What are the objectives of the Reserve Bank of India (RBI)?
Important aspects relating to the objectives of the Reserve Bank of India (RBI) are as follows:
1. Primary objects: The Preamble to the RBI Act, 1934 spells out the objectives of the RBI as:
- To regulate the issue of banknotes.
- To keep reserves with a view to securing monetary stability in India.
- To operate the currency and credit system of the country to its advantage.
2. Remain free from political influence: Another objective of the RBI has been to remain free from political influence and be in successful operation for maintaining financial stability and credit.
3. Fundamental objects: The fundamental object of the RBI is to discharge purely central banking functions in the Indian money market i.e. to act as:
- Note-issuing authority
- Bankers’ bank
- Banker to Government
4. Promote the growth of the economy: The RBI aims to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need for the maintenance of price stability.
5. Development of Indian Economy: Besides the traditional central banking functions, with the launching of the 5-year plans in the country, the RBI has been moving ahead in performing a host of developmental and promotional functions, which are normally beyond the purview of a traditional Central Bank.
Which kind of business cannot be transacted by the RBI as per the Reserve Bank of India Act, 1934?
A business which the RBI may not transact:
RBI cannot engage in trade. It cannot have a direct interest in any commercial, industrial, or other undertakings except such interest as it may in any way acquire in the course of the satisfaction of any of its claims. However, all such interests shall be disposed of at the earliest possible moment.
2. Purchase of Shares
RBI cannot purchase the shares of any banking company or of any other company, or grant loans upon the security of any such shares.
3. Advance money against Immovable Property
RBI cannot advance money on mortgage of immovable property or documents of title relating thereto. The RBI cannot become the owner of immovable property, except so far as is necessary for its own business premises and residences for its officers and servants.
4. Loans and Advances generally
RBI cannot make loans or advances.
5. Draw or accept Bills of Exchange
RBI cannot draw or accept bills payable otherwise than on-demand.
6. Interest on Deposit
RBI cannot allow interest on deposits or current accounts.
RBI is the banker to Central and Statement Government bank. Comment.
Bankers to Central and State Government:
(a) Payment and Receipt: Reserve Bank receives and pays money on behalf of the various Government departments
(b) Loans and advances:
- Bank also undertakes to float loans and manage them on behalf of the Governments
- It also provides Ways and Means Advances – a short-term interest-bearing advance – to the Governments, to meet the temporary mismatches in their receipts and payments.
(c) Investment: It arranges for investments of surplus cash balances of the Governments as a portfolio manager
(d) Advisor: The Reserve Bank also acts as adviser to Government, when-ever called upon to do so, on monetary and banking related matters
Public Accounts Department: Banking functions for the governments
Public Debt Office: Management of debt
Write a short note on the Notes issue function of RBI
Management of currency is one of the core central banking functions of the RBI for which it derives the necessary statutory powers from Section 22 of the RBI Act, 1934.
(a) Sole Right: The RBI shall have the sole right to issue ‘bank notes’ in India.
(b) Right to issue banknotes [Section 22]: Reserve Bank is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes.
(c) Security Issue: Reserve Bank routinely addresses security issues and targets ways to enhance security features to reduce the risk of counterfeiting
(d) Denomination of Notes [Section 24]:
Bank notes shall be of the denominational values of ₹ 2,₹ 5, ₹ 10,₹ 20, ₹ 50, ₹ 100, ₹ 500, ₹ 1,000, ₹ 2,000, ₹ 5,000 & ₹ 10,000 or other denominations not exceeding ₹ 10,000
(e) Issue Department [Section 23]: The issue function of banknotes is performed by the Issue’ Department, which is separated and kept wholly distinct from Banking Department.
(f) Legal Tender [Section 26]: Every banknote is a legal tender at any place in India.
(g) Certain notes to cease to be legal tender [Section 26A]: On the recommendation of the Central Board, the Central Government may declare any series of banknotes of any denomination as not to be a legal tender.
Eg: The government of India announced the demonetisation of ₹ 500 and ₹ 1000 banknotes with effect from midnight of November 8, 2016, making these notes invalid.
(h) Stamp Duty [ Section 29]: Banknotes that are being issued by RBI are exempt from payment of stamp duty.
What are the ‘Stressed Assets’? What are the powers of RBI for the resolution of stressed assets?
1. Meaning: Stressed Assets are loans where the borrower has defaulted in repayment or where the loan has been restructured.
2. Authority with RBI: In terms of Sections 35AA & 35AB of the Banking Regulation Act, 1949, the RBI has been specifically authorized to issue directions to banking companies for the resolution of stressed assets.
3. Power of RBI
(a) Power of issuing directions to banking companies to initiate insolvency resolution process [Section 35AA]: The Central Government may authorize the RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency & Bankruptcy Code, 2016.
(b) Power of RBI to issue directions in respect of stressed assets [Section 35AB]: The RBI may, from time to time, issue directions to any banking company for resolution of stressed assets.
4. Committee to advise on resolution of stressed assets: The RBI may specify one or more authorities or committees with such members as the RBI may appoint to advise any banking company or banking companies on the resolution of stressed assets.
Write a short note on Coin Distribution
- Governing Law: The Indian Coinage Act, 1906 governs the minting of rupee coins, including small coins of the value of less than Re. 1.
- Legal tender: Coins are legal tender in India for unlimited amounts.
- 50 Paisa and small coins Limit: 50 paisa coins are legal tender for any sum not exceeding ₹ 10 and smaller coins for any sum not exceeding Rel.
- Distribution of coins: The RBI acts as an agent of the Central Government for distribution, issue and handling of the coins and for withdrawing and remitting them back to the Government as may be necessary.
A mint is an industrial facility that manufactures coins that can be used as currency.
What do you understand by ‘counterfeit money? What steps are being taken by the RBI against counterfeiting of currency?
1. Meaning: Counterfeit money is imitation currency produced without the legal sanction of the Government. Producing or using counterfeit money is a form of fraud or forgery.
2. Offence under IPC: Counterfeiting currency-notes or bank-notes is an offence u/s 489A of the Indian Penal Code, 1860 and
3. Punishment and Penalty: Imprisonment for life, or with imprisonment of either description for a term which may extend to 10 years and shall also be liable to fine.
4. Combating Counterfeiting: The RBI, in consultation with the Government of India,
(a) Review and Upgrade: -Periodically reviews and upgrades the security features of the banknotes to deter counterfeiting.
(b) Information Dissemination: Shares information with various law enforcement agencies to address the issue of counterfeiting.
(c) Guidelines: Issued detailed guidelines to banks and Government treasury offices on how to detect and impound counterfeit notes.
What are the functions of the Reserve Bank of India? [Dec. 2018 (5 Marks)]
Various functions of RBI under the RBI Act, 1934 are as follows:
- Banking Functions
- Issue banknotes
- Monetary Policy Functions
- Public Debt Functions
- Foreign Exchange Management
- Banking Regulation & Supervision
- Regulation and Supervision of NBFCs
- Regulation & Supervision of Co-operative banks
- Regulation of Derivatives and Money Market Instruments
- Payment and Settlement Functions
- Consumer Protection Functions
- Financial Inclusion and Development Functions
Reserve Bank of India is a banker of banks. Comment. [June 2019 (5 Marks)]
Reserve Bank of India as Banker to Banks:
1. Bank open account with RBI: The RBI to fulfil this function opens current accounts of banks with itself, enabling these banks to maintain cash reserves as well as to carry out inter-bank transactions through these accounts.
2. Settlement of accounts: Inter-bank accounts can also be settled by the transfer of money through an electronic fund transfer system, such as the Real-Time Gross Settlement System (RTGS).
3. Fund Management: In addition, the RBI has also introduced the Centralised Funds Management System (CFMS) to facilitate centralized funds enquiry and transfer of funds across Deposit Accounts Department (DADs). This helps banks in their fund managers as they can access information on their balances maintained across different DADs from a single location.
4. Short term loan and advances: As Banker to Banks, the RBI provides short-term loans and advances to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes. These loans are provided against promissory notes and other collaterals given by the banks.
5. Lender of last resort: The RBI also acts as the ‘lender of last resort. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank.
6. Prevent Failure of Bank: The RBI extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of a bank.
What do you understand by ‘Open Market Operations?
1. Meaning: Open Market Operations are conducted by the RBI by way of sale or purchase of Government Securities to adjust money supply conditions.
2. Objective: The Central Bank sells Government Securities to suck out liquidity from the system and buys back Government Securities to infuse liquidity into the system.
3. Monetary Policy Tool: The RBI uses Open Market Operations along with other monetary policy tools such as Repo Rate, Cash Reserve Ratio & Statutory Liquidity Ratio to adjust the quantum and price of money in the system.
4. System used: The Bank carries out such operations in the secondary market on the electronic Negotiated Dealing System – Order Matching (NDS-OM) platform by placing bids and/or taking the offers for securities.
Write a short note on the Monetary Policy Function of the RBI
1. Meaning: Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act.
2. Objective: The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.
3. Macro Objectives: It is the policy to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
4. RBI: Monetary policy is the policy laid down by the RBI which involves the management of money supply and interest rate.
5. Implementation of Policy: The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and many other instruments.
6. Monetary Policy report: RBI shall publish a monetary policy report every 6 months
Distinguish between: Repo Rate and Bank Rate
Following are the main points of distinction between repo rate and bank rate:
|Points||Repo Rate||Bank Rate|
|Meaning||Rate that central bank charge on the repurchase of securities||The rate at which the central bank lends money to other banks|
|Time Frame||Repo Rate is a short-term measure and is governed by the short-term monetary policies of the RBI.||Bank Rate is a long-term measure and is governed by the long-term monetary policies of the RBI.|
|Rate||Repo rate is lower than a bank rate.||The bank rate is higher than the repo rate.|
|Current rate||The current repo rate is 4%. (3-10-2020)||The current bank rate is 4.25%. (310-2020)|
|Repurchase||There is a repurchase agreement||There is no repurchase in case of Bank rate|
|Collateral||Securities act as security||There is no collateral in the bank rate|
Distinguish between: Repo Rate and Reverse Repo Rate
Following are the main points of distinction between repo rate and reverse repo rate:
|Points||Repo Rate||Reverse Repo Rate|
|Meaning||Repo rate is the rate at which the Central Bank (RBI) lends money to commercial banks in the event of any shortfall of funds.||The reverse repo rate is the rate at which the Central Bank (RBI) borrows money from commercial banks within the country.|
|Effect||Repo transaction will inject liquidity into the system||Reverse Repo operation absorbs the Liquidity in the system|
|Rate||Repo rate is always higher than the reverse repo rate||The reverse repo rate is always lower than the repo rate.|
|Current rate||The current repo rate is 4%. (310-2020)||The current reverse repo rate is 3.35%. (3-10-2020)|
|Higher Rate Effect||The commercial bank will borrow less||Commercial bank transfer more funds to RBI|
|Objective||Control inflation by making debt costly||Control to the money supply|
Distinguish between: Cash Reserve Ratio & Statutory Liquidity Ratio
Following are the main points of distinction between cash reserve ratio and statutory liquidity ratio:
|Points||Cash Reserve Ratio (CRR)||Statutory Liquidity Ratio (SLR)|
|Meaning||Cash Resen e Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash with the central bank.||Liquidity maintained by the banks in a specified percentage of its ‘Demand & Time Liabilities’ is known as Statutory Liquidity Ratio.|
|Form||Cash Reserve Ratio has to be maintained by the banks in cash.||Statutory Liquidity Ratio has to be maintained in (a) cash (b) Gold and (c) Government securities viz, Central and State Government securities.|
|Maintenance with||Cash Reserve Ratio is to be maintained in form of cash with RBI||The statutory Liquidity Ratio has to be maintained in cash and other assets by the bank itself.|
|Purpose||Cash Reserve Ratio controls the excess money flow in the economy.||Statutory liquidity ratio helps in meeting the unexpected demand of depositors.|
|Rate||Currently, Cash Reserve Ratio is 3% (3-10-2020) of total ‘Demand & Time Liabilities.||Currently, Statutory Reserve Ratio is 18% (3-10-2020) of total ‘Demand & Time Liabilities.|
Write a short note on Monetary Policy Report
- Authority: RBI shall publish a report once every 6 months a document called Monetary Policy Report.
- Tenure: The RBI shall publish once every 6 months.
- Provision: Monetary Policy report is specified in the provision of RBI Act, 1934 under Section 45ZM.
- Explanation in Report:
(a) the sources of inflation, and
(b) the forecasts of inflation for the period between 6 to 18 months from the date of publication of the document.
- Forms and Contents: The form and contents of the Monetary Policy Report shall be such as may be specified by the regulations made by the Central Board.
How is the Monetary Policy Committee constituted under the Reserve Bank of India Act, 1934? What are its functions? Explain [Dec. 2019 (4 Marks)}
(a) Constituted by: The Central Government may, by notification in the Official Gazette, constitute a Committee to be called the Monetary Policy Committee of the Bank.
(b) Composition: The Monetary Policy Committee shall consist of the following Members, namely:
(a) the Governor of the Bank – Chairperson, ex officio;
(b) Deputy Governor of the Bank, in charge of Monetary Policy – Member, ex officio;
(c) one officer of the Bank to be nominated by the Central Board – Member, ex officio; and
(d) three persons to be appointed by the Central Government – Members
- Policy Rate: The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target.
- Binding Decision: The decision of the Monetary Policy Committee shall be binding on the Bank.
- Report: RBI is required to publish a document explaining the steps to be taken to implement the decisions of the Monetary Policy Committee.
What are the instruments of Monetary Policy?
There are several direct and indirect instruments that are used for implementing monetary policy
(a) Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF). ‘
(b) Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
(c) Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
(d) Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
(e) Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
(f) Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
(g) Open Market Operations: These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
(h) Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions.
The Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors.
(i) Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.
(j) Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills