RBI – CONTROLLER OF CREDIT

CLASS 12 PROJECT – ECONOMICS

BY; ANMOL BHASIN

CLASS 12-N

INDEX
1. INTRODUCTION

2. PREAMBLE AND LOGO

3. OBJECTIVES OF RBI

4. BRIEF HISTORY OF RBI

5. FUNCTIONS OF RBI

6. BRANCHES AND SUPPORT BODIES

7. DEMONITIZATION

8. POLICY RATES AND RESERVE RATIO

10.RBI GOVERNER – SHAKTIKANTA DAS

11.CONCLUSION
 INTRODUCTION

A central bank, reserve bank or monetary authority is an institution

that manages a state’s currency, money supply and interest rates.
Central Bank’s also usually oversee the commercial banking system
of their country. In Contrast to a commercial bank, a central bank
possesses a monopoly on increasing the monetary base in the state
and usually also prints the national currency, which usually serves as
the state’s legal tender.
The main function of a central bank is to control the Nations money
supply (monetary policy) through by managing interest rates, setting the
reserve requirement, also acting as a lender of last resort to the nations
banking sector during times of financial emergency and crisis. Central
Bank usually also have supervisory powers, to reduce the risk that
commercial banks and other financial institutions engage in. Central
banks in most developed nations are institutionally designed to be
independent from political interference.
 RBI

• HEADQUATER: MUMBAI (INDIA)

• COORDINATES: SBI
• ESTABLISHED: 1st APRIL 1935; 84 YEARS AGO
• GOVERNER: SHAKTIKANTA DAS
• CENTRAL BANK OF: REPUBLIC OF INDIA
• CURRECNY: INDIAN RUPEES ( ₹ )
• RESERVES: US $ 410 BILLION
• BANK RATE: 6.00%
• WEBSITE: rbi.org.in
 PREAMBLE

The preamble of the Reserve Bank of India describes the basic

functions of the reserve bank as:

“Toregulate
“To regulatethetheissue
issueofofBank
Banknotes
notesandandkeeping
keepingofofreserves
reserveswith
awith
viewa to
view to securing
securing monetary
monetary stability
stability in India
in India and generally
and generally to to
operate the
operate the currency
currency and
and credit
credit system
system of of the
the country
country toto its
its
advantage; to
advantage; to have
have aa modern
modern monetary
monetary policy
policy framework
framework to to meet
meet
the challenge
the challenge ofof an
an increasingly
increasingly complex
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economy, to to maintain
maintain
price stability
price stability while
while keeping
keeping in
in mind
mind thethe objective
objective of
of growth.”
growth.”
 LOGO
On 1 April 1935 the RBI was ensconced during the British Rule.
It replicated its official emblem after the double mohur of The
East India Company. The logo originally featured a sketch of the
Lion & Palm Tree but it was later decided to substitute the lion
with a tiger to represent India better.
The selection of the Bank’s common seal to be used as the
emblem of the Bank on currency notes, cheques and
publications, was an issue that had to be taken up at an early
stage of the Bank’s formation.
The general ideas on the seal were as follows:
- The seal should emphasize the Governmental status of the
Bank, but not too closely;
- It should have something Indian in the design;
- It should be simple, artistic and heraldically correct; and
- The design should be such that it could be used without
substantial alteration for letter heading, etc.
For this purpose, various seals, medals and coins were
examined. The logo of Lion and Palm Tree replaced the lion
with a tiger.
 OBJECTIVES OF RBI
* To help ensure monetary stability of the country.
* To manage the monetary and credit system of the country.
* To stabilizes internal and external value of rupee.
* For balanced and systematic development of banking in the
country.
* For the development of organized money market in the
country.
* To maintain supply of currency.
* For proper arrangement of agriculture finance.
* For proper arrangement of industrial finance.
* For proper management of public debts.
* To establish monetary relations with other countries of the
world and international financial institutions.
* For centralization of cash reserves of commercial banks.
* To maintain balance between the demand and supply of
currency.
 BRIEF HISTORY
The Reserve Bank of India was set up on the basis of the
recommendations of the Hilton Young Commission. The Reserve
Bank of India Act, 1934 (II of 1934) provides the statutory basis of
the functioning of the Bank, which commenced operations on April
1, 1935.
The Bank was constituted to
• Regulate the issue of banknotes
• Maintain reserves with a view to securing monetary stability and
• To operate the credit and currency system of the country to its
advantage.
The Bank began its operations by taking over from the Government
the functions so far being performed by the Controller of Currency
and from the Imperial Bank of India, the management of
Government accounts and public debt. Offices of the Banking
Department were established in Calcutta, Bombay, Madras, Delhi
and Rangoon.
After the partition of India, the Reserve Bank served as the central
bank of Pakistan up-to June 1948 when the State Bank of Pakistan
commenced operations. The Bank, which was originally set up as a
shareholder's bank, was nationalized in 1949.
An interesting feature of the Reserve Bank of India was that at its very
inception, the Bank was seen as playing a special role in the context of
development, especially Agriculture. When India commenced its plan
endeavours, the development role of the Bank came into focus,
especially in the sixties when the Reserve Bank, in many ways,
pioneered the concept and practice of using finance to catalyze
development.
With liberalization, the Bank's focus has shifted back to core central
banking functions like Monetary Policy, Bank Supervision and
Regulation, and Overseeing the Payments System and onto developing
the financial markets.

**First Central Board of Directors

 FUNCTIONS OF RBI
1. Bank of Issue:

- Central Bank is the sole authority that issues currency in India.

All currency (except for one rupee notes and coins) issued by
the Central Bank is its monetary liability.

- Central Bank prints currency notes following the Minimum

Reserve System -i.e., issuing is backed up with assets of equal
value example, gold coin, bullion, foreign securities & the
domestic government’s local currency securities.

- Central bank through this function monetizes the public debt.

This central bank issues currency once it acquires these
securities. Thus, the central bank monetizes the public debt by
converting the debt into a monetary liability.

- It maintains the external and internal value of the currency.

- It enables the government to control money supply through RBI

- It builds up public faith in the currency system.

 2. Banker to the Government:

The Central bank acts as a banker, agent and financial advisor to the
government – both Central and State governments.
As a banker, it carries out all banking business of the government
- It maintains the current account for keeping their cash
balances.

- It purchases and sells the bills and currencies on behalf of the

government.

- Central bank accepts receipts and makes payments for the

government and carries out exchange, remittance and other
banking operations.

- Gives short-term loans and advances against securities to

government to meet and temporary shortfalls. The govt borrows
by selling treasury bills to the Central Bank.
As an agent,
- It manages public debt i.e., manages all new issues of the
government’s loans.
- It services the public debt outstanding.
- It nurtures the market for government securities.

As a financial advisor, it advises the government on all banking and

financial matters like deficit financing, price stability etc., and it
represents the govt in international financial institutions and
conferences.
3. Banker’s Bank and Supervisor:
Being the apex bank, the Central bank acts as the banker to all the
commercial banks in the country.
It performs this function in three capacities:
a) Custodian of Cash Reserve:
Its main function is to function as a banker to all commercial banks
by keeping all cash reserves in its custody. A certain percentage of the
deposits of the commercial banks, called as Cash Reserve Ratio
(CRR), is kept with the Central bank that is to be used in times of
financial emergencies.
b) Clearing House and bank for Settlement and transfers:
i. Provides centralized clearing and remittance facilities as the Central
Bank holds excess cash reserves of all banks to meet any clearing
drains due to settlement with other banks.
ii. All the commercial banks maintain their accounts with Central
bank, it can easily settle claims of various commercial banks against
each other through debit/credit entries.
As a Supervisor, the central bank regulates and supervises all
commercial banks in the country.
i. The regulation of banks may be related to liquidation,
amalgamation, mergers of commercial banks, licensing, branch
expansion, liquidity of assets, management & liquidation.
ii. Supervisory control is exercised through conducting periodic
inspection of the banks and the returns filed by them.
c) Lender of Last Resort:
i. RBI is obliged to provide funds to commercial banks as and when
they need financial help.
ii. This is done so that no sound and genuine business transaction
should be restricted or abandoned due to shortage of funds. It does
this from cash reserves.
iii. Commercial banks approach the RBI as a last resort in distress.
The RBI fulfils this role by rediscounting their eligible securities and
bills.
iv. It never refuses to accommodate any eligible bank and help them
to meet emergencies.

4.Controller of Credit:
In order to control money supply and credit, central bank uses
various instruments that can
categorized as quantitative and qualitative tools.
I . Quantitative tools:
i. Bank Rate (Discount Rate): Bank rate is the minimum rate at
which the central bank lends funds as a ‘lender of last resort’ to
commercial banks, against approved securities or eligible bills of
exchange to meet their long-term lending.
The effect of a change in the bank rate is to change the cost of
securing funds from the central bank.
a) During inflation bank rate is increased which increases the
costs of borrowing from the central bank. This will in turn cause
the banks to increase the interest rates at which they lend to
public. This will then discourage businessmen and others from
taking loans, thus reducing the volume of credit.
b) During deflation the bank rate is reduced, it in turn decreases
the rate of interest at which the commercial banks lend to the
public, making credit cheaper. The demand for credit will
increase and the volume of credit in the economy increases.
Thus, during inflation or excess demand the bank rate is increase
while during deficient demand bank rate is decreased.

ii. Repo rate (Repurchase rate): Repo rate is the rate at which the
central bank of a country lends money to commercial banks to
meet their short term needs against approved securities or eligible
bills of exchange.
a. During inflation an increase in the repo rate increases the cost
of borrowings from central bank. In turn it causes the commercial
banks to increase their lending rates, which discourages borrowers
from taking loans and thus reducing the volume of credit.
b. During deflation a decrease in the repo rate reduces the cost of
borrowings for the commercial banks and in turn will reduce the
interest rate. This encourages the borrowers to take loans and
thus increases the volume of credit.
iii. Reverse Repo rate: Reverse repo rate is the rate at which the
Commercial banks park their surplus funds with Central Bank
a. During inflation, the reverse repo rate is increased, it
encourages the commercial banks to park their surplus funds with
the central bank. This has a negative effect on the lending
capability of the commercial banks. Demand for credit reduces,
less money goes to the economy and thus inflation is reduced as
the aggregate demand falls.
b. During deflation A decrease in reverse repo rate discourages
the commercial banks to park their surplus funds with the Central
bank. Therefore, lowering the reverse repo rate has the positive
effect on the lending capability of the commercial banks which
raises the demand for borrowings from the commercial banks,
more money flows to the system and the deflation is reduced.
iv. Legal Reserve Requirements:
Commercial Banks are obliged to maintain reserves on two
accounts:
a) Cash Reserve Ratio: CRR is a specified percentage of the total
deposits that the commercial bank have to maintain with central
bank as idle cash. The central bank can increase or decrease the
commercial bank’s ability to give credit by varying the CRR.
- During Inflation Increasing CRR implies more cash to be
deposited with central bank. Therefore, funds for investment
loans decreases. This decreases money supply.
- During Deflation Reducing the CRR implies more cash will be
available for commercial banks to lend as reserves with central
bank can be lowered. This increases money supply in the
economy. But if banks are holding surplus cash reserves with
them beyond the CRR, increase in CRR by Central bank will not
be effective. Cash Reserve and credit availability in the economy
would remain the same.

b) Statutory Liquidity Ratio: The SLR requires the bank to

maintain a specified percentage of their net total demand and
time deposit in the form of designated liquid assets with
themselves.
- During inflation An increase in SLR reduces bank’s ability to
give long term loans for investment purposes. This decreases
money supply and aggregate demand in the economy.
- During Deflation A decrease in SLR implies that the banks have
to keep less money in the form of liquid assets. This will in turn
enable the banks to give more loans for investment which
increases the aggregate demand in the economy. This is
recommended during deficient demand.

v. Open Market Operations: OMO refers the sale and purchase

of govt security to /from public and commercial banks by the
central bank.
- During inflation Sale of government securities reduces the credit
availability with the commercial banks and also decrease the
amount of credit they give. Therefore, money supply and
demand falls. This is done during Excess demand or inflationary
gap.
- During deflation Purchase of securities by Central bank
increases credit availability with the commercial banks and
expands the money supply in the economy. This is done during
deficient demand or deflationary gap.
II. Qualitative Tools
i. Margin Requirements: Margin refers to the difference between
the amount of loan and the market value of the collateral security
offered by the borrower for the loan. E.g., if the margin imposed
by the central bank is 40% then the bank is allowed to give a loan
only upto 60% of the value of security.
a. An increase in margin requirements reduces the capacity to
borrow and thereby reduce money supply
b. A decrease in margin increases the borrowing capacity and
thereby increase the money supply

ii. Moral Suasion: It is a combination of persuasion and pressure

that the central bank apples on the other banks in order to get
them to fall in line with its policy. This is done through
discussion, letters, speeches and hints to banks.
iii. Selective Credit controls: These can be applied in both a
positive and negative manner.
Application in a positive manner would mean using measures to
channelise credit to particular sectors, i.e., priority sectors.
Application in a negative manner would mean using measures to
restrict the flow of credit to particular sectors.
5. Custodian of Foreign Exchange Reserves:
(i) Central bank acts as a Custodian of country’s stock of gold and
international currencies.
(ii) It buys and sells foreign currencies to maintains stability of
exchange rate.
(iii) All earnings, in foreign exchange transaction, are to be deposited
with the RBI and routed through it.
(iv) RBI can bring the external value of the currencies at par with the
internal values through sale and purchase of foreign currencies in the
market.
(v) Helps the government pursue a coordinated policy and maintain
the balance of payments of the country.
6. Stabilization from exogeneous shocks by RBI:
RBI often uses its instruments of money creation for stabilizing
money stock in the economy from external shocks.
 BRANCHES & SUPPORT
BODIES OF THE RBI
The RBI has four regional representations: North in New Delhi,
South in Chennai, East in Kolkata and West in Mumbai. The
representations are formed by five members, appointed for four
years by the central government and with the advice of the central
board of directors serve as a forum for regional banks and to deal
with delegated tasks from the Central Board.
It has two training colleges for its officers, viz. Reserve Bank Staff
College, Chennai and College of Agricultural Banking, Pune.
There are three autonomous institutions run by RBI
namely National Institute of Bank Management(NIBM), Indira
Gandhi Institute of Development Research (IGIDR), Institute for
Development and Research in Banking Technology (IDRBT).
There are also four zonal training centers at Mumbai, Chennai,
Kolkata, and New Delhi.
The Board of Financial Supervision (BFS), formed in November
1994, serves as a CCBD committee to control the financial
institutions. It has four members, appointed for two years, and
takes measures to strength the role of statutory auditors in the
financial sector, external monitoring, and internal controlling
systems. The Tarapore committee was set up by the Reserve
Bank of India under the chairmanship of former RBI deputy
governor S. S. Tarapore to "lay the road map" to capital account
convertibility. The five-member committee recommended a
three-year time frame for complete convertibility by 1999–2000.
 DEMONITIZATION
On November 8, 2016, the day Prime Minister Narendra Modi
announced demonetisation, banning high-currency notes, to hit at
black money.
The government had said demonetisation would help curb black
money and steep rise in Rs 500 and Rs 1,000 notes; check the
circulation of fake currency; and promote e-payments and financial
inclusion. But according to minutes of the RBI board meet at 5.30
pm on November 8, 2016, three hours before the PM announced
demonetisation, some directors said, “Most of the black money is
held not in cash but in the form of real sector assets such as gold or
real estate and this move would not have a material ..
The government had argued that during 2011-12 to 2015-16, the
economy had expanded by 30%, while the pace of rise in Rs 500
notes was 76% and that of Rs 1000 notes was 10.9%. In counter, RBI
said, “The growth rate of economy mentioned is the real rate, while
growth in currency is nominal… Hence, the argument does not
adequately support the recommendation.”

* source: rbi.org.in
POLICY RATES & RESERVE
RATIOS
POLICY RATES

- Policy repo rate: 5.40%

- Reverse repo rate: 5.15%
- Marginal Standing Facility rate: 5.65%
- Bank Rate: 5.65%

RESERVE RATIOS

- CRR: 4%
- SLR: 18.75%
TRENDS

**source: rbi.org.in
RBI GOVERNER – SHAKTIKANTA DAS
Shaktikanta Das (born 26 February 1957) is a retired
1980 batch Indian Administrative Service (IAS) officer of Tamil
Nadu cadre. Currently serving as the 25th governor of
the Reserve Bank of India (RBI), he was earlier a member of
the Fifteenth Finance Commission and India's Sherpa to the G20.
During his career as an IAS officer, Das served in various
capacities for Indian and Tamil Nadu governments, including
as Economic Affairs Secretary, Revenue Secretary, Fertilizers
Secretary.
Das was appointed Governor of the Reserve Bank of India by the
ACC on 11 December 2018 for a period of three years,
replacing Urjit Patel who had resigned the day before.
 CONCLUSION
Conclusion RBI is the apex banking institution in India. RBI
is an autonomous body promoted by the government of
India and is headquartered at Mumbai. The RBI plays a key
role in the management of the treasury foreign exchange
movements and is also the primary regulator for banking and
non-banking financial institutions. The RBI operates a
number of government mints that produce currency and
coins. The RBI has been one of the most successful central
banks around the world in preventing the effects of the
subprime crisis to the Indian economy, particularly its banks.
This adds a lot of credibility to every decision that is taken by
them. Further, as a large proportion of the Indian population
is impacted by inflation, it was necessary for the RBI to think
about the majority and try to curb inflation by tightening its
monetary stance. All the functions of RBI, monitory, non
monitory, supervisory or promotional are equally significant
in context of the Indian economy. Under the Banking
Regulation Act, RBI has been given a wide range of powers.
Under the supervision & inspection of RBI, the working of
banks has greatly improved. RBI has been responsible for
strong financial support to industrial & agricultural
development in the country.