The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India 

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. 

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. 

Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. 

As supereme banking authority in the country, the Reserve Bank of India, therefore, has the

following powers:(a) It holds the cash reserves of all the scheduled banks. 

(b) It controls the credit operations of banks through quantitative and qualitative controls. 

(c) It controls the banking system through the system of licensing, inspection and calling for information. 

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against

the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

Promotional functions

With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a varietyof developmental and

promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.

RESERVE BANK OF INDIA ADDRESSReserve Bank of India,Central Office,Shaheed Bhagat Singh Road,Mumbai - 400 001.

SECOND

The Reserve Bank of India (RBI) is India's central banking institution, which controls

the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British

Raj in accordance with the provisions of the Reserve Bank of India Act, 1934.[2] The share

capital was divided into shares of 100 each fully paid, which was entirely owned by private₹

shareholders in the beginning.[3] Following India's independence in 1947, the RBI was

nationalised in the year 1949.

The RBI plays an important part in the development strategy of the Government of India. It

is a member bank of the Asian Clearing Union. The general superintendence and direction

of the RBI is entrusted with the 21-member-strong Central Board of Directors—

the Governor (currently Duvvuri Subbarao), four Deputy Governors, two Finance

Ministry representative, ten government-nominated directors to represent important

elements from India's economy, and four directors to represent local boards headquartered

at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of five

members who represent regional interests, as well as the interests of co-operative and

indigenous banks.

HISTORY

1935–1950

The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles

after the First World War. It began according to the guidelines laid down by Dr. Ambedkar.

RBI was conceptualized as per the guidelines, working style and outlook presented by

Ambedkar in front of the Hilton Young Commission. When this commission came to India

under the name of “Royal Commission on Indian Currency & Finance”, each and every

member of this commission were holding Ambedkar’s book titled The Problem of the Rupee

– It’s origin and it’s solution.[4] The bank was set up based on the recommendations of the

1926 Royal Commission on Indian Currency and Finance, also known as the Hilton–Young

Commission.[5] The original choice for the seal of RBI was The East India CompanyDouble

Mohur, with the sketch of the Lion and Palm Tree. However it was decided to replace the

lion with the tiger, the national animal of India. The Preamble of the RBI describes its basic

functions to regulate the issue of bank notes, keep reserves to secure monetary stability in

India, and generally to operate the currency and credit system in the best interests of the

country. The Central Office of the RBI was initially established in Calcutta (now Kolkata), but

was permanently moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's

central bank, except during the years of the Japanese occupation of Burma (1942–45), until

April 1947, even though Burma seceded from the Indian Union in 1937. After the Partition of

India in 1947, the Bank served as the central bank for Pakistan until June 1948 when

the State Bank of Pakistan commenced operations. Though originally set up as a

shareholders’ bank, the RBI has been fully owned by the Government of Indiasince its

nationalization in 1949.[6]

[edit]1950–1960

In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru,

developed a centrally planned economic policy that focused on the agricultural sector. The

administration nationalized commercial banks[7] and established, based on the Banking

Companies Act of 1949 (later called the Banking Regulation Act), a central bank regulation

as part of the RBI. Furthermore, the central bank was ordered to support the economic plan

with loans.[8]

[edit]1960–1969

As a result of bank crashes, the RBI was requested to establish and monitor a deposit

insurance system. It should restore the trust in the national bank system and was initialized

on 7 December 1961. The Indian government founded funds to promote the economy and

used the slogan "Developing Banking". The government of India restructured the national

bank market and nationalized a lot of institutes. As a result, the RBI had to play the central

part of control and support of this public banking sector.

[edit]1969–1985

In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks.

Upon Gandhi's return to power in 1980, a further six banks were nationalized.[5] The

regulation of the economy and especially the financial sector was reinforced by the

Government of India in the 1970s and 1980s.[9] The central bank became the central player

and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[10] These measures aimed at better economic development and had a huge effect on the

company policy of the institutes. The banks lent money in selected sectors, like agri-

business and small trade companies.[11]

The branch was forced to establish two new offices in the country for every newly

established office in a town.[12] The oil crises in 1973 resulted in increasing inflation, and the

RBI restricted monetary policy to reduce the effects.[13]

[edit]1985–1991

A lot of committees analysed the Indian economy between 1985 and 1991. Their results

had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira

Gandhi Institute of Development Research and the Security & Exchange Board of

India investigated the national economy as a whole, and the security and exchange board

proposed better methods for more effective markets and the protection of investor interests.

The Indian financial market was a leading example for so-called "financial repression"

(Mackinnon and Shaw).[14] The Discount and Finance House of India began its operations

on the monetary market in April 1988; the National Housing Bank, founded in July 1988,

was forced to invest in the property market and a new financial law improved the versatility

of direct deposit by more security measures and liberalisation.[15]

[edit]1991–2000

The national economy came down in July 1991 and the Indian rupee was devalued.[16] The

currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised

restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory

liquidity ratio. New guidelines were published in 1993 to establish a private banking sector.

This turning point should reinforce the market and was often called neo-liberal.[17] The

central bank deregulated bank interests and some sectors of the financial market like the

trust and property markets.[18] This first phase was a success and the central government

forced a diversity liberalisation to diversify owner structures in 1998.[19]

The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed

nationalized banks in July to interact with the capital market to reinforce their capital base.

The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note

Mudran Limited—in February 1995 to produce banknotes.[20]

[edit]Since 2000

The Foreign Exchange Management Act from 1999 came into force in June 2000. It should

improve the foreign exchange market, international investments in India and transactions.

The RBI promoted the development of the financial market in the last years, allowed online

banking in 2001 and established a new payment system in 2004–2005 (National Electronic

Fund Transfer).[21] The Security Printing & Minting Corporation of India Ltd., a merger of nine

institutions, was founded in 2006 and produces banknotes and coins.[22]

The national economy's growth rate came down to 5.8% in the last quarter of 2008–

2009[23] and the central bank promotes the economic development.[24]

Structure

Central Board of Directors

The Central Board of Directors is the main committee of the central bank. The Government

of India appoints the directors for a four-year term. The Board consists of a governor, four

deputy governors, fifteen directors to represent the regional boards, one from the Ministry of

Finance and ten other directors from various fields. The Government nominated Arvind

Mayaram, as a director of the Central Board of Directors with effect from August 7, 2012

and vice R Gopalan, RBI said in a statement on August 8, 2012. .[25] The Central

Government has nominated Shri Rajiv Takru, Secretary, Department of Financial Services,

Ministry of Finance, New Delhi as a director on the Central Board of Directors of the

Reserve Bank of India vice Shri D. K. Mittal. Shri Takru's nomination is with effect from

February 4, 2013 and until further orders.[26]

[edit]Governors

The current Governor of RBI is Duvvuri Subbarao. The RBI extended the period of the

present governor up to 2013. There are four deputy governors, Deputy Governor K C

Chakrabarty, Urjit Patel, Shri Anand Sinhaand Shri H.R. Khan . Deputy Governor K C

Chakrabarty's term has been extended further by 2 years. Subir Gokarn was replaced by

Mr. Urjit Patel in January 2013.[27]

[edit]Supportive bodies

The Reserve Bank of India has ten regional representations: North in New Delhi, South in

Chennai, East in Kolkata and West in Mumbai. The representations are formed by five

members, appointed for four years by the central government and serve—beside the advice

of the Central Board of Directors—as a forum for regional banks and to deal with delegated

tasks from the central board.[28] The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD

committee to control the financial institutions. It has four members, appointed for two years,

and takes measures to strength the role of statutory auditors in the financial sector, external

monitoring and internal controlling systems.

The Tarapore committee was set up by the Reserve Bank of India under the chairmanship

of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account

convertibility. The five-member committee recommended a three-year time frame for

complete convertibility by 1999–2000.

On 1 July 2007, in an attempt to enhance the quality of customer service and strengthen the

grievance redressal mechanism, the Reserve Bank of India created a new customer service

department.

[edit]Offices and branches

The Reserve Bank of India has four zonal offices.[29] It has 19 regional offices at most state

capitals and at a few major cities in India. Few of them are located

in Ahmedabad,Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, H

yderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna,

and Thiruvananthapuram. Besides it has 09 sub-offices

at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shillong, Shimla and Srinag

ar.

The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at

Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training

Centres at Mumbai, Chennai, Kolkata and New Delhi.

Main functions

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue

bank notes of all denominations. The distribution of one rupee notes and coins and small

coins all over the country is undertaken by the Reserve Bank as agent of the government.

The Reserve Bank has a separate Issue Department which is entrusted with the issue of

currency notes. The assets and liabilities of the Issue Department are kept separate from

those of the Banking Department.

[edit]Monetary authority

The Reserve Bank of India is the main monetary authority of the country and beside that the

central bank acts as the bank of the national and state governments. It formulates,

implements and monitors the monetary policy as well as it has to ensure an adequate flow

of credit to productive sectors.

[edit]Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes

broad parameters of banking operations within which the country's banking and financial

system functions.Its objectives are to maintain public confidence in the system, protect

depositors' interest and provide cost-effective banking services to the public. The Banking

Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective

addressing of complaints by bank customers. The RBI controls the monetary supply,

monitors economic indicators like the gross domestic product and has to decide the design

of the rupee banknotes as well as coins.[31]

[edit]Managerial of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act,

1999. Objective: to facilitate external trade and payment and promote orderly development

and maintenance of foreign exchange market in India.

[edit]Issuer of currency

The bank issues and exchanges or destroys currency notes and coins that are not fit for

circulation. The objectives are giving the public adequate supply of currency of good quality

and to provide loans to commercial banks to maintain or improve the GDP. The basic

objectives of RBI are to issue bank notes, to maintain the currency and credit system of the

country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the

economic structure of the country so that it can achieve the objective of price stability as

well as economic development, because both objectives are diverse in themselves.

[edit]Banker of Banks

RBI also works as a central bank where commercial banks are account holders and can

deposit money.RBI maintains banking accounts of all scheduled banks.[32] Commercial

banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate

and open market operations. As banker's bank, the RBI facilitates the clearing of cheques

between the commercial banks and helps inter-bank transfer of funds. It can grant financial

accommodation to schedule banks. It acts as the lender of the last resort by providing

emergency advances to the banks. It supervises the functioning of the commercial banks

and take action against it if need arises.

Policy rates and reserve ratios

Bank Rate

RBI lends to the commercial banks through its discount window to help the banks meet

depositor’s demands and reserve requirements for long term. The Interest rate the RBI

charges the banks for this purpose is called bank rate. If the RBI wants to increase the

liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to

reduce the liquidity and money supply in the system, it will increase the bank rate. As of 25

June 2012 the bank rate was 9.0%.latest bank rate is 8.75% as on 29/01/2013.

[edit]Reserve requirement cash reserve ratio (CRR)

Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent

upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of

securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR)

for scheduled banks without any floor rate or ceiling rate, [Before the enactment of this

amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe

CRR for scheduled banks between 5% and 20% of total of their demand and time liabilities].

RBI uses this tool to increase or decrease the reserve requirement depending on whether it

wants to effect a decrease or an increase in the money supply. An increase in Cash

Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large

proportion of their deposits in the form of deposits with the RBI. This will reduce the size of

their deposits and they will lend less. This will in turn decrease the money supply. The

current rate is 4.75%. ( As a Reduction in CRR by 0.25% as on Date- 17 September 2012).

-25 basis points cut in Cash Reserve Ratio(CRR) on 17 September 2012, It will release Rs

17,000 crore into the system/Market. The RBI lowered the CRR by 25 basis points to 4.25%

on 30 October 2012, a move it said would inject about 175 billion rupees into the banking

system in order to pre-empt potentially tightening liquidity. The latest CRR as on 29/01/13 is

4%

[edit]Statutory Liquidity ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash

and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger

proportion of their resources in liquid form and thus reduces their capacity to grant loans

and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank

funds from loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market operations—buying and

selling of eligible securities by central bank in the money market—to influence the volume of

cash reserves with commercial banks and thus influence the volume of loans and advances

they can make to the commercial and industrial sectors. In the open money market,

government securities are traded at market related rates of interest. The RBI is resorting

more to open market operations in the more recent years.

Generally RBI uses three kinds of selective credit controls:

1. Minimum margins for lending against specific securities.

2. Ceiling on the amounts of credit for certain purposes.

3. Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

1. Part of the interest rate structure i.e. on small savings and provident funds, are

administratively set.

2. Banks are mandatory required to keep 23% of their deposits in the form of

government securities.

3. Banks are required to lend to the priority sectors to the extent of 40% of their

advances.

Monetary policy of India

Monetary policy is the process by which monetary authority of a country, generally a central

bank controls the supply of money in the economy by exercising its control over interest

rates in order to maintain price stability and achieve high economic growth.[1] In India, the

central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain

the price stability in the economy. Other objectives of the monetary policy of India, as stated

by RBI, are:

Price Stability

Price Stability implies promoting economic development with considerable emphasis

on price stability. The centre of focus is to facilitate the environment which is

favourable to the architecture that enables the developmental projects to run swiftly

while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit and

money supply with special attention to seasonal requirement for credit without

affecting the output.

Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non

essential fixed investment.

Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock often

results is sickness of the unit. To avoid this problem the central monetary authority

carries out this essential function of restricting the inventories. The main objective of

this policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and facilitate the

trade. It is an independent objective of monetary policy.

Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of credit to

priority sector and small borrowers. This policy decides over the specified

percentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit

The policy of Reserve Bank aims equitable distribution to all sectors of the economy

and all social and economic class of people

To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It tries to

increase the efficiency in the financial system and tries to incorporate structural

changes such as deregulating interest rates, ease operational constraints in the

credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide a considerable

autonomy. It encourages more competitive environment and diversification. It

maintains its control over financial system whenever and wherever necessary to

maintain the discipline and prudence in operations of the financial system.

Monetary operations

Monetary operations involve monetary techniques which operate on monetary magnitudes

such as money supply, interest rates and availability of credit aimed to

maintain PriceStability, Stable exchange rate, Healthy Balance of Payment, Financial

stability, Economic growth. RBI, the apex institute of India which monitors and regulates

the monetary policy of the country stabilizes the price by controlling Inflation. RBI takes into

account the following monetary policies:

Major Operations

Open Market Operations

An open market operation is an instrument of monetary policy which involves buying

or selling of government securities from or to the public and banks. This mechanism

influences the reserve position of the banks, yield on government securities and cost

of bank credit. The RBI sells government securities to contract the flow of credit and

buys government securities to increase credit flow. Open market operation makes

bank rate policy effective and maintains stability in government securities market.

CRR Graph from 1992 to 2011[2]

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits which banks are

required to keep with RBI in the form of reserves or balances .Higher the CRR with

the RBI lower will be the liquidity in the system and vice-versa.RBI is empowered to

vary CRR between 15 percent and 3 percent. But as per the suggestion by the

Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5

percent in 2002. As of January 2013, the CRR is 4.00 percent.[3]

Statutory Liquidity Ratio

Every financial institution has to maintain a certain quantity of liquid assets with

themselves at any point of time of their total time and demand liabilities. These

assets can be cash, precious metals, approved securities like bonds etc. The ratio of

the liquid assets to time and demand liabilities is termed as the Statutory liquidity

ratio.There was a reduction of SLR from 38.5% to 25% because of the suggestion by

Narshimam Committee. The current SLR is 23%.[5]

Bank Rate Policy[6]

Bank rate is the rate of interest charged by the RBI for providing funds or loans to the

banking system. This banking system involves commercial and co-operative banks,

Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial

institutes. Funds are provided either through lending directly or rediscounting or

buying money market instruments like commercial bills andtreasury bills. Increase in

Bank Rate increases the cost of borrowing by commercial banks which results into

the reduction in credit volume to the banks and hence declines the supply of money.

Increase in the bank rate is the symbol of tightening of RBI monetary policy. Bank

rate is also known as Discount rate. The current Bank rate is 8.75%.

Credit Ceiling

In this operation RBI issues prior information or direction that loans to the

commercial banks will be given up to a certain limit. In this case commercial bank will

be tight in advancing loans to the public. They will allocate loans to limited sectors.

Few example of ceiling are agriculture sector advances, priority sector lending.

Credit Authorization Scheme

Credit Authorization Scheme was introduced in November, 1965 when P C

Bhattacharya was the chairman of RBI. Under this instrument of credit regulation RBI

as per the guideline authorizes the banks to advance loans to desired sectors.[7]

Moral Suasion

Moral Suasion is just as a request by the RBI to the commercial banks to take so

and so action and measures in so and so trend of the economy. RBI may request

commercial banks not to give loans for unproductive purpose which does not add to

economic growth but increases inflation.

Repo Rate and Reverse Repo Rate

Repo rate is the rate at which RBI lends to commercial banks generally against

government securities. Reduction in Repo rate helps the commercial banks to get

money at a cheaper rate and increase in Repo rate discourages the commercial

banks to get money as the rate increases and becomes expensive. Reverse Repo

rate is the rate at which RBI borrows money from the commercial banks. The

increase in the Repo rate will increase the cost of borrowing and lending of the

banks which will discourage the public to borrow money and will encourage them to

deposit. As the rates are high the availability of credit and demand decreases

resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo

Rate is a symbol of tightening of the policy. As of January 2013, the repo rate is

7.75 % and reverse repo rate is 6.75%

[edit]Key Indicators

As of 29 January 2013, the key indicators are[8][9]

Indicator Current rate

Inflation 4.25%

Bank rate 8.75%

CRR 4.00%

SLR 23%

Repo rate 7.75%

Reverse repo rate 6.75%

fiscal policy is the use of government revenue collection (taxation) and expenditure

(spending) to influence the economy.[1] The two main instruments of fiscal policy are

government taxation and changes in the level and composition of taxation and government

spending can affect the following variables in the economy:

Aggregate demand and the level of economic activity;

The distribution of income;

The pattern of resource allocation within the government sector and relative to

the private sector.