Project on RBI

8/2/2019 Project on RBI

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A report on

CUSTOMER SATISFACTION

At

RESERVE BANK OF INDIA, DEHRADUN, UTTRAKHAND.

Bachelor of Business Administration

Submitted by-

Mr.Vishal Sharma

B.B.A. 5th (sem)

ALPINE INSTITUTE OF MGT. & TECH,

Nandaki Chawki, Premnagar, Dehradun (U.K.)

2011


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Before I get into the depth of the thing, I would like to add a few heartfelt words for the people

who at various stages of the project development helped me by their valuable guidance.

First and foremost I would like to pay my sincere gratitude which I owe to Mr. Suneel Chauhan

(HOD), and Ms. Priya Sharma (project guide), for their valued help and guidance which they

gave me when I needed it the most. It was only due to their sincere help and efforts that I was

able to end up with this project.

Last but not the least; I would like to pay our gratitude to my PARENTS, without their help and

blessing I cant take a single step in right direction..

Vishal Sharma

ACKNOWLEDGEMENT


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CONTENTS

SL No. TITLES

1- Introduction

2- History

3- Central Board of Directors

4- Governors

5- Supportive Bodies

6- Offices & Branches

7- Main Functions

8- Related Functions

9- R B I

10- Function of R B I

11- Role of R B I

12- Objectives of R B I

13- R B I Action

14- Case Study on FEMA


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Introduction

The banking section will navigate through all the aspects of the Banking System in India. It willdiscuss upon the matters with the birth of the banking concept in the country to new players

adding their names in the industry in coming few years.

The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) andtop 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under threeseparate heads with one page dedicated to each bank.

However, in the introduction part of the entire banking cosmos, the past has been well explainedunder three different heads namely:

History of Banking in India Nationalisation of Banks in India Scheduled Commercial Banks in India

The first deals with the history part since the dawn of banking system in India. Government tookmajor step in the 1969 to put the banking sector into systems and it nationalised 14 privatebanks in the mentioned year. This has been elaborated in Nationalisationof Banks in India. Thelast but not the least explains about the scheduled and unscheduled banks in India. Section 42(6) (a) of RBI Act 1934 lays down the condition of scheduled commercial banks. The descriptionalong with a list of scheduled commercial banks are given on this page.

History of Banking in IndiaWithout a sound and effective banking system in India it cannot have a healthy economy. Thebanking system of India should not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to itscredit. The most striking is its extensive reach. It is no longer confined to only metropolitans orcosmopolitans in India. In fact, Indian banking system has reached even to the remote cornersof the country. This is one of the main reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with thenationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft orfor withdrawing his own money. Today, he has a choice. Gone are days when the most efficient

bank transferred money from one branch to other in two days. Now it is simple as instantmessaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, thejourney of Indian Banking System can be segregated into three distinct phases. They are asmentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.


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New phase of Indian Banking System with the advent of Indian Financial & BankingSector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. Thesethree banks were amalgamated in 1920 and Imperial Bank of India was established whichstarted as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab NationalBank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank ofIndia, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysorewere set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failuresbetween 1913 and 1948. There were approximately 1100 banks, mostly small. To streamlinethe functioning and activities of commercial banks, the Government of India came up with TheBanking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as peramending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensivepowers for the supervision of banking in india as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath depositmobilisation was slow. Abreast of it the savings bank facility provided by the Postal departmentwas comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scalespecially in rural and semi-urban areas. It formed State Bank of india to act as the principalagent of RBI and to handle banking transactions of the Union and State Governments all overthe country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,1969, major process of nationalisation was carried out. It was the effort of the then PrimeMinister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country wasnationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 withseven more banks. This step brought 80% of the banking segment in India under Governmentownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions inthe Country:

1949 : Enactment of Banking Regulation Act.


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1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms

measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his

name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire

system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis

triggered by any external macroeconomics shock as other East Asian Countries suffered. This

is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is

not yet fully convertible, and banks and their customers have limited foreign exchange

exposure.

The Reserve Bank of India (RBI), is thecentral bankinginstitution ofIndiaand controls the

monetary policy of therupeeas well asUS$300.21 billion (2010) ofcurrency reserves. The

institution was established on 1 April 1935 during theBritish Rajin accordance with the

provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of

Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning.

Reserve Bank of India plays an important part in the development strategy of the government.

It is a member bank of theAsian Clearing Union. Reserve Bank of India was nationalised in the
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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

Seal of RBI The RBI headquarters in Mumbai

Headquarters Mumbai,Maharashtra

Coordinates18.93337N 72.836201ECoordinates:

18.93337N 72.836201E

Established 1 April 1935

Governor Duvvuri Subbarao

Central bank of India

Currency Indian Rupee

ISO 4217Code INR

Reserves US$300.21 billion (2010

Base deposit rate 7.00%

Website rbi.org.in
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History

19351950

The old RBI Building in Mumbai

The central bank was founded in 1935 to respond to economic troubles after the first world war.

The Reserve Bank of India was set up on the recommendations of the Hilton-Young

Commission. The commission submitted its report in the year 1926, though the bank was not

set up for another nine years. The Preamble of the Reserve Bank of India describes the basic

functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a

view to securing 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 Reserve Bank was initiallyestablished inKolkata,Bengal, but was permanently moved toMumbaiin 1937. The Reserve

Bank continued to act as the central bank forMyanmartillJapaneseoccupation ofBurmaand

later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the

Reserve Bank served as the central bank forPakistanuntil June 1948 when theState Bank of

Pakistancommenced operations. Though originally set up as a shareholders bank, the RBI has

been fully owned by thegovernment of Indiasince its nationalization in 1949

19501960

Between 1950 and 1960, the Indian government developed a centrally planned economic policyand focused on the agricultural sector. The administration nationalized commercial banks and

established, based on the Banking Companies Act, 1949 (later called 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.
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19601969

As a result of bank crashes, the reserve bank 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.

19691985

Between 1969 and 1980, the Indian government nationalized 6 more commercial banks,

following 14 major commercial banks being nationalized in 1969(As mentioned in RBI website).

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

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

increased its policies for a lot of tasks like interests, reserve ratio and visible deposits The

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.

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

office in a town.Theoil crisesin 1973 resulted in increasinginflation, and the RBI restricted

monetary policy to reduce the effects.

19851991

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 Researchand the Security & Exchange Board of Indiainvestigated 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). The Discount

and Finance House of Indiabegan 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.
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19912000

The national economy came down in July 1991 and the Indian rupee was devalued The

currency lost 18% relative to theUS dollar, and the Narsimahmam Committeeadvised

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 calledneo-liberalThe central bank

deregulated bank interests and some sectors of the financial market like the trust and property

markets. This first phase was a success and the central government forced a diversity

liberalization to diversify owner structures in 1998.

TheNational Stock Exchange of Indiatook 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 companythe Bharatiya Reserve Bank Note Mudran

Limitedin February 1995 to produce banknotes.

Since 2000

The Foreign Exchange Management Actfrom 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, allowedonline

bankingin 2001 and established a new payment system in 2004 - 2005 (National Electronic

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

institutions, was founded in 2006 and produces banknotes and coins.

The national economy's growth rate came down to 5.8% in the last quarter of 2008 2009 and

the central bank promotes the economic development.

Central Board of Directors

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

Indiaappoints the directors for a four-year term. The Board consists of a governor, four deputy

governors, four directors to represent the regional boards, and ten other directors from various

fields.
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Governors

The central bank till now was governed by 21governors. The 22nd, Current Governor of

Reserve Bank of India is Dr Subbarao

Supportive bodies

The Reserve Bank of India has four 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. 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, andtakes measures to strength the role of statutory auditors in the financial sector, external

monitoring and internal controlling systems.

TheTarapore committeewas set up by the Reserve Bank of India under the chairmanship of

former RBI deputy governor S S Tarapore to "lay the road map" tocapital account convertibility.

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

by 1999-2000.

On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the

grievance redressal mechanism, the Reserve Bank of India constituted a new department

Customer Service Department (CSD).

Offices and branches

The Reserve Bank of India has 4 regional offices,15 branches and 5 sub-offices. It has 22

branch offices at most state capitals and at a few major cities in India. Few of them are located

inAhmedabad,Bangalore,Bhopal,Bhubaneswar,Chandigarh,Chennai,Delhi,Guwahati,Hyde

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

andThiruvananthapuram. Besides it has sub-offices

atAgartala,Dehradun,Gangtok,Kochi,Panaji,Raipur,Ranchi,ShimlaandSrinagar.

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

Chennai and College of Agricultural Banking atPune. There are also fourZonal Training

CentresatBelapur,Chennai,KolkataandNew Delhi.
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ki/RBI_Thiruvananthapuramhttp://en.wikipedia.org/wiki/Patnahttp://en.wikipedia.org/wiki/Nagpurhttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Lucknowhttp://en.wikipedia.org/wiki/Kolkatahttp://en.wikipedia.org/wiki/Kanpurhttp://en.wikipedia.org/wiki/Jammuhttp://en.wikipedia.org/wiki/Jaipurhttp://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/wiki/Hyderabad,_Indiahttp://en.wikipedia.org/wiki/Guwahatihttp://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Chandigarhhttp://en.wikipedia.org/wiki/Bhubaneswarhttp://en.wikipedia.org/wiki/Bhopalhttp://en.wikipedia.org/wiki/Bangalorehttp://en.wikipedia.org/wiki/Ahmedabadhttp://en.wikipedia.org/wiki/Customer_Service_Departmenthttp://en.wikipedia.org/wiki/Capital_account_convertibilityhttp://en.wikipedia.org/wiki/Tarapore_committeehttp://en.wikipedia.org/wiki/List_of_Governors_of_the_Reserve_Bank_of_India


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Main functions

Reserve Bank of India regional office, Delhi entrance with theYakshinisculpturedepicting "Prosperity through agriculture"

The RBI Regional Office inDelhi.

The regional offices ofGPO(in white) and RBI (in sandstone) atDalhousie

Square,Kolkata.
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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 requiredto maintain gold and foreign exchange reserves of Rs. 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.

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. Objectives are maintaining price stability and ensuring adequate flow of

credit to productive sectors. The national economy depends on the public sector and the central

bank promotes an expansive monetary policy to push the private sector since the financial

market reforms of the 1990s.

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. Objectives are to maintain public confidence in the system, protect depositors'

interest and provide cost-effective banking services to the public. The Banking OmbudsmanSchemehas 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 thegross domestic productand has to decide the design of the rupee banknotes

as well as coins.
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Policy rates and Reserve ratios

Policy rates, Reserve ratios, lending, and deposit rates as of 14 September, 2011

Bank Rate 6.0%

Repo Rate 8.25%

Reverse Repo Rate 7.25%

Cash Reserve Ratio (CRR) 6.0%

Statutory Liquidity Ratio (SLR) 24.0%

Base Rate 9.50%10.75%

Reserve Bank Rate 4%

Deposit Rate 8.50%9.50%

Bank Rate:RBI lends to the commercial banks through its discount window to help the

banks meet depositors demands and reserve requirements. 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 it wants to reduce the liquidity

and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate

was 6%.

Cash Reserve Ratio(CRR):Every commercial bank has to keep certain minimum cash

reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase

or decrease the reserve requirement depending on whether it wants to affect 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 6%.
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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 mandatorily required to keep 24% 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.

Reserve Bank of India (RBI)The central bank of the country is the Reserve Bank of India (RBI). It was established in April1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the HiltonYoung 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 ofnominal value of Rs. 2,20,000.

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

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of1934) 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 banknotes of all denominations. The distribution of one rupee notes and coins and small coins allover the country is undertaken by the Reserve Bank as agent of the Government. The ReserveBank has a separate Issue Department which is entrusted with the issue of currency notes. Theassets and liabilities of the Issue Department are kept separate from those of the BankingDepartment. 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 rupeecoins, Government of India rupee securities, eligible bills of exchange and promissory notespayable 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 requiredto maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115crores should be in gold. The system as it exists today is known as the minimum reservesystem.

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


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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.


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(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


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etc. Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market

Operations etc., would also be settled through the respective components of payment systems.

As a provider of payment system services, the RBI has taken many initiatives as can be seen

under the evolution of payment systems in the country in the development and

operationalisation of the systems. Under this, the clearing houses and ECS systems are

managed by the Reserve Bank of India at 16 and 15 centres respectively and EFT systems arecompletely managed by RBI at the 15 centres. The CFMS, NDS/SSS and RTGS systems have

been fully developed, operationalised and maintained by RBI. Besides the above, RBI (through

IDRBT) has also provided the communication back bone to the financial system in the country in

the form ofIndian Financial Network (INFINET).

By way of being the central bank, the RBI derives regulatory powers in certain jurisdictions of

payment systems. However, specific oversight powers for payment systems for RBI is sought to

be obtained through appropriate legislation in the form of the Payment Systems Legislation and

the setting of Board for Payment and Settlement Systems.

Organizational Framework

Moving from a technology-based solution towards issues ofPayment and Settlement Systems,

the Reserve Bank of India has adopted a holistic approach, in which Information Technology is

an integral component. In order to usher in and establish a modern, robust payments and

settlement system consistent with international best practices, the Reserve Bank has adopted a

three-pronged strategy of Consolidation of existing Payment Systems, Development of Payment

Systems and Integration of the Payment and Settlement System.

In order to drive this Payment System reforms process an institutional framework and structure

has been created within the Reserve Bank. The base layer of this structure consisted of the

Payment Systems Group, which included an exclusive team of inter-disciplinary professionalsrepresenting IT, Banking Operations, Supervision, Legal, Economics, Government & Bank

Accounts, and Foreign Exchange operations. The Group focused on the System Design of an

integrated payments system, Payment Instruments, Electronic Banking systems, clearing and

settlement arrangements, technological infrastructure, legal issues, Monetary Policy

implications, Change management and responsibilities of banks. The Group was disbanded in

December 2002.

The next tier in the institutional framework is the Payment Systems Advisory Committee which

is a permanent body and oversees the operations of the Payment Systems Group and reviews

the developments in the area of Payment Systems.

The apex layer in the institutional structure is the National Payments Council. The council laysdown the broad policy framework and guidelines for the implementation of a sound and efficient

payments and settlement system for the country. The NPC is chaired by the Deputy Governor in

charge of the Department of Information Technology and represented by the Executive Director-

in-Charge of the Department of Information Technology, Chairman of the Indian Banks

Association, Joint Secretary, Banking Division, Ministry of Finance, Chairmen and Managing

Directors of two Public Sector banks, one Private bank, a Nonbanking financial company,

Securities Exchange Board of India and the National Stock Exchange. The National Payments
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Council is assisted by five permanent Task Forces, each of which is headed by a member of the

National Payments Council and comprises of a few experts appointed by the Chairman from

different disciplines / institutions. It is assisted by the respective Head of the Department

concerned within the Reserve Bank. These are the:

Task Force on Monetary Policy and related issues;

Task Force on Payment and Settlement Systems Oversight;

Task Force on Legal Issues;

Task Force on Technology Related Issues;

Task Force on Systems and Procedures related issues.

Role of Reserve Bank of India (RBI) in Indian Economy

Bank Issue:

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

notes of all denominations. The notice issued by the Reserve bank has the following

advantages:

It brings uniformity to note issue.

It is easier to control credit when there is a single agency of note issue.

It keeps the public faith in the paper currency alive.

It helps in the stabilization of the internal and external value of the currency and

Credit can be regulated according to the needs of the business.

The system of note issue as it exists today is known as the minimum reserve system. The

currency notes issued by the Bank arid legal tender everywhere in India without any limit. At

present, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50 100, and

500. The responsibility of the Bank is not only to put currency into, or withdraw it from, the

circulation but also to exchange notes and coins of one denomination into those of other

denominations as demanded by the public. All affairs of the Bank relating to note issue are

conducted through its Issue Department.

Banker, Agent and Financial Advisor to the State:

As a banker agent and financial advisor to the State, the Reserve Bank performs the following

functions:

It keeps the banking accounts of the government.

It advances short-term loans to the government and raises loans from the public.

It purchases and sells through bills and currencies on behalf to the government.

It receives and makes payment on behalf of the government.

It manages public debt and


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It advises the government on economic matters like deficit financing price stability,

management of public debts. etc.

Banker to the Banks:

It acts as a guardian for the commercial banks. Commercial banks are required to keep acertain proportion of cash reserves with the Reserve bank. In lieu of this, the Reserve bank

provide them various facilities like advancing loans, underwriting securities etc. The RBI controls

the volume of reserves of commercial banks and thereby determines the deposits/credit

creating ability of the banks. The banks hold a part or all of their reserves with the RBI. Similarly,

in times of their needs, the banks borrow funds from the RBI. It is, therefore, called the bank of

last resort or the lender of last resort.

Custodian of Foreign Exchange Reserves:

It is the responsibility of the Reserve bank to stabilize the external value of the national

currency. The Reserve Bank keeps golds and foreign currencies as reserves against note issueand also meets adverse balance of payments with other counties. It also manages foreign

currency in accordance with the controls imposed by the government.

As far as the external sector is concerned, the task of the RBI has the following dimensions:

To administer the foreign Exchange Control;

To choose ,the exchange rate system and fix or manages the exchange rate between the

rupee and other currencies;

To manage exchange reserves;

To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing

Union, and other countries, and with International financial institutions such as the IMF, World

Bank, and Asian Development Bank.

The RBI is the custodian of the countrys foreign exchange reserves, id it is vested with the

responsibility of managing the investment and utilization of the reserves in the most

advantageous manner. The RBI achieves this through buying and selling of foreign exchange

market, from and to schedule banks, which, are the authorized dealers in the Indian, foreign

exchange market. The Bank manages the investment of reserves in gold counts abroad and

the shares and securities issued by foreign governments and international banks or financial

institutions.

Lender of the Last Resort:At one time, it was supposed to be the most important function of the Reserve Bank. When

Commercial banks fail to meet obligations of their depositors the Reserve Bank comes to their

rescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meeting

directly or indirectly all legitimate demands for accommodation by the Commercial Banks under

emergency conditions.


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Banks of Central Clearance, Settlement and Transfer:

The commercial banks are not required to settle the payments of their mutual transactions in

cash, It is easier to effect clearance and settlement of claims among them by making entries in

their accounts maintained with the Reserve Bank, The Reserve Bank also provides the facility

for transfer to money free of charge to member banks.

Controller of Credit:

In modern times credit control is considered as the most crucial and important functional of a

Reserve Bank. The Reserve Bank regulates and controls the volume and direction of credit by

using quantitative and qualitative controls. Quantitative controls include the bank rate policy, the

open market operations, and the variable reserve ratio. Qualitative or selective credit control, on

the other hand includes rationing of credit, margin requirements, direct action, moral suasion

publicity, etc. Besides the above mentioned traditional functions, the Reserve Bank also

performs some promotional and supervisory functions. The Reserve Bank promotes the

development of agriculture and industry promotes rural credit, etc. The Reserve Bank also acts

as an agent for the international institutions as I.M.F., I.B.R.D., etc.

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 supervisory functions of the RBI have helped a great deal in improving the methods

of their operation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949 have given

the RBI wide powers of:

Supervision and control over commercial and cooperative banks, relating to licensing and

establishments.

Branch expansion.

Liquidity of their assets.

Management and methods of working, amalgamation reconstruction and liquidations.

The RBI is authorized to carry out periodical inspections off the banks and to call for returns and

necessary information from them.

Promotional Role

A striking feature of the Reserve Bank of India Act was that it made agricultural credit the Banks

special responsibility. This reflected the realisation that the countrys central bank should make

special efforts to develop, under its direction and guidance, a system of institutional credit for amajor sector of the economy, namely, agriculture, which then accounted for more than 50 per

cent of the national income. However, major advances in agricultural finance materialised only

after Indias independence. Over the years, the Reserve Bank has helped to evolve a suitable

institutional infrastructure for providing credit in rural areas.

Another important function of the Bank is the regulation of banking. All the scheduled banks are

required to keep with the Reserve Bank a consolidated 3 per cent of their total deposits, and the


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Reserve Bank has power to increase this percentage up to 15. These banks must have capital

and reserves of not less than Rs.5 lakhs. The accumulation of these balances with the Reserve

Bank places it in a position to use them freely in emergencies to support the scheduled banks

themselves in times of need as the lender of last resort. To a certain extent, it is also possible

for the Reserve Bank to influence the credit policy of scheduled banks by means of an open

market operations policy, that is, by the purchase and sale of securities or bills in the market.The Reserve bank has another instrument of control in the form of the bank rate, which it

publishes from time to time.

Further, the Bank has been given the following special powers to control banking companies

under the Banking Companies Act, 1949:

The power to issue licenses to banks operating in India.

The power to have supervision and inspection of banks.

The power to control the opening of new branches.

The power to examine and sanction schemes of arrangement and amalgamation.

The power to recommend the liquidation of weak banking companies.

The power to receive and scrutinize prescribed returns, and to call for any other information

relating to the banking business.

The power to caution or prohibit banking companies generally or any banking company in

particular from entering into any particular transaction or transactions.

The power to control the lending policy of, and advances by banking companies or any

particular bank in the public interest and to give directions as to the purpose for which

advances mayor may not be made, the margins to be maintained in respect of secured

advances and the interest to be charged on advances.

Indias apex bank: The Reserve Bank of India(RBI), its objectives andfunctionsThe Reserve Bank of India (RBI) is the apex financial institution of the countrys financial

system entrusted with the task of control, supervision, promotion, development and planning.

RBI is the queen bee of the Indian financial system which influences the commercial banks

management in more than one way. The RBI influences the management of commercial banks

through its various policies, directions and regulations. Its role in bank management is quite

unique. In fact, the RBI performs the four basic functions of management, viz., planning,organising, directing and controlling in laying a strong foundation for the functioning of

commercial banks.


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Objectives of the Reserve Bank of India

The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve

Bank as: to regulate the issue of Bank notes and the keeping of reserves with a view to

securing monetary stability in India and generally to operate the currency and credit system of

the country to its advantage.

Prior to the establishment of the Reserve Bank, the Indian financial system was totally

inadequate on account of the inherent weakness of the dual control of currency by the Central

Government and of credit by the Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and

division of responsibility for control of currency and credit and the divergent policies in this

respect must be ended by setting-up of a central bank called the Reserve Bank of India

which would regulate the financial policy and develop banking facilities throughout the country.

Hence, the Bank was established with this primary object in view.

Another objective of the Reserve Bank has been to remain free from political influence and be in

successful operation for maintaining financial stability and credit. The fundamental object of the

Reserve Bank of India is to discharge purely central banking functions in the Indian money

market, i.e., to act as the note- issuing authority, bankers bank and banker to government, and

to promote the growth of the economy within the framework of the general economic policy of

the Government, consistent with the need of maintenance of price stability.

A significant object of the Reserve -Bank of India has also been to assist the planned process of

development of the Indian economy. Besides the traditional central banking functions, with the

launching of the five-year plans in the country, the Reserve Bank of India has been moving

ahead in performing a host of developmental and promotional functions, which are normallybeyond the purview of a traditional Central Bank.

Functions of the Reserve Bank of IndiaThe Reserve Bank of India performs all the typical functions of a good Central Bank. In addition,

it carries out a variety of developmental and promotional functions attuned to the course of

economic planning in the country:
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Issuing currency notes, Le., to act as a currency authority.

Serving as banker to the Government.

Acting as bankers bank and supervisor.

Monetary regulation and management.

Exchange management and control.

Collection of data and their publication.

Miscellaneous developmental and promotional functions and activities.

Agricultural Finance.

Industrial Finance

Export Finance.

Institutional promotion.

RBIs Role in Risk Management and Settlement of Transactions in theForeign Exchange Market

Foreign Exchange Market

Share

The Indian Foreign Exchange (Forex) market is characterized by constant changes and rapid

innovations in trading methods and products. While the innovative products and ways of trading

create new possibilities for profit, they also pose various kinds of risks to the market. Central

banks all over the world, therefore, have become increasingly concerned of the scale of foreign

exchange settlement risk and the importance of risk mitigation measures. Behind this growing

awareness are several events in the past in which foreign exchange settlement risk might have

resulted in systemic risk in global financial markets, including the failure of Bankhaus Herstatt in

1974 and the closure of BCCI SA in 1991.

The foreign exchange settlement risk arises because the delivery of the two currencies involved

in a trade usually occurs in two different countries, which, in many cases are located in different

time zones. This risk is of particular concern to the central banks given the large values involved

in settling foreign exchange transactions and the resulting potential for systemic risk. Most of the

banks in the EMEs use some form of methodology for measuring the foreign exchangesettlement exposure. Many of these banks use the single day method, in which the exposure is

measured as being equal to all foreign exchange receipts that are due on the day. Some

institutions use a multiple day approach for measuring risk. Most of the banks in EMEs use

some form of individual counterparty limit to manage their exposures. These limits are often

applied to the global operations of the institution. These limits are sometimes monitored by

banks on a regular basis. In certain cases, there are separate limits for foreign exchange
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settlement exposures, while in other cases, limits for aggregate settlement exposures are

created through a range of instruments. Bilateral obligation netting, in jurisdictions where it is

legally certain, is an important way for trade counterparties to mitigate the foreign exchange

settlement risk. This process allows trade counterparties to offset their gross settlement

obligations to each other in the currencies they have traded and settle these obligations with the

payment of a single net amount in each currency.Several emerging markets in recent years have implemented domestic real time gross

settlement (RTGS) systems for the settlement of high value and time critical payments to settle

the domestic leg of foreign exchange transactions. Apart from risk reduction, these initiatives

enable participants to actively manage the time at which they irrevocably pay way when selling

the domestic currency, and reconcile final receipt when purchasing the domestic currency.

Participants, therefore, are able to reduce the duration of the foreign exchange settlement risk.

Recognizing the systemic impact of foreign exchange settlement risk, an important element in

the infrastructure for the efficient functioning of the Indian foreign exchange market has been

the clearing and settlement of inter-bank USD-INR transactions. In pursuance of the

recommendations of the Sodhani Committee, the Reserve Bank had set up the ClearingCorporation of India Ltd. (CCIL) in 2001 to mitigate risks in the Indian financial markets. The

CCIL commenced settlement of foreign exchange operations for inter-bank USD-INR spot and

forward trades from November 8, 2002 and for inter-bank USD-INR cash and tom trades from

February 5, 2004. The CCIL undertakes settlement of foreign exchange trades on a multilateral

net basis through a process of notation and all spot, cash and tom transactions are guaranteed

for settlement from the trade date. Every eligible foreign exchange contract entered between

members gets notated or replaced by two new contracts between the CCIL and each of the

two parties, respectively. Following the multilateral netting procedure, the net amount payable

to, or receivable from, the CCIL in each currency is arrived at, member-wise. The Rupee leg is

settled through the members current accounts with the Reserve Bank and the USD leg throughCCILs account with the settlement bank at New York. The CCIL sets limits for each member

bank on the basis of certain parameters such as members credit rating, net worth, asset value

and management quality. The CCIL settled over 900,000 deals for a gross volume of US $

1,180 billion in 2005-06. The CCIL has consistently endeavoured the entire gamut of foreign

exchange transactions under its purview. Intermediation, by the CCIL thus, provides its

members the benefits of risk mitigation, improved efficiency, lower operational cost and easier

reconciliation of accounts with correspondents.

An issue related to the guaranteed settlement of transactions by the CCIL has been the

extension of this facility to all forward trades as well. Member banks currently encounter

problems in terms of huge outstanding foreign exchange exposures in their books and thiscomes in the way of their doing more trades in the market. Risks on such huge outstanding

trades were found to be very high and so were the capital requirements for supporting such

trades. Hence, many member banks have expressed their desire in several fora that the CCIL

should extend its guarantee to these forward trades from the trade date itself which could lead

to significant increase in the liquidity and depth in the forward market. The risks that banks

today carry in their books on account of large outstanding forward positions will also be


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significantly reduced (Gopinath, 2005). This has also been one of the recommendations of the

Committee on Fuller Capital Account Convertibility.

Apart from managing the foreign exchange settlement risk, participants also need to manage

market risk, liquidity risk, credit risk and operational risk efficiently to avoid future losses. As per

the guidelines framed by the Reserve Bank for banks to aligns and exposure in derivative

markets as market makers, the boards of directors of ADs (category-I) are required to frame anappropriate policy and fix suitable limits for operations in the foreign exchange market. The net

overnight open exchange position and the aggregate gap limits need to be approved by the

Reserve Bank. The open position is generally measured separately for each foreign currency

consisting of the net spot position, the net forward position, and the net options position. Various

limits for exposure, viz., overnight, daylight, stop loss, gap limit, credit limit, value at risk (VaR),

etc., for foreign exchange transactions by banks are fixed. Within the contour of these limits,

front office of the treasury of ADs transacts in the foreign exchange market for customers and

own proprietary requirements. These exposures are accounted, confirmed and settled by back

office, while mid-office evaluates the profit and monitors adherence to risk limits on a continuous

basis. In the case of market risk, most banks use a combination of measurement techniquesincluding and managed by most banks on an aggregate counter-party basis so as to include all

exposures in the underlying spot and derivative markets. Some banks also monitor country risk

through cross-border country risk exposure limits. Liquidity risk is generally estimated by

monitoring asset liability profile in various currencies in various buckets and monitoring

currency-wise gaps in various buckets. Banks also track balances to be maintained on a daily

basis in Nostro accounts, remittances and committed foreign currency term loans while

monitoring liquidity risk.

To sum up, the foreign exchange market structure in India has undergone substantial

transformation from the early 1990s. The market participants have become diversified and there

are several instruments available to manage their risks. Sources of supply and demand in theforeign exchange market have also changed in line with the shifts in the relative importance in

balance of payments from current to capital account. There has also been considerable

improvement in the market infrastructure in terms of trading platforms and settlement

mechanisms. Trading in Indian foreign exchange market is largely concentrated in the spot

segment even as volumes in the derivatives segment are on the rise. Some of the issues that

need attention to further improve the activity in the derivatives segment include flexibility in the

use of various instruments, enhancing the knowledge and understanding the nature of risk

involved in transacting the derivative products, reviewing the role of underlying in booking

forward contracts and guaranteed settlements of forwards. Besides, market players would need

to acquire the necessary expertise to use different kinds of instruments and manage the risksinvolved.


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Interest Rate Administration by Reserve Bank of India (RBI) during GlobalRecession/Subprime Crisis

The subprime crises triggered by a dramatic rise in mortgage delinquencies and foreclosures in

the United States ,lead to major adverse consequences for banks and financial markets around

the globe. Administered interest rates are one of the major measures for controlling the money

supply in an economy. Bank rate, repo rate and reverse repo rate are administered by The

Reserve Bank of India. The records show high fluctuation in the interest rates in the past in

India. The Reserve Bank of India (RBI) made drastic cuts in interest rates during the recession

period to make sure that the banks and individuals get the benefit of higher credit availability.

The Government of India had the stimulus package for the India Inc., where as the Banking

sector has been successfully managed by RBI measures.

Meaning of Interest Rates/Policy rates: Interest rates can be defined from different

perspectives, for an Individual aninterest rate is the price a borrower pays for the use

of money, they do not own. For an Organization, Interest is a fee paid on borrowed

funds/assets. It is the price paid for the use of borrowed money or, money earned by

deposited funds. For General Banking, An interest rate is the amount received in relation to an

amount loaned. An interest rate is the amount received in relation to an amount loaned,

generally expressed as a ratio of rupees received per hundred rupees lent. Interest rates can

be classified as specific interest rates and interest rates in general. Specific interest rates area

interest rates on a particular financial instrument market, these rates are driven by market

forces (i.e. Demand and supply). General interest rates, such as bank rate are administered


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interest rates i.e. re set by some established group ( bank rate is administered by central bank

of a country, RBI in India ).

Bank Rate,Repo and Reverse Repo Rate: Every central bank functions as a controller of

credit in an economy. One of the measures to control credit is by the way of monitoring the

bank rate, repo rate and reverse repo rate. Bank rate is the rate at which the central bank (R in

INDIA) lends to commercial banks and acts an important benchmark in determination of

interest rates charged by banks from the ultimate borrowers. In brief, raising bank rates by

raising bank rate, central bank raises the cost of borrowing. This forces the commercial banks

to raise in turn the rate of interest from the public and vice versa. Changes in bank rate are

generally referred in terms of basis points. A basis point (often denoted as bp) is a unit relating

to interest rates that is equal to 1/100th of a percentage point per annum. It is frequently but

not exclusively used to express differences in interest rates of less than 1% pa. It avoids the

ambiguity between relative and absolute discussions about rates. For example, a 1%

increase from a 10% interest rate could refer to an increase either from 10% to 10.1%

(relative), or from 10% to 11%. Similar, are the repo and reverse repo rates. Whenever the

banks have any shortage of funds they can borrow it either from Reserve Bank of India (RBI)

or from other banks. The repo rate is the rate at which the banks borrow these excess funds.

The borrowing bank mortgages its government securities to carry out this loan transaction. 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 is the rate at

which Reserve Bank of India (RBI) borrows money from the various commercial banks. An

increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to

attractive interest rates. It can cause the money to be drawn out of the banking system.

RBI Actions During Global Recession/Subprime CrisisSince September 2008, RBI has taken multiple actions in order to ensure that the economy

does not suffer a massive downturn. The RBI has cut the repo rate by 400 basis points from 9%

to 5%, reverse repo rate by 250 basis points from 6% to 3.5% and the CRR by 400 basis points

from a high of 9% to the current 5%. Where as the Statutory Liquidity Ratio (SLR) was reduced

from 25% to 24%. The RBI has also reprimanded the Banks which have been slow in passing

on the benefits of the lower interest rate onto the borrower. It clearly pointed out that the interest

rate cuts by the public sector banks have been in the range of 1.25%-2.25%, 1%-1.25% for

private banks and 1% for foreign banks. The slackness in passing on benefits to the consumers

can be seen in a comparison between reactions of banks to RBI policies in 2004 and 2008.

Towards the beginning of 2004 the RBI key policy rates were at approximately similar levels

although private banks were charging about 7.5-8% during that time and are currently charging

approximately 10-11% for home loans.


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The RBI has adopted a comparatively more conservative target of 6%, as compared to the

Governments 7% GDP growth target for the current fiscal, in light of the global downturn

resulting in moderation of growth and muted inflationary pressures that are being experienced

currently by the Indian economy. The policy announced a cut in repo and reverse repo by 25

bps in order to encourage lowering of lending rates, increased lending and stimulate aggregate

demand within the economy in order to mitigate downside risks. After the additional 25 bps cut,currently the repo rate has lowered down to 4.75% and reverse repo rate to 3.25%.There is also

a clear indication that the central bank will continue to monitor the economic performance as

downside risks continue to persist in the economy and necessary action will be undertaken as

deemed favorable which translates to possibly more rate cuts in the short term.

YEAR BANK RATE

2006 5.25 5.50 5.50 5.50 5.50 5.50 5.75 6.00 6.00 6.00 6.00 6.00

2007 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

2008 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.002009 4.00 4.00 3.50 3.25 3.25 3.25 3.25 3.25 3.25

Date Repo Reverse repo

26-oct-05 5.25 6.25

24-jan-06 5.50 6.50

9-jun-06 5.75 6.75

25-jul-06 6.00 7.00

31-oct-06 6 7.25

23-dec-06 6 7.25

6-jan-07 6 7.25

31-jan-07 6 7.50

17-feb-07 6 7.5

3-mar-07 6 7.5

30-mar-07 6 7.75

14-apr-07 6 7.75

28-apr-07 6 7.75

4-aug-07 6 7.75

10-nov-07 6 7.75

26-apr-08 6 7.75


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10-may-08 6 7.75

24-may-08 6 7.75

11-jun-08 6 8.00

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Documents

Project on RBI