gold, cash, etc. This should remain with the respective bank. It is an important tool of monetary policy.
SLR has become a major instrument for financing the public debt ( Government borrowing ).
- Cash Reserve Ratio - Cash Reserve Ratio ( CRR ) is the cash which the commercial banks keep with the RBI as a percentage of time and demand liabilities. It
is a monetary tool to regulate the money supply. The more the CRR value, the less will be the money available for lending.
- Repo Rate - It is the interest rate at which the central bank infuses the cash into the banking system by lending the money for a short period.
- Reverse Repo Rate - It is the interest rate at which the central bank absorbs the excess cash from the banking system for a short term. It is less
remunerative to park surplus money for banks and thereby encouraging the banking system to lend more to the productive sectors.
- Non performing Assets - Non performing Assets ( NPAs ) are those accounts of the borrowers who have defaulted in payment of either interest or principal
for more than 90 days. With NPAs, the bank's profitability diminishes since the banks will not be able to lend the money.
- Treasury Bills - As part of the powers and functions of RBI, Treasury Bills are issued by Reserve Bank of India and they are part of the money market.
These Bills facilitate the short term borrowing programme to take care of deficit financing by the Government. Currently, they are issued with 14 days, 91 days,
182 days and 364 days of maturity.