RESERVE BANK OF INDIA

• The Reserve Bank of India was set up on recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 has given the statutory status to the functioning of the Bank, which started its operations on April 1, 1935.
• Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947.
•  After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 
• The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949.

Chronology of RBI till now:

• 1 Apr 1935: Reserve Bank of India commences operations. Sir Osborne Smith the first Governor of the Bank. The Bank was constituted as a shareholders' bank.
• Oct 1935: London Office of the Reserve Bank set up. This was closed on September 30, 1963.
• 1937: RBI acts as banker to the Government of Burma and also responsible for note issue in Burma.
• Jan 1938: First Reserve Bank notes issued.
• 11 Aug 1943: Sir C. D. Deshmukh assumes office of Governor.
• 1944: The security thread on notes introduced for the first time in India as a security feature.
• 12 Jan 1946: High Denomination Bank Notes of Rs 500, Rs 1000 and Rs 10,000 Demonetized to curb unaccounted money. All three notes were reintroduced in 1954.
• 1946: Interim arrangements for Bank Supervision were put in place by ordinances which were later replaced by the Banking Companies Act, 1949. These Ordinances empowered the Reserve Bank to inspect banks, as well as authorize the licensing of bank branches.
• 1 Jan 1949: Reserve Bank of India nationalized.
• 16 Jan 1978: Notes of Rs 1,000/-, Rs 5,000/- and Rs 10,000/- denominations demonetised to curb 'the illicit transfer of money for financing transactions which are harmful to the national economy'.
• Rs 500 note came into circulation in October 1987.
• The Rs 1,000 note made a comeback in November 2000.
• Mahatma Gandhi (MG) series banknotes - 1996 were issued in the denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (August 2001), Rs 50 (March 1997), Rs 100 (June 1996), Rs 500 (October 1997) and Rs 1,000 (November 2000).
• The Mahatma Gandhi Series - 2005 bank notes were issued in the denomination of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1,000 and contained some additional/new security features as compared to the 1996 MG series.Mahatma Gandhi (MG) series banknotes - 1996 were issued in the denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (August 2001), Rs 50 (March 1997), Rs 100 (June 1996), Rs 500 (October 1997) and Rs 1,000 (November 2000).
• In 2010, a new rupee symbol ''?', was officially adopted. It was designed by D. Udaya Kumar. It was derived from the combination of the Devanagari consonant ""?" " (ra) and the Latin capital letter "R" without its vertical bar.
• 8^th November 2016: Demonetization of Rs. 500 and Rs. 1000 notes and introduction of new Rs 2000 note.
• 2017: Introduction of Rs 200 note.
• 2018: Resignation of RBI governor Urjit Patel.
• 2019: Shaktikanta Das appointed as new Governor.

FUNCTIONS OF RBI:

     1.  Currency Issuing Authority:

• This power given under Section 22 of the RBI Act, 1934.
• Between 1861 and 1935, the Government of India managed the issue of paper currency.

Currency notes

• Maximum of ten thousand can be printed and issued rupees by RBI.
• The Government of India on the advice of the Reserve Bank decides on the various denominations of the notes to be printed. The Reserve Bank coordinates with the Government in designing the banknotes, including their security features.
• For printing of notes, the Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the Government of India, has set up printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
• Notes up to Rs 5 are discontinued.
• Currency paper is composed of cotton and cotton rag.
• The printing of Re.1 and Rs.2 denominations has been discontinued. Under RBI Act 1934, notes in denominations higher than ten thousand rupees cannot be issued.
• The highest denomination notes ever printed by the Reserve Bank of India was the ` 10000 note in 1938 and again in 1954.
• There are fifteen languages appearing in the language panel of banknotes in addition to Hindi prominently displayed in the centre of the note and English on the reverse of the banknote

COINS:

• Distributed by RBI but issued and printed on the name of Govt of India.
• Maximum of RS 1000 coin can be issued under coinage act,1906.
• Minting press: Mumbai, Noida (UP), Kolkata and Hyderabad by SMPCIL.
• Coins up to 25 paisa are discontinued.
• Mainly made up of stainless steel.
• Coin denomination: Coins of one rupee, two rupees, five rupees and ten rupees are issued. Coins up to 50 paisa are called “small coins” and coins of Rupee one and above are called “Rupee coins”. As per the provisions of Coinage Act, 1906, coins can be issued up to the denomination of Rs.1,000.

Currency chests:

• These are storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank of India.  RBI have selected more than 4000 currency chests in various banks in India like in SBI, nationalized banks, RRBs, Cooperative banks and some private banks.
• Every bank has a maximum balance to be maintained in one day. If one day amount of any bank exceeds that maximum balance, bank have to deposit it into currency chest of that place. This money considered as CRR for that bank.

Types of Notes:

• Soiled notes: means a note which, has become dirty due to usage and also includes a two piece note pasted together wherein both the pieces presented belong to the same note, and form the entire note.
• Mutilated banknote is a banknote, of which a portion is missing, or which is composed of more than two pieces. 
• Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote.
• Counterfeits / Forgeries currency: A suspected forged note, counterfeit note or fake note is any note which does not possess the characteristics of genuine Indian currency notes.

Clean Note Policy:

• Reserve Bank of India has been continuously making efforts to make good quality banknotes available to the members of public.  To help RBI and banking system, the members of public are requested to ensure the following: a) Not to staple the banknotes; b) Not to write / put rubber stamp or any other mark on the banknotes; and c) Not to use banknotes for making garlands/toys, decorating pandals and places of worship or for showering on personalities in social events, etc.

      2. Financial Regulator and Supervision:

• The Reserve Bank’s regulatory and supervisory domain extends not only to the Indian banking system but also to the development financial institutions (DFIs), non-banking financial companies (NBFCs), primary dealers, credit information companies and select segments of the financial markets.
• In respect of banks, the Reserve Bank derives its powers from the provisions  of the Banking Regulation Act, 1949.
• The credit information companies are regulated under the provisions of Credit Information Companies (Regulation) Act, 2005.
• The Board for  Financial Supervision (BFS), constituted in November 1994, is the principal  guiding force behind the Reserve Bank’s regulatory and supervisory initiative.

3.   Manager of Foreign Exchange Reserve:

• The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
• Manages the Foreign Exchange Management Act, 1999.

4.   RBI Frames Monetary Policy

• Monetary Policy: To control supply of money in the market.
• Why: To keep check on inflation and Growth.
• RBI can use various techniques /tools/ways to either increase or decrease the money supply. Low money supply leads to low inflation and low economic growth and more money supply leads to high inflation and high economic growth. So, if these is high inflation in the country then RBI will decrease the money supply and if there is low economic growth in Indian then RBI will increase the money supply.
• RBI review its monetary policy on bimonthly basis.

Measures of money supply in India:

• The measures of money supply in India are classified into four categories M1, M2, M3 and M4 along with M0. This classification was introduced in April 1977 by Reserve Bank of India.
• Let’s discuss these one by one:

Reserve Money (M0):

• It is also known as High-Powered Money, monetary base, base money etc.
• M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI. It is the monetary base of economy.

Narrow Money (M1):

• M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI.

M2:

• M2 = M1 + Savings deposits of post office savings banks

Broad Money (M3)

• M3 = M1 + Time deposits with the banking system
• M4 = M3 + All deposits with post office savings banks

Tools of Monetary Policy:

Quantitative Tools (Effect Whole Money Supply)

• C R R
• SLR
• BANK RATE
• OMO
• LAF: a) Repo rate; b) Reverse repo
• MSF
• OMO

Qualitative Tools (effect selective money supply sectors, mainly in the form of guidelines to banks)

• Margin requirement
• Consumer credit control
• Selective credit control
• Moral suasion

Quantitative Tools:

CRR (Cash Reserve Ratio):

• It refers to the minimum amount of funds in cash (decided by the RBI) that a commercial bank must maintain with the Reserve Bank of India, in the form of deposits. This minimum amount is a certain percentage which is decided by the RBI from time to time. And this minimum percentage is calculated out of total demand and time liabilities (DTL) of the banks.
• Time Liability: Total Money deposited in Fixed deposit, Recurring deposits.
• Demand Liability:Total Money deposited in Current account, Saving account.
• So, let us suppose that SBI has total DTL of Rs 100 and RBI fixed the CRR at 4%. This means that SBI must deposit Rs 4 with RBI in cash.
• More CRR means less money with the bank which further leads to the decrease in money supply.
• And decrease in CRR means more money with the bank which further leads to increase in money supply.
• Currently CRR is 4% except form urban cooperative banks. For urban cooperative banks it is 3%.
• It comes under Section 42 (1) of the Reserve Bank of India Act, 1934.
• CRR is calculated on daily basis (which should be at least 70% of total CRR amount) and reported to RBI on fortnight basis in form A.
• No interest is given by RBI on CRR amount deposited by the banks.
• In case of failure to maintain CRR, a penalty of 3% more than bank rate will be imposed.

SLR (Statutory Liquidity Ratio):

• It is defined as the certain percentage of total DTL (Demand and Time liability) which bank have to maintain with itself in the form of cash, gold or government securities.
• It is mentioned under Section 24 of the Banking Regulation Act, 1949.
• Currently SLR= 19.5%. It can’t be more than 40%
• Banks should submit its report on SLR to the Reserve Bank before 20th day of every month, a Return in Form VIII.
• In case of failure to maintain CRR, a penalty of 3% more than bank rate will be imposed.
• More SLR means less money with the bank to invest in the marker which leads to less money supply.
• And decrease in SLR means more money with the bank which further leads to increase in money supply.

Bank Rate:

• It is rate of interest which is charged by RBI on the loans given to bank.
• Currently bank rate:6.75%.
• Bank can borrow money without any security or guarantee from RBI.
• This tool is used for long term lending.
• It has the same impact on money supply as that of CRR and SLR.

Repo Rate:

• It is rate of interest which is charged by RBI on the loans given to bank.
• This tool is used for short term borrowing of banks from RBI.
• Currently Repo rate: 6.50%.
• Bank can borrow from RBI under Repo Rate by parking its government securities with the RBI(Not included in SLR).
• Minimum amount borrowed under Repo Rate: 5 crores.

Reverse repo:

• It is the rate of interest which is given by RBI on Money deposited by banks with RBI.
• Current Reverse repo: 6.25%
• More reverse means more money supply and less reverse repo means less money supply.

MSF (Marginal Standing Facility):

• This facility was introduced in 2011.
• It is also the rate of interest which is charged by RBI on the loans given to banks.
• Current MSF: 6.75%
• Only schedule commercial banks can borrow under this scheme.
• Min borrowed amount should be 1 crore.
• Bank can borrow from RBI under this by parking its government securities with the RBI (under SLR).
• Bank can borrow up to 2% of their total DTL under MSF.

OMO (Open Market Operations):

• Sale and purchase of government security by RBI through PDO (public debt office).
• Sale of security (mean debt raised by RBI for govt from market) means less money supply in market.
• Purchase of security (means debt is return back by govt to market) means more money supply in market.               

     5. Banker’s Bank: 

• The Reserve Bank performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of the country. 

B. Qualitative Credit Control policy:

• This method of credit control is adopted by the RBI in its pursuit of economic stabilization and as part of credit management and control.

Publicity:

• RBI makes direct appeal to the public and publishes data which will have sobering effect on other banks and the commercial circles.

Moral Suasion:

• To arrest inflationary situation RBI persuades and request the commercial banks to refrain from giving loans for speculative and non-essential purposes.
• On the other hand, to counteract deflation RBI persuades the commercial banks to extend credit for different purposes.
• The policy of moral suasion will succeed only if the Reserve Bank is strong enough to influence the commercial banks.

Significance:

• It brings the commercial banks to fall in line with its policies regarding credit as that of RBI.
• RBI appeals commercial banks to extend their wholehearted co-operation to achieve the objectives of monetary policy.

Direct Action:

• This method is adopted when a commercial bank does not co-operate with the RBI in achieving its desirable objectives.
• RBI  may charge a penal rate of interest over and above the bank rate upon the defaulting banks.

Significance:

• RBI may refuse to rediscount the bills of those banks which are not following its directives.
• Central bank may refuse to grant further accommodation to those banks whose borrowings are in excess of their capital and reserves

Variation In Margin Requirements:

• The margin requirements against specific securities are determined by the RBI. Changes in margin requirements influence the flow of credit against specific commodities. The commercial banks generally advance loans to their customers against some security and acceptable to banks.

Significance:

• The commercial banks do not lend upto the full amount of the security but lend an amount less than its value
• A change in margin requirements will influence the flow of credit
• A rise in the margin requirements results in a contraction in the borrowing value of the security
• A fall in the margin requirements results in expansion in the borrowing value of the security.

Marginal Cost of Funds-based Lending Rate

• The RBI issued a new set of guidelines known as the Marginal Cost of Funds-based Lending Rate (MCLR). Commercial banks must use the MCLR to set their interest rates. This system replaced the base rate system with effect from 1 April 2016. Its main purpose is ensuring that banks pass on the benefit of rate cuts to borrowers.
• The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
• The base rate system does not incorporate the repo rate in its calculations. So, any change in repo rate does not reflect directly in the interest rates proposed by banks. On the other hand, the MCLR rate depends on the marginal cost of funds to a large extent. The repo rate is a big factor in the calculation of the marginal cost of funds. So, any change in the repo rate brings a major change in the marginal cost of funds. This forces banks to change the MCLR right away.
• Present MCLR: 6.75%.