The Reserve Bank of India was established in 1935 under the provisions of the Reserve Bank of India Act, 1934 in Calcutta, eventually moved permanently to Mumbai. Though originally privately owned, was nationalized in 1949.
Organisation and Management:
The Reserve Bank”s affairs are governed by a central board of directors. The board is appointed by the Government of India for a period of four years, under the Reserve Bank of India Act.
Main Role and Functions of RBI
Offices and Training Centres:
Instruments of Monetary Policy of RBI :
As discussed earlier, RBI executes Monetary Policy for Indian Economy. The RBI formulates, implements and monitors the monetary policy. The Monetary Policy Committee (MPC) is entrusted with the task of fixing the benchmark policy interest rate (repo rate) for inflation targeting.
The main objectives of monitoring monetary policy are:
The monetary policy (credit policy) of RBI involves the two instruments given in the flow chart below:
Quantitative measures refer to those measures that affect the variables, which in turn affect the overall money supply in the economy.
Instruments of quantitative measures:
The rate at which central bank provides loan to commercial banks is called bank rate. This instrument is a key at the hands of RBI to control the money supply in long term lending. At present it is 6.25%.
|What is bank rate?|| |
The rate at which a bank can borrow from the RBI
|Any hike in the bank repo and reverse repo rates will lead to a rise in interest rates in tlie economy and vice versa.|
|What is repo rate?||The rate at which RBI lends shortterm money to banks against deposits.|
|What is reverse repo rate?||The rate at which a bank can park excess short-term funds with the RBI.|
Liquidity Adjustment Facility-
Reserve Bank of India’s LAF helps banks to adjust their daily liquidity mismatches. LAF has two components – repo (repurchase agreement) and reverse repo.
(i) Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends short-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive.Repo rate is always higher than the reverse repo rate. At present it is 6.00%
(ii) Reverse Repo Rate: It is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks.The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. At present it is 5.75%
(iii) Marginal Standing Facility (MSF): was introduced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12). The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio SLR.
The scheme has been introduced by RBI for reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system. Currently, it is 6.25%
Varying reserve ratios –
The reserve ratio determines the reserve requirements that banks are liable to maintain with the central bank. These tools are:
(i) Cash Reserve Ratio (CRR)
It refers to the minimum amount of funds in cash( decided by the RBI) that a commercial bank has to maintain with the Reserve Bank of India, in the form of deposits. An increase in this ratio will eventually lead to considerable decrease in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply. Currently, it is 4%.
(ii) Statuary Liquidity Ratio (SLR)
SLR is concerned with maintaining the minimum percentage( fixed by RBI) of assets in the form of non-cash with itself. The flow of credit is reduced by increasing this liquidity ratio and vice-versa. As SLR rises the banks will be restricted to pump money in the economy, thereby contributing towards a decrease in money supply. The reverse case happens if there is a fall in SLR, it increases the money supply in the economy. Currently, SLR is 19.5%.
Open Market Operations (OMOs)
These include both, outright purchase and sale of government securities, for both, injection and absorption of liquidity in the economy.
Market Stabilisation Scheme (MSS)
This instrument was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.