RBI is the central Bank of India and controls the entire the entire
money issue, circulation and control by its monetary policies and
lending policies. RBI is also known as the lender of last resort.
Establishment: The reserve bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank of India was initially established in Calcutta but was permanently moved to Mumbai in 1937. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Main Functions
1) Monetary Authority: Formulate, implements and monitors the monetary policy.
2) Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country‘s banking and financial system functions.
3) Manager of Foreign Exchange: Manages the Foreign Exchange Management Act, 1999.
4) Issuer of Currency: Issues and exchanges or destroys currency and coins not fit for circulations.
5) Development role: Performs a wide range of promotional functions to support national objectives.
6) Bankers to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
7) Bankers to banks: maintains banking accounts of all scheduled banks
IMPORTANT POINTS ON RBI
1. RBI generally reviews the monetary policy every three months on a quarterly basis
2. The rate at which Reserve Bank of India lends short term money to the banks is called as repo rate
3. The Reserve Bank of India was nationalized on 1.1.1949
4. RBI functions are governed by RBI act 1934
5. RBI is not expected to perform the function of accepting deposits from the general public
6. RBI has its headquarters at Mumbai
7. Prime lending rate is not decided by RBI
8. Prime lending rate is decided by the individual banks
9. RBI decides the following rates namely; Bank rate, repo rate, reverse repo rate and cash reserve ratio
10. RBI was set up on the recommendations of Hilton Young commission
11. The quantitative instruments of RBI are – bank rate policy, cash reserve ratio and statutory liquidity ratio
12. The objective of monetary policy of RBI is to control inflation; discourage hoarding of commodities and encourage flow of credit into neglected sector
13. When RBI is lender of the last resort, it means that RBI advances credit against eligible securities 14. Government of India decides the quantity of coins to be minted
15. The method which is used currently in India to issue currency note – minimum reserve system
16. For issuing notes, RBI is required to hold the minimum reserves of Rs. 200 c
INTEREST RATES DECIDED BY RBI
Repo Rate
Repo rate is the rate of interest which is levied on Short-Term loans taken by commercial banks from RBI. Whenever the banks have any shortage of funds they can borrow it from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive.
Reverse Repo Rate
This is exact opposite of Repo rate. Reverse repo rate is the rate at which commercial banks CHARGE on their surplus funds with RBI. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to keep money with RBI since their money is in the safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to these attractive interest rates.
CRR
Rate Cash reserve Ratio (CRR) is the amount of cash funds that the banks have to maintain with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
SLR
Rate SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or government approved securities (Bonds) before providing credit to its customers. SLR is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and time liabilities. Time Liabilities are the liabilities a commercial bank is liable to pay to the customers after a specific time period. SLR is used to control inflation and proper growth. Through SLR tuning, the money supply in the system can be controlled efficiently.
Bank Rate
Bank rate is the rate of interest which is levied on Long Term loans and Advances taken by commercial banks from RBI. Changes in the bank rate are often used by central banks to control the money supply.
MSF Rate
MSF (Marginal Standing Facility Rate) is the rate at which banks can borrow overnight from RBI. This was introduced in the monetary policy of RBI for the year 2011-2012. Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.
Establishment: The reserve bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank of India was initially established in Calcutta but was permanently moved to Mumbai in 1937. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Main Functions
1) Monetary Authority: Formulate, implements and monitors the monetary policy.
2) Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country‘s banking and financial system functions.
3) Manager of Foreign Exchange: Manages the Foreign Exchange Management Act, 1999.
4) Issuer of Currency: Issues and exchanges or destroys currency and coins not fit for circulations.
5) Development role: Performs a wide range of promotional functions to support national objectives.
6) Bankers to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
7) Bankers to banks: maintains banking accounts of all scheduled banks
IMPORTANT POINTS ON RBI
1. RBI generally reviews the monetary policy every three months on a quarterly basis
2. The rate at which Reserve Bank of India lends short term money to the banks is called as repo rate
3. The Reserve Bank of India was nationalized on 1.1.1949
4. RBI functions are governed by RBI act 1934
5. RBI is not expected to perform the function of accepting deposits from the general public
6. RBI has its headquarters at Mumbai
7. Prime lending rate is not decided by RBI
8. Prime lending rate is decided by the individual banks
9. RBI decides the following rates namely; Bank rate, repo rate, reverse repo rate and cash reserve ratio
10. RBI was set up on the recommendations of Hilton Young commission
11. The quantitative instruments of RBI are – bank rate policy, cash reserve ratio and statutory liquidity ratio
12. The objective of monetary policy of RBI is to control inflation; discourage hoarding of commodities and encourage flow of credit into neglected sector
13. When RBI is lender of the last resort, it means that RBI advances credit against eligible securities 14. Government of India decides the quantity of coins to be minted
15. The method which is used currently in India to issue currency note – minimum reserve system
16. For issuing notes, RBI is required to hold the minimum reserves of Rs. 200 c
INTEREST RATES DECIDED BY RBI
Repo Rate
Repo rate is the rate of interest which is levied on Short-Term loans taken by commercial banks from RBI. Whenever the banks have any shortage of funds they can borrow it from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive.
Reverse Repo Rate
This is exact opposite of Repo rate. Reverse repo rate is the rate at which commercial banks CHARGE on their surplus funds with RBI. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to keep money with RBI since their money is in the safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to these attractive interest rates.
CRR
Rate Cash reserve Ratio (CRR) is the amount of cash funds that the banks have to maintain with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
SLR
Rate SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or government approved securities (Bonds) before providing credit to its customers. SLR is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and time liabilities. Time Liabilities are the liabilities a commercial bank is liable to pay to the customers after a specific time period. SLR is used to control inflation and proper growth. Through SLR tuning, the money supply in the system can be controlled efficiently.
Bank Rate
Bank rate is the rate of interest which is levied on Long Term loans and Advances taken by commercial banks from RBI. Changes in the bank rate are often used by central banks to control the money supply.
MSF Rate
MSF (Marginal Standing Facility Rate) is the rate at which banks can borrow overnight from RBI. This was introduced in the monetary policy of RBI for the year 2011-2012. Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.
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