About RBI (Notes)

RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India (RBI, Hindi:भारतीय रिज़र्व बैंक) is India's central banking institution, which controls the monetary policy of the Indian rupee . It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934 . The original share capital was divided into shares of 100 each fully paid, which were initially owned entirely by private shareholders. [6] Following India's independence on 15 August 1947, the RBI was nationalised on 1 January 1949.



ABOUT RBI:

Established: 1 April 1935
Headquarter: Mumbai
Nationalization: 1 Jan 1949
Committee: Hilton Young Committee

Zonal Offices: 4
1- New Delhi
2- Mumbai
3- Kolkata
4- Chennai

Members in RBI: 21
1 Governer
4 Deputy Governers
2 Finance Ministry Representatives
10 Government Nomitated Directors
4 Directors to Represent Local Boards


Policy Rates and Reserve Ratios

Bank Rate: 7. 00%
Repo Rate: 6. 50%
Reverse Repo Rate: 6. 00%
Cash Reserve Ratio: 4%
Statutory Liquidity Ratio: 21. 25%
Base Rate: 9. 70% - 10. 00%
Savings Deposit Rate: 4%
Term Deposit Rate: 7. 25% - 8. 00%


FUNCTIONS OF RBI:

1) Monetary Authority: Formulate, implements and monitors the monetary policy.

2) Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.

3) Manager of Foreign Exchange: Manages the Foreign Exchange Management Act, 1999.

4)   Issuer of Currency: Issues and exchanges or destroys currency and coins not fit for circulations.

5)   Development role: Performs a wide range of promotional functions to support national objectives.

6) Bankers to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

7)   Bankers to banks: maintains banking accounts of all scheduled banks.

IMPORTANT POINTS ON RBI

·         RBI is not expected to perform the function of accepting deposits from the general public.

·         RBI has its headquarters at Mumbai.

·         Prime lending rate is not decided by RBI.

·         Prime lending rate is decided by the individual banks.

·         RBI decides the following rates namely; Bank rate, repo rate, reverse repo rate and cash reserve ratio.

·         RBI was set up on the recommendations of Hilton Young commission.

·         The quantitative instruments of RBI are – bank rate policy, cash reserve ratio and statutory liquidity ratio.

·         The objective of monetary policy of RBI is to control inflation; discourage hoarding of commodities and encourage flow of credit into neglected sector.

·         When RBI is lender of the last resort, it means that RBI advances credit against eligible securities.

·         Government of India decides the quantity of coins to be minted.

·         The method which is used currently in India to issue currency note – minimum reserve system.

·         For issuing notes, RBI is required to hold the minimum reserves of Rs. 200 crore of which note less than Rs. 115 crore is to be held in gold.

POLICY RATES

Repo Rate

Ø Repo rate is the rate of interest which is levied on Short-Term loans taken by commercial banks from RBI. Whenever the banks have any shortage of funds they can borrow it from RBI.

Reverse Repo Rate

Ø This is exact opposite of Repo rate. Reverse repo rate is the rate at which commercial banks charge on their surplus funds with RBI. RBI uses this tool when it feels there is too much money floating in the banking system.

CRR Rate

Ø Cash reserve Ratio (CRR) is the amount of cash funds that the banks have to maintain with RBI in cash as reserves.

SLR Rate

Ø SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or government approved securities (Bonds) before providing credit to its customers.

Ø It is determined as the percentage of total Net Demand and Time Liabilities (NDTL).

Bank Rate

Ø Bank rate is the rate of interest which is levied on Long Term loans and Advances taken by commercial banks from RBI.

MSF Rate

Ø MSF (Marginal Standing Facility Rate) is the rate at which banks can borrow overnight from RBI.

Ø This was introduced in the monetary policy of RBI for the year 2011-2012.

Ø Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.