[G]Monetary Control

INTRODUCTION:
 1.Monetary Control is the main function of the Reserve Bank ,as it is central
bank of the country.

 2.Formulating and administering monetary policy involves using of

instruments within it’s control to influence the level of aggregate demand for
goods and services by regulation of the total money supply and credit.

 3.The RBI exercises monetary regulation by influencing the availability and

cost of credit by exercising different types of controls.

 4.General or quantitative controls are the instruments of Bank rate,reserve

requirements and open market operations.These methods affect the total
money supply.
 Bank Rate
 Bank Rate is defined in Section.49 of the RBI Act
as “the standard rate at which the Bank is prepared
to buy or re- discount bills of exchange or other
commercial paper eligible for purchase under the
Act ”.
 In India Bank rate has been changed frequently to
effect change in the cost of funds available from
Central Bank to banks and financial institutions.
 The effectiveness of
Bank Rate
 The effectiveness of Bank Rate as an
instrument of monetary control depends on
the extent of operation in the money market
and also on how far the commercial banks
resort to borrowing from Reserve Bank.
 Open Market Operations [OMO].
 Section17(8) of the RBI Act authorizes the Reserve Bank to engage in the
purchase and sale of securities of any maturity of the Central Governments and
State Governments.

 OMO can be carried out by purchase and sale of a variety of assets such as
Government securities ,commercial bills of exchange ,foreign exchange,gold and
even company shares.

 In actual practice they are confined to buying and selling of Government

securities.When securities are purchased from the open market ,the reserves of
the banks with Reserve Bank increases and they can accordingly expand credit .


 Cash Reserve
 Section 42 of RBI Act & Section 18 of Banking
Regulation Act,1949 deal with cash reserves to be
kept with the Reserve Bank by scheduled banks
and non-scheduled banks respectively.
 Scheduled banks have to maintain an average
daily balance of 5% of the total demand and time
liabilities in India of such banks.Further RBI is
empowered to raise up to 20% of total demand
and time liabilities.
Statutory Liquidity Ratio(SLR)
Banks are required under section [24(1)of
RBI Act,1949] to maintain in India liquid
assets in cash ,gold or unencumbered
approved securities amounting to 25% of
it’s total demand and time liabilities.
RBI is empowered to raise up to 40%.
 Interest Rate
 Reserve Bank exercises direct control over
the lending rate of banks by influencing
cost of bank credit by increase or decrease
in the lending rates rather than the Bank
rate.
 RBI is empowered to issue direction to
banks in public interest or in the interest of
banking policy.
 Selective Credit Control
 “Selective Credit Control” refers to
regulation of distribution or direction of
bank resources to certain sectors of the
economy.This is done in terms of broad
national policies for achieving
developmental goals.
 Selective credit control is exercised by RBI by
stipulating…

a)minimum margins for lending against selected

commodities
(b)ceilings on the levels of credit, and
(c) rates of interested commodities.
The first two control quantum of credit and the
last,the cost of credit.
 Indian Financial System

Reserve Bank of India

Introduction to Central Banking
 RBI, as the central bank of the country ,is the
center of Indian financial and monetary system.
 RBI was formed in 1935 as per RBI Act 1935 as
shareholders bank with a share capital of Rs 5
crores,divided in to 5 lakhs fully paid up shares of
Rs 100/- each.
 In 1948 , RBI was nationalized by Reserve Bank
(Transfer to Public Ownership)Act,1948 and the
entire share capital was acquired by the Central
Government.
 Regulation of non-banking
institutions:
 The fast growth of non-banking institutions in the
country and their accepting deposits from the
public at very high rates of interest
raised question of regulating their activities.
As the credit from the banking sector was under the
control of the Reserve Bank,the non-banking
institutions had a ready market and many
unhealthy practices developed in n course of time.
 [h] Custodian of Foreign
Exchange
Introduction:Regulation and conservation of foreign
exchange is a major function of the Reserve Bank
of India under FERA,1973.
Regulation of foreign exchange was introduced in
India under the Defense of India Rules,1939
which was replaced by the Foreign Exchange
Regulation Act,1947 and later by the Foreign
Exchange Regulation Act,1973 which is currently
in force.
 Restrictions on dealings in
foreign exchange
U/s 8 of this Act,the previous general or
special permission of the RBI is necessary
 for any person other an authorized dealer
in India to purchase or otherwise acquire,
borrow, sell,lend exchange with any
person not being an authorized dealer .
 Foreign exchange defined
under section 2(h) RBI Act.
 Foreign exchange means foreign currency
and includes all deposits ,credits and
balances payable in any foreign currency
and any drafts,travelers checks ,letters of
credit and bills of exchange ,expressed or
drawn in foreign currency too .
 Authorized Dealers &Money
Changers
 Under section 6 of the Act,Reserve Bank is empowered to
authorize any person to deal in foreign exchange .Persons so
authorized are called “Authorized dealers” as defined in
Section 2(b).
 Such authorization may be granted subject to conditions and
may be for,[i] dealings in foreign currencies or restricted to
specified foreign currencies;[ii] transactions of all
descriptions in foreign currencies or restricted to specified
transactions;[iii]a specified period or within specified
periods.Authorized dealers are generally scheduled
banks .However RBI has given restricted license IDBI and
EXIM and to undertake certain specified functions.
 Money Changers defined
Section 7 of the Act.
 Act empowers the RBI to authorize any person to
deal in foreign currency.Persons so authorized are
called ‘money changers’.
 The authorization given to money changers may
be , [i] for all foreign currencies [ii]for all
transactions in foreign currencies or for specified
transactions and also may be[iii]for operating a
specified place and for a specified amounts money
changers license have been given to certain
established firms ,hotels and other organizations.
 Blocked Accounts
 Section 10 of the Act deals with blocked
accounts.[Regarding NRI Accounts:NRE,
NRO,FCNR,NRNR, etc].A blocked account
is an account opened as a blocked account
at any office or branch of bank in India
authorized by RBI
 IMPORT & EXPORT OF
CURRENCY
 Import or Export of Foreign exchange or Indian
currency to or from India is also subject to
restrictions imposed under Section 13. General or
special permission of RBI is necessary to take
or send out of India any Indian currency or
foreign exchange obtained from an authorized
dealer or a money changer.


 Acquisition of Foreign
Exchange
 Section 14 authorizes the Central Govt. to
order by by a notification in the official
gazette ,every person in or resident in India
to sell foreign exchange to the RBI or to
persons authorized by the RBI for this
purpose.
 Export and Transfer of
Securities
General or special permission of
the RBI is necessary under Section 19 for
the following transactions:
[i] Taking or sending any security to any
place outside India;
[ii]Transfer of any security or creation or
transfer of any interest in a security to or in
favor of any non-resident;
 ………….[cont’d]
 [iii] Issuing in India or outside India, any
security which is registered or to be
registered in India to a non resident;
 [iv] Acquiring,holding or disposing of any
foreign security.
 Bearer Securities
 Section 22 of the Act restricts the issue of
bearer securities without permission of RBI.
 Gift and Settlements
 Settlement or gift of any property to a non
resident without the general or special
permission of RBI under Section 24.
 Holding of Immovable
Property outside India
 Persons resident in India are prohibited
under Section 25 from acquiring ,holding or
disposing of [by sale,
mortgage,lease,gift,settlement or
otherwise]any immovable property situated
outside India except with the general or
special permission of RBI.
 Establishment of place of
Business
 Non residents and other persons under Section 28
require the general or special permission of the RBI
FOR VARIOUS TRANSACTIONS AS UNDER;
 [1] To establish or carry on in India a place of
business for carrying bon trading ,commercial or
industrial activity
 [ii] Acquiring the whole or any part of any
undertaking in India of any person or a company
carrying on trade,commerce or industry ,or
purchasing the shares of such company in India.
 Duty of Persons Entitled to
Receive Foreign Exchange
 Under Section 16(1) of the Act,general or
special permission of the Reserve Bank is
necessary for any person having a right to
receive foreign exchange or a rupee
payment from a non-resident,to do or
refrain from doing anything which has the
effect of delaying such payment or ceasing
such payment in whole or in part.
Payment for Exported Goods
 [Section :81]Empowers Central
Government to stipulate that before
exporting any goods from India ,the
Exporter furnishes to the prescribed
authority a declaration in the prescribed
form like GR,PP AND VP/COD forms.
 Export and Transfer of
Securities
 General or special permission of the
Reserve Bank is necessary under Section 19
for the following transactions:
 1. Taking or sending any security to any
place outside India;
 2.Transfer of any security or creation or
transfer of any interest in security to or in
favor of any non resident;
 …….[Con’t ]
 3.Issuing in India or outside ,any security
which is registered or to be registered in
India;

 4.Acquiring ,holding or disposing of any

foreign security.
 Holding of Immovable
Property outside India
 Persons resident in India are prohibited
under Section 25 from acquiring,holding or
disposing of
 Organization & Management
 RBI was initially designed on the pattern of Bank of
England,theoretically subordinate to treasury.
 The Governor,4 Deputy Governors,all Directors of the Central
Boards are either appointed or nominated by the Central
Government.
 The Governor & the Deputy Governors are whole time officials and
hold office for such term not exceeding 5 years as may be fixed by
the Central Government and are eligible for re-appointment[Section
8(4)].
 They however may be removed from their office by the Central
Government at any time.This legal provision has made RBI an
almost subordinate agency of the Ministry of Finance,Government
of India.
 Preamble of RBI Act 1934
 “Where as it is expedient to constitute a
Reserve Bank of India to regulate the issue
of bank notes and the keeping of reserves
with a view to securing monetary
stability[in India] and generally to operate
the currency and credit system of the
country to it’s advantage”.
 1. Main Functions of RBI
 To maintain monetary stability so that the business
and economic life can deliver welfare gains of a
properly functioning mixed economy.
 To maintain financial stability and ensure sound
financial institutions so that monetary stability
can be safely pursued and economic units can
conduct their business with confidence.
 To maintain stable payments system so that
financial transactions can be safely and efficiently
executed.
 1. Main Functions of RBI
 To promote the development of financial
infrastructure ,and to enable it to operate
efficiently ie.,to play a leading role in
developing a sound financial system so that
it can discharge it’s regulatory function
efficiently.
 1. Main Functions of RBI
 To ensure that credit allocation by the
financial system broadly reflects the
national economic priorities and societal
concerns.
 1. Main Functions of RBI
 To regulate the overall volume of money
and credit in the economy with a view to
ensure a reasonable degree of price
stability.
 ROLES OF RBI
 [a] Note Issuing Authority
 * Sole right,authority or monopoly of issuing currency notes[other
than one rupee notes or coins].

* The responsibility is not only to put currency in to or with draw it

from circulation but also to exchange currencies and notes.

* All affairs of Bank are related to note issue are conducted by Issue
Department.
* The Bank can issue notes against the security of the gold coins and
gold bullion,foreign securities , rupee coins , Government of India
securities ,and such bills of exchange and promissory notes as are
eligible for the purchase by the Bank.
 [b]Government Banker
The RBI is the banker to the Central and State .
Governments
* It provides to the governments all banking
services such as acceptance of deposits,withdrawal
of funds by cheques, making payments as well as
receipts and collection of payments on behalf of
the government ,transfer of funds,and
management of public debt.
 [c] Banker’s Bank
 The RBI like all other central banks,can be called
a banker’s bank because it has a very special
relationship with commercial and co-operative
banks and major part of it’s business with these
banks.
 In times of need ,the banks borrow funds from the
RBI.It is therefore called the “bank of last resort”
or “the lender of last resort”.
 On the whole,the RBI is the ultimate source of
money and credit in India.
 [d]Supervising Authority
 The RBI has vast powers to supervise and
control commercial and co-operative banks
with a view to developing an adequate and
sound banking system in the country.
The RBI has the following powers
as the Supervising Authority.
 1.To issue licenses for the establishment of new
banks;
 2.To issue bank licenses for setting up of bank
branches;
 3.To prescribe minimum requirements regarding
paid up capital and reserves,transfer to reserve
fund,and maintenance of cash reserves and other
liquid assets;
 Cont’d
 4.To inspect the working of banks in India
as well as abroad in respect of their
organizational set up,branch
expansion,mobilization of
deposits,investments,and credit portfolio
management,credit appraisal,region wise
performance,profit planning ,manpower
planning and training,and so on.
 Cont’d
 5.To conduct ad hoc Investigations ,from
time to time,in to complaints,
irregularities,and frauds in respect of banks.
 6.To control methods of operation of banks
 7.To control appointment,reappointment,and
termination of appointment of Chairman and
CEOs of private sector banks.
[e]Exchange Control Authority
 One of the essential functions the RBI is to
maintain the stability of the external value of the
rupee.
 * To administer the ‘foreign exchange control’
 * To choose the exchange rate system and fix or
manage the exchange rate between rupee and other
currencies
 * To manage exchange reserves
 * To interact or negotiate with the monetary
authorities with IMF,World Bank & ADB.
 The objective of Exchange
Control
 Is primarily to regulate the demand for
foreign exchange within the limits set by
the available supply.
 This is sought to be achieved by conserving
foreign exchange,by using it in accordance
with the plan priorities,and by controlling
flows of foreign capital.
 [f]Promoter of the financial
system
 The RBI has been rendering
‘developmental’ or ‘promotional’ services
which have strengthened the country’s
banking and financial sector.The following
sectors have attracted the benefits from
RBI.
 Money Market
 In the money market ,RBI has continuously
worked for the integration of it’s organized
and unorganized sectors by trying to bring
indigenous bankers in to the main stream of
the banking business.
 Agricultural sector
 The RBI has rendered service in directing
and increasing the flow of credit to the
agricultural sector.
 Industrial Finance
 The role of the Bank in diversifying the
institutional structure for providing industrial
finance has been equally important.
 All the special developmental institutions[SDIs] at
the central and state levels and many other
financial institutions were either created by by the
Bank on it’s own or it advised and rendered help
in setting up these institutions.
 Credit Delivery
 The Bank has evolved and put in to practice
the consortium ,co-operative ,and
participatory approach to lending among
banks and other financial institutions.
 Regulator of Money and
Credit
 Monetary policy refers to the use of
techniques of monetary control at the
disposal of the Central Bank for achieving
certain objectives.