Central Banking (Reserve Bank of India) Origin of Central Banking dates back to 1894-when the Governor and the

e company of the Bank of England (the present day Bank of England) was established. Art of Central Banking assumed new dimensions only during 20th century-earlier institutions were not different from other existing institutions doing banking business except with sole right of note issue. I.W.W and consequent monetary conditions brought home the necessity of establishing a centralized institution capable of creating and maintaining equilibrium in monetary sphere. international conference held at Brussels in September 1920 pointed out the urgency of establishing a Central Bank. Geneva conference in 1922 emphasized the importance of Central Bank as an agency to correct the financial disequilibrium and to promote international co-operation in the monetary world. Welcome reception to these advices throughout the world. 1990-18 Central Banks. Presently-172. It took nearly three centuries for the art of Central Banking to attain the present day importance. But in the word of Decock Central Banks have their own code of rules and practices which can be described as the art of central banking which is still in the process of evolution and subject to periodical adjustment. R.B.I is the Central Bank of our country. was set up on the basis of the recommendations of Hilton Young Commission.RBI Act1934 provides the statutory bases of the functioning of RBI which commenced operations on 1.4.1935. Bank was constituted to: regulate the issue of bank notes. maintain reserve with a view to securing monitory stability. To operate the credit and currency system of the country to its advantage. began operations by taking over from the Govt., the functions so far preformed by controller of currency and from Imperial Bank of India the management of Government accounts and Public debts. Burma (Myanmar) separated from Indian Union in 1937 but RBI continued to act as Central Bank for Burma till Japanese occupation of Burma and later unto 1947. After partition of India RBI served as Central Bank of Pakistan up to June 1948 when State Bank of Pakistan commenced operations. RBI originally set up as a share holders Bank was nationalized in 1949.

 With Liberalization banks focus has shifted back to core central banking functions like monetary policy, Bank supervision and Regulation, overseeing the payment system and on to developing the financial markets. RBI owns four subsidiaries: 1. National Housing Bank (NHB) 2. NABARD 3. Deposit Insurance and guarantee corporations of India (DIGCA) 4. Bharathiya Reserve Bank Note Mudran Private Ltd-(BRBNMPL) Legal Regulatory FrameworkA) Umbrella Acts which form the basis of its foundation. 1. RBI Act 1934-RBI functions. 2. Banking Regulation Act 1949- governs financial sector. B) Acts governing specific functions of RBI. 1. Public Debt Act 1944- Govt. Debt Market 2. Indian Coinage Act 1906- Currency and Coins. 3. Securities Contract Act 1956- Govt. Securities Market. 4. Foreign Exchange Regulation Act 1973- Foreign Exchange Market. C) Acts governing Banking Operation 1. Companies Act 1956- Banks as Companies 2. Banking Companies (Acquisition and Transfer of Undertakings) Act 1970/1980-Nationalisation. 3. Bankers Book Evident Act 4. Negotiable Instruments Act 1881. D) Acts Governing Individual Institutions coming under RBI: 1. S.B.I Act 1954 2. IDBI (Transfer of Undertaking and Repeal) Act 2003. 3. Industrial Finance Corporation (Transfer of Undertaking and Repeal)Act 1993. 4. NABARD 5. NHB Act.

6. DICGC Act.

Main Functions of RBI1. Maintanace of price level. 2. Regulator end Supervisor of Financial Control. 3. Manger of Foreign Exchange. 4. Issuance and Replacement of Currency (Monopoly of Note Issue) Note issue systems area) Maximum Fiduciary System b) Proportionate Reserve System. c) Minimum Reserve System. d) Foreign Exchange Reserve System. 5. Monetary Policy. a) Bank Rate Policy b) Open Market Operation c) Variable Reserve Ratio d) Selective Credit Control e) Credit Rationing. f) Moral Suasion g) Direct Action 6. as banker and Advisor of the State. 7. Bankers Bank and the Lender of the last Resort 8. Central Bank of Clearance. 9. Custodian of Nations Metallic Reserve.

A) Monopoly of Note Issue Concentration of Note issue- bringing about uniformity

 Commanding Public Confidence. Bank endowed with necessary Powers of Monetary Management must be equipped with Monopoly of Note Issue. Section 22 of RBI Act, RBI has sole right for the Issue of currency other than One Rupee Note, One Rupee Coin and subsidiary coins by issue department- Liability of Issue Department. Assets of Issue Department against, forming the backing for the note issue are kept separate from those of the Banking Department. Section 37 of RBI Act Aggregate value of gold coins, gold bullion and Foreign securities held in the issue department shall not at any time be less then Rs: 200 Crores, of which the value of the gold coins and value of the Gold Bullion should at no time be less than 115 crores- Minimum Limit for Foreign Securities 85 crores this system is called Minimum Reserve System.

B) Monetary Policy Primary objective of Monetary Policy- Domestic Price Stability-Maintenance of Price Stability and Ensuring availability of adequate credit to Productive Sector of the Economy The stated objectives of monetary policy in India are: a) To promote sufficient credit for growth b) Ensuring no emergence of Inflationary Pressure. Pre-reform period Bank rate had limited role as an instrument of Monetary Policy. Activated in 1997 along with other measures such as Bank Rate, Open Market Operations, Liquidity Adjustment Facility. This facility is to be used an effective flexible instrument for smoothening interest rate. An effective mechanism for absorbing or injecting liquidity on a day to day basis. Policy Statements of RBI announced twice during year (November and May) werw known as credit policy statements till 1992 Renamed as Monetary and credit policy to make it more market oriented financial system and Operating Procedure. since 2004-05 this has been renamed as Annual Policy Statement.

Instruments of Monetary Policy: 1. Bank Rate: Bank Rate is the Rate at which Reserve Bank of India discounted certain Defined Bills. Market may have temporary access to Central Bank through discount of selected short term assets or through secured advances. By manipulating Bank Rate RBI can regulate commercial bank and credit and general credit Situation. In the country. Since 1951, RBI resorted to changes in bank rate from time to time, in order to exercise a restraining influence in an environment of serious imbalances in the economy. Importance of bank rate which influence the cost and availability of credit in the economy has increased since 1990. Repo rate Reverse repo rate Liquidity adjustment facility

RAF is a tool of day to day liquidity management through the absorption of or injection of liquidity by way of sale or purchase of securities followed by this repurchase and resale, repo and reverse repo operations. Repo rate: is a transaction in which the borrower gets funds against the collateral of securities placed with the lender. Maturity period of repos range from 1-14 days. At the time of maturity the securities revert to the borrower, after repays the dues. Repo implies injection of liquidity. Reverse repo implies Absorption of liquidity OPEN MARKET OPERATIONS Purchase and sale of govt. securities Also covers purchases and sales of equities, gold and foreign exchange, besides govt Securities. Section 17(8) of RBI actDuring pre reform period O.M.O were carried out for assisting Govt. in its borrowing operations. Under administered interest rate regime, RBI would purchase large volume of securities in the primary market and sell the securities in the secondary market, as a part of O.M.O Post Reform Period OMO used as an effective instrument for liquidity management. Success of O.M.O- Pre requisite for successful OMO is stability of cash reserve of commercial banks, because OMO serve to reduce excess reserves of commercial banks. Steps taken by RBI for creating proper institutional framework Setting up of discount and finance of India Securities trading corporation

Primary dealers see to purchase securities and to access them deeper into the market.

Introduction of a delivery versus payment system under which transfer of securities from the seller to the buyer and payment therefore by buyer to the seller would be simultaneous in respect of those who have an SGL A/C & current A/C with the RBI. Variable Reserve Ratio Cash reserve ratio is the mandatory deposit to be held by banks with requisite monetary authority, Percentage of their demand and time liability. Increase or decrease can be effected by the central bank to pump in or soak liquidity in the banking system. Section 42 of RBI act(amended) banks were required to keep with the RBI an average daily balance of 3% of their total time and demand liabilities(can be varied between 3% to 15%) Again RBI act amended during 2006-07 came into force from 1.4.2007 following which the floor and the ceiling on CRR to be prescribed by RBI ceased to exist. Statutory liquidity ratio (S.L.R) Prescribed percentage of demand and time liability of a bank to be held in prescribed securities (mostly Govt. Securities) Section 24 of Banking Regulation Act statutory minimum 25% - maximum 40% - Reached 38.5% in july 1989-progresivelly brought down to 25% on oct. 1997. B.R Act was amended on 23.1.2007, removing the floor rate of 25% for S.L.R and empowered RBI to determine SLR eligible Assets among other. Increase or decrease in the CRR or SLR contracts and enhances credit creation. Up to 30.7.2012 SLR was 24%. On 31.7.2012 reduced to 23%. Qualitative credit controls Besides quantitative controls, RBI may resort to qualitative restrictions to make e3ffective its monetary policy measures. RBI is vested with powers to control entire banking system. Section 21- RBI may give dir4ections to banking cos with regard to lending policies- purchase for which advances may or may not be made, margins to be maintained in respect of secured advances, rates of interest to be charged on advances.

In the national interest, to prevent the affairs of banking cos being conducted detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking co. To secure the proper management of any banking co- issue directions to banking cos generally or any banking co in particular against entering into any particular transactions.

Selective Credit Control In order to enforce the policy of selective credit control, RBI issue directives to scheduled banks. First directive was issued on 17.5.1956(second five year plan). Not to increase any credit limit already sanctioned and not to sanction any fresh limit against rice paddy in excess of Rs 50000 to any single party. In September 1956 control was further extended to cover bank advances against other food grains gram, pulses, cotton etc. since then RBI continued issuing such directives. Essential commodities Objectives of selective credit control: Intended to prevent anti social use of credit associated with speculative hoarding of stocks of strategic commodities like food grains and push down prices or check on warranted increase in their prices. Controlling quality of lending

Moral suasion and credit rationing: Moral suasion implies persuasion of bank s to follow certain lines of policies impressing upon them the necessity to do so. No compulsion but active co-operation of banks and their goodwill to fall in line with the advices of RBI. Direct action implies refusal of RBI to extend rediscounting facilities and other financial accommodation to banks following unsound banking principles. This weapon not resorted to but cases of willful and persistent violations of rules by the banks could be met with direct action.