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Reserve Bank of India

ESTABLISHMENT
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It started functioning from April 1,1935 on the term of the

reserve bank of India act,1934.

Started as a Shareholder bank with share capital of Rs.

5crores.
Share were taken by the general public and the government

of India kept shares worth only Rs.220000

In January 1, 1949 transfer to public ownership .

OBJECTIVE
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The issue of bank notes Keeping of reserves

Securing monetary stability

Operate the currency and credit system

Three fully owned subsidiaries

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National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation

of India (DICGC)
Bharatiya Reserve Bank Note Mudran Private

Limited (BRBNMPL).

Traditional Functions of RBI

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Issue of Currency Notes Banker to other Banks Banker to the Government Exchange Rate Management Credit Control Function Data collection & publication

Developmental and Promotional Functions of RBI

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Promotion of Commercial banks Promotion of co-operative banks Promotion of rural credit Promotion of Industrial Finance Promotion of industrial credit Promotion of export finance

Supervisory Functions of RBI

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Granting license to banks Bank Inspection Control over NBFIs

Implementation of the Deposit Insurance

Scheme

MONETARY POLICY
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Monetary policy
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Monetary policy is essentially a programme of

action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals

Monetary policy

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Monetary Policy refers to the steps taken by the Central

Bank (RBI) to control and regulate the cost and supply of money and credit to achieve various economic and social objectives such as economic stability, full employment, exchange regulation, higher economic growth, etc

Objectives of Monetary Policy

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Controlled Expansion of Money

Channelizing Credit to Desired Sectors

Employment generation Exchange rate generation

Financial Stability

INTRUMENTS OF MONETARY POLICY

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THE RATE OF INTEREST

THE QUANTITY OF MONEY THE DEMAND OF MONEY

GENERAL OR QUANTITIVE METHODS

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BANK RATE

RESERVE REQUIREMENTS
OPEN MARKET OPERATIONS(OMO) REPO AND REVERSE REPO RATE

BANK RATE POLICY

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DISCOUNTS AND REDISCOUNTING

BANK OR DISCOUNT RATE

IMPACT OF CHANGES IN BANK RATE

RESERVE REQUIREMENTS
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CASH RESERVE RATIO(CRR)

STATUTORY LIQUIDITY RATIO(SLR)

THEIR MECHANICS

OPEN MARKET OPERATIONS(OMO)

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WHAT IS OMO?
OMO DEPENDS ON.. SWITCH OPERATIONS

REPO & REVERSE REPO RATE

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REPO RATE

REVERSE REPO RATE

EFFECT OF CHANGES IN REPO & REVERSE

REPO RATE

SELECTIVE OR QUALITITIVE METHODS

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MINIMUM MARGIN REQUIREMENTS

CEILLING ON CREDIT
MORAL SUASION DISCREMINATORY INTEREST RATE(DIR)

DIRECT ACTION

CONTROLS
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This method is used to control the flow of credit to

particular sectors of the economy. The direction of credit is regulated by the central bank .

INSTRUMENTS
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Minimum Margin Requirements

While lending commercial banks accept securities, deduct a certain margin from the market value of the security. REGULATION OF CONSUMER CREDIT Apart from trade and industry a great amount of credit is given to the consumers for purchasing durable goods also.

INSTRUMENTS
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CEILING ON CREDIT

The amount of credit to be granted is fixed by the central bank. MORAL SUASION Under moral suasion RBI sends letters to banks periodically, advising them to follow sound principles of banking.

INSTRUMENTS
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DISCRIMINATORY INTEREST RATE (DIR)

Through DIR, RBI makes credit flow to certain priority or weaker sectors by charging concessional rates of interest. DIRECT ACTION It is an extreme step taken by the RBI. It involves refusal by RBI to extend credit facilities, denial of permission to open new branches etc.

Evaluation of Monetary policy

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1) Huge Budgetary Deficits 2) Coverage of only commercial bank 3)Unorganized Money Market 4)Black Money 5)Predominance of Cash 6) Lack of Transparency 7) Increased Volatility

Limitation of monetary policy

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1)There exist a Non-Monetized Sector 2)Excess Non-Banking Financial Institutions (NBFI):3)Existence of Unorganized Financial Markets 4)Higher Liquidity Hinders Monetary Policy 5)Money Not Appearing in an Economy 6)Time Lag Affects Success of Monetary Policy 7)Monetary & Fiscal Policy Lacks Coordination

Fiscal policy
Meaning Fiscal policy is the government programme of making discretionary changes in the pattern &level of its expenditure ,taxation & borrowing in order to achieve intended economic growth ,employment ,income equality ,& stabilization of the economy on a growth

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Fiscal instruments
Budgetary balance policy Government expenditure

Taxation
Public borrowings

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Main Objectives of Fiscal Policy In India

1. Development by effective Mobilisation of Resources The financial resources can be mobilized Taxation Public Savings Private Savings 2. Efficient allocation of Financial Resource Development Activities Non-development Activities

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28 Main Objectives of Fiscal Policy In India

3. Reduction in inequalities of Income and Wealth

4. Price Stability and Control of Inflation 5. Employment Generation

6. Capital Formation
7.Development of Infrastructure 8. Foreign Exchange Earnings

LIMITATIONS OF FISCAL POLICY

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1. Absence of a foolproof method of

economic forecasting 2. Decision and execution lags in case of discretionary fiscal policy 3. The working and effectiveness of fiscal policies in underdeveloped countries is severely limited