RBI (RESERVE BANK OF INDIA)

CENTRAL BANK AND MONETARY AUTHORITY (RBI)

Reserve Bank of India (RBI)

Commercial Banks Regional Rural Banks Co-operative Banks

State Co-operative
Public Sector Banks Private Sector Banks
Banks

Indian Foreign Central/District Co-

operative Banks

Old Banks New Banks Local Area Banks Primary Credit

Societies

State Bank Group State Bank Group

 RESERVE BANK OF INDIA- INTRODUCTION

Establishment: 1st April 1935 Initial Structure: Started as a

under the Reserve Bank of India First Governor: Mrs. Osborne shareholders bank with a paid-up
Act, 1934. Smith. capital of ₹5 crores.

Recommendation: Based on the Shares: Paid-up capital divided into

Hilton-Young Commission (Royal 5 lakh shares of ₹100 each, owned
Commission on Indian Currency entirely by the Government of
and Finance). India.
Reserve Bank of
India
Functions Taken Over: Issuing
Nationalization: Nationalized on
paper currency (from Government
1st January 1949, became State-
of India) and controlling credit
owned and State-controlled.
(from Imperial Bank of India).

Initial Location: Central Office First Indian Governor: Mr. C. Central Office: Location where the
established in Kolkata, moved to D. Deshmukh. Governor sits and policies are
Mumbai in 1937. formulated.
RESERVE BANK OF INDIA- HISTORY

✓ Burma (Myanmar) seceded from the Indian Union in 1937

but the Reserve Bank continued to act as the Central Bank
for Burma till Japanese Occupation of Burma and later upto
April, 1947.

✓ After the partition of India, the Reserve Bank served as the

central bank of Pakistan upto June 1948 when the State
Bank of Pakistan commenced operations.

✓ The Bank, which was originally set up as a shareholder's

bank, was nationalised in 1949.

✓ With liberalization, the Bank's focus has shifted back to

core central banking functions like Monetary Policy, Bank
Supervision and Regulation, and Overseeing the Payments
System and onto developing the financial markets.
ORGANIZATIONAL STRUCTURE OF CENTRAL BANK

Governor

Deputy Governor

Executive Director

Principal Chief General Managers

Chief General Managers

General Managers

Deputy General Managers & Asstt. General Managers

Managers & Asstt. Manager

Support Staff
 ORGANIZATIONAL STRUCTURE OF CENTRAL BANK
Board Description Key Points

Central Board ✓ The main governing body of RBI, ✓ Meets at least six times a year.
✓ Responsible for overall direction ✓ Governed by the Governor.
and supervision of RBI's functions. ✓ Includes Four Deputy Governors.
✓ Approves major policies.

Local Board ✓ Constituted for different regions to ✓ Four local boards: Western, Eastern, Northern, Southern.
advise the Central Board and ✓ Five members each.
represent local interests. ✓ Members appointed by Central Govt.
✓ Term of four years

Board for Financial ✓ Responsible for the supervision of ✓ Formed in 1994.

Supervision (BFS) financial institutions, including ✓ Includes four Central Board Directors and Governor.
banks, financial institutions, and ✓ Meets Monthly
NBFCs. ✓ Reviews inspection reports.

✓ Each of these boards plays a crucial role in the governance and regulatory framework of the RBI, ensuring comprehensive
supervision and management of the banking and financial sectors in India.
 RESERVE BANK OF INDIA: NATURE AND FUNCTIONS

A. Traditional Central Banking 1. Bank of Issue – The Minimum

Functions (monetary functions) Reserve System

2. Banker to Government
B. Supervisory Functions (Non-
Functions of monetary Functions)
Reserve 3. Banker's Bank and Lender of the
Bank of Last Resort

India C. Promotional Functions (Non-

monetary Functions) 4. Controller of Credit

5. Custodian of Foreign Reserves

D. Miscellaneous Functions
 1. BANK OF ISSUE- THE MINIMUM RESERVE SYSTEM
✓ Issue Department: Separate from banking, handles currency and
notes

✓ Sole Right: RBI exclusively issues bank notes under Section 22.

✓ Government Role: Makes and distributes coins through RBI.

✓ Original Assets: Gold and securities, minimum 40 crore gold

value.

✓ Emergency Modifications: Changed asset provisions during/after

World war and post war period.

✓ Minimum Reserve System: Post-1957, 200 crore reserves, 115

crore in gold.
2. BANKER TO GOVERNMENT
✓ Government Banker: Acts as banker, agent, and adviser to both the
Central and State Governments in India.

✓ Cash Balances: Manages government deposits, processes payments,

and handles remittances without charging interest.

✓ Public Debt: Assists in floating new loans and managing public debt
for Union and State governments.

✓ WMA: Provides temporary financial support (Ways and Means

Advances) to governments for up to 90 days.

✓ WMA Types: Normal advances are unsecured, while Special advances

are secured against government securities.

✓ Section 17(5): Authorizes RBI to extend advances to governments to

cover temporary cash flow mismatches.
 3. BANKER’S BANK AND LENDER OF THE LAST RESORT
✓ Cash Balance Requirements: Scheduled banks must maintain
cash balance with RBI as per the Banking Regulation Act of 1949.

✓ Reserve Requirement: Banks need to keep cash reserves equal

to 3% of aggregate deposit liabilities post-1962 amendment.

✓ Crisis Support: RBI provides financial support to commercial

banks during banking crises, acting as the lender of last resort.

✓ Regulatory Flexibility: RBI can modify minimum cash reserve

requirements as needed.

✓ Borrowing Facility: Scheduled banks can borrow from RBI against

eligible securities

✓ Financial Accommodation: RBI provides financial assistance by

rediscounting bills of exchange during liquidity shortages.
4. CONTROLLER OF CREDIT
✓ Open Market Operations: Central bank controls money supply directly
by buying/selling government securities.

✓ Lending Restrictions: Under the Banking Regulation Act of 1949, RBI

can restrict banks from lending to specific entities.

✓ Selective Credit Controls: Since 1956, RBI uses selective controls to

regulate credit allocation.

✓ Licensing: Banks need RBI licenses to operate, which can be revoked if

conditions aren't met.

✓ Branch Expansion: Banks must obtain RBI approval to open new

branches. RBI can inspect any commercial bank account.

✓ Weekly Reports: Scheduled banks must submit detailed weekly

reports of assets and liabilities to RBI.
 5. CUSTODIAN OF FOREIGN RESERVES
✓ Maintain Exchange Rate: RBI maintains the official exchange
rate.

✓ Fixed Rate Transactions: Buys and sells sterling at fixed rates.

✓ Custodian of Forex: Manages India’s reserves of international

currencies.

✓ Exchange Rate Maintenance: Maintains fixed exchange rates

despite market pressures.

✓ Administers Exchange Controls: Oversees the country's

exchange control mechanisms.

✓ IMF Membership Responsibility: Manages fixed exchange rates

with IMF member countries.
 B. SUPERVISORY FUNCTIONS (NON-MONETARY FUNCTIONS)
✓ The Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949 have
given the RBI wide powers.

✓ The RBI has to supervise and control commercial and co-operative banks in relation to
licensing and establishments, branch expansion, liquidity of their assets, management
and methods of working, amalgamation, reconstruction, and liquidation.

✓ The RBI is authorized to carry out periodical inspections of the banks and to call for
returns and necessary information from them.

✓ The nationalization of 14 major Indian scheduled banks in July 1969 imposed new
responsibilities on the RBI for directing the growth of banking and credit policies
towards more rapid development of the economy and realization 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.
C. PROMOTIONAL FUNCTIONS (NON-MONETARY FUNCTIONS)

✓ The Bank now performs a variety of developmental and

promotional functions, which, at one time, were regarded
as outside the normal scope of central banking.

✓ The Reserve Bank promotes the banking habit.

✓ Extends banking facilities to rural and semi-urban areas.

✓ Establishes and promotes new specialized financing

agencies i.e., Industrial Development Banks.

✓ Development of the co-operative credit movement to

encourage savings and to eliminate moneylenders from
the villages and to route its short-term credit to
agriculture.
 D. MISCELLANEOUS FUNCTIONS: INTEREST RATE INTERVETIONS

✓ The most visible and obvious power of many modern central

banks is to influence market interest rates; contrary to popular
belief, they rarely ‘set’ rates to a fixed number.

✓ Typically, a central bank controls certain types of short-term

interest rates.
✓ These influence the stock and bond markets as well as
mortgage and other interest rates.

✓ The mechanism to move the market towards a ‘target rate’

(whichever specific rate is used) is generally to lend money or
borrow money in theoretically unlimited quantities, until the
targeted market rate is sufficiently close to the target.

✓ Central banks may do so by lending money to and borrowing

money from (taking deposits from) a limited number of
qualified banks, or by purchasing and selling bonds.
 RESERVE BANK OF INDIA: OBJECTIVES

✓ Promotion of monetization and monetary integration of the economy.

✓ Amendment and modification of currency and regulation of foreign exchange.

✓ Promotion of specialized financial institutions at national and regional levels to enhance facilities for term
finance to industry.

✓ Provide support to planning authorities and governments to bring economic development with stability
and social justice.

✓ Institutionalization of savings through promotion of banking habit.

✓ Building up a sound and adequate banking and credit structure.

✓ Evolving a well-differentiated structure of institutions for providing credit for Agriculture and Allied
(related) activities.
 RESERVE BANK OF INDIA: POWERS

✓ It holds the cash reserves of all the scheduled banks.

✓ It controls the credit operations of banks through quantitative and qualitative

controls.

Powers of ✓ It controls the banking system through the system of licensing, inspection and
Reserve calling for information.
Bank of
India ✓ It acts as the lender of the last resort by providing rediscounting facilities to
scheduled banks.
✓ Controller of Forex Reserves of the country.

✓ 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.
 WHOLLY OWNED SUBSIDIARIES OF RBI

Deposit Insurance and Credit Guarantee Corporation of India

(DICGC)- July 15, 1978

Bharatiya Reserve Bank Note Mudran Private Limited

(BRBNMPL)- 3rd February, 1995

Indian Financial Technology and Allied Services (IFTAS)

February 2015

Reserve Bank Information Technology Private Limited (ReBIT)

2016

Reserve Bank Innovation Hub (RBIH)

Announcement- Nov, 17 2020, Inauguration: March 24, 2022
DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION OF INDIA (DICGC)

✓ Full Form: Deposit Insurance and Credit Guarantee Corporation of India

✓ Establishment Year: July 15, 1978

✓ DICGC was formed by merging Deposit Insurance Corporation (DIC)

and Credit Guarantee Corporation of India Ltd. (CGCI)

✓ Purpose: insurance of deposits and guaranteeing of credit facilities and

for other matters connected therewith or incidental thereto.

✓ Insurance cover by DICGC increased to Rs. 5 Lakhs (w.e.f 4th February

2020)

✓ Earlier the limit was set at Rs. 1 Lakh

DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION OF INDIA (DICGC)

✓ DICGC insures all bank deposits, such as saving, fixed, current, recurring
deposit for up to the limit of Rs. 100,000 of each deposit in a bank.

✓ However, if there are more accounts in same bank, all of those are
treated as a single account.
✓ The insurance premium is paid by the insured banks itself.

✓ Its head office is located in Mumbai, Maharashtra.

✓ Banks covered by Deposit Insurance Scheme.

✓ All commercial banks including the branches of foreign banks

functioning in India, Local Area Banks and Regional Rural Banks.

✓ Co-operative Banks - All eligible co-operative banks as defined in

Section 2(gg) of the DICGC Act are covered by the Deposit Insurance
Scheme.
BHARATIYA RESERVE BANK NOTE MUDRAN PRIVATE LIMITED (BRBNMPL)
✓ Established in 1995 to meet the demand for banknotes, headquartered
in Bangalore.

✓ Operates presses in Mysore and Salboni, and has its own design cell.

✓ Prints all denominations of Indian banknotes, alongside presses in Nashik

and Dewas.

✓ Security Paper Mill (SPM), Hoshangabad, under SPMCIL, established in

1968.

✓ Supplies most banknotes in India, with the rest produced by SPMCIL.

✓ SPM, an ISO 9001:2000 unit, manufactures various security papers, with

mints in Mumbai, Hyderabad, Kolkata, and Noida producing all
circulated coins.
 INDIAN FINANCIAL TECHNOLOGY AND ALLIED SERVICES (IFTAS)

✓ Full Form: Indian Financial Technology and Allied Services

✓ Establishment Year: 2015

✓ Purpose: Manages IT-related services for RBI, banks, and

financial institutions, including RTGS and NEFT.

✓ Important Facts: Operates the Financial Messaging

Platform (SFMS) and INFINET.
RESERVE BANK INFORMATION TECHNOLOGY PRIVATE LIMITED (ReBIT)

✓ Full Form: Reserve Bank Information

Technology Private Limited

✓ Establishment Year: 2016

✓ Purpose: Handles IT requirements

and cybersecurity for RBI and
regulated entities.

✓ Important Facts: Established to

address IT needs of RBI and its
supervised entities.
 RESERVE BANK INNOVATION HUB (RBIH)

✓ Full Form: Reserve Bank Innovation

Hub

✓ Announced in 2020,
✓ Inaugurated in 2022

✓ Purpose: Promotes innovation in the

financial sector through technology.

✓ Important Facts: Registered as a

section 8 company under Companies
Act 2013, with its office in
Hyderabad.
 WHOLLY OWNED SUBSIDIARIES OF RBI: SUMMARY CHART
Subsidiaries Full Form Establishment Year Purpose Important Facts

DICGC ✓ Deposit Insurance ✓ Establishment Year: ✓ Insures bank ✓ Resulted from the
and Credit 1978 deposits up to ₹5 merger of DIC and
Guarantee lakh per depositor in CGCI.
Corporation of registered insured
India banks.

BRBNMPL ✓ Bharatiya Reserve ✓ Establishment Year: ✓ Augments the ✓ A wholly-owned

Bank Note Mudran 1995 production of subsidiary of RBI,
Private Limited banknotes in India. managing two printing
presses.
 WHOLLY OWNED SUBSIDIARIES OF RBI: SUMMARY CHART
Subsidiaries Full Form Establishment Year Purpose Important Facts

IFTAS ✓ Indian Financial ✓ Establishment ✓ Manages IT-related ✓ Operates the Financial

Technology and Year: 2015 services for RBI, banks, Messaging Platform
Allied Services and financial (SFMS) and INFINET.
institutions, including
RTGS and NEFT.

ReBIT ✓ Reserve Bank ✓ Establishment ✓ Handles IT ✓ Established to address

Information Year: 2016 requirements and IT needs of RBI and its
Technology Private cybersecurity for RBI supervised entities.
Limited and regulated entities.

RBIH ✓ Reserve Bank ✓ Announced in ✓ Promotes innovation ✓ Registered as a

Innovation Hub 2020, in the financial sector section 8 company
✓ Inaugurated in through technology. under Companies Act
2022 2013, with its office in
Hyderabad.
NATIONAL CENTRE FOR FINANCIAL EDUCATION (NCFE): ASSOCIATE OF RBI

✓ NCFE is a Section 8 (Not for Profit) Company with key stakeholders,

including RBI, SEBI, IRDAI, and PFRDA, holding stakes in the
organization.

✓ These stakeholders have a distribution of 30% stake each, with PFRDA

holding a 10% stake in NCFE.

✓ This objective aligns with the National Strategy for Financial Education
(NSFE) of the Financial Stability and Development Council (FSDC).

✓ NCFE operates as a non-profit entity, emphasizing its focus on

education rather than profit.

✓ NCFE plays a crucial role in advancing financial literacy and awareness

across the country, contributing to the financial well-being of Indian
citizens.
MONETARY POLICY AND ITS FRAMEWORK

✓ The Reserve Bank of India (RBI) is vested with the

responsibility of conducting monetary policy.

✓ This responsibility is explicitly mandated under the Reserve

Bank of India Act, 1934.

✓ Monetary policy refers to the use of monetary instruments

under the control of the central bank to regulate magnitudes
such as interest rates, money supply and availability of credit
with a view to achieving the ultimate objective of economic
policy, while keeping in mind the objective of growth specified
in the Act.

✓ The framework aims at setting the policy (repo) rate based on

an assessment of the current and evolving macroeconomic
situation; and modulation of liquidity conditions to anchor
money market rates at or around the repo rate.
 TECHNIQUES OF CREDIT CONTROL
✓ Several tools and techniques of credit control used by the Reserve Bank of India can be broadly
categorized as quantitative or general methods and qualitative or selective methods.

Quantitative or General Methods Qualitative or Selective Methods

Bank Rate Policy Marginal Requirements

Repo Rate Regulation of Consumer Credit

Reverse Repo Rate Rationing of Credit

Marginal Standing Facility Moral Suasion

Reserve Ratios: CRR and SLR Direct Action

Open Market Operation Publicity

 QUANTITATIVE OR GENERAL METHODS

✓ These are the traditional measures

of monetary control.

✓ All the quantitative methods affect

the entire credit market in the same
direction.

✓ This means their impact on all the

sectors of the economy is uniform.

✓ But however it does not take into

consideration the objectives of
credit control.
BANK RATE POLICY

✓ Bank Rate: Central bank's rate for buying or rediscounting commercial

papers.

✓ Liquidity Support: Helps commercial banks with liquidity needs.

✓ Variable Rate: Adjusted based on economic stability.

✓ Long-Term Outlook: Reflects central bank's view on interest rates.

✓ Rate Impact: Bank rate influences long-term interest rates.

✓ Profit Mechanism: Banks profit by borrowing at lower rates and

lending at higher rates.
 REPO RATE

✓ Repo Rate: RBI's fixed interest rate for overnight liquidity to banks.

✓ Collateral: Banks offer government securities for short-term funds.

✓ Rate Impact: Higher repo rate means costlier borrowing from RBI.

✓ Monetary Policy Tool: Influences money supply and interest rates.

✓ Economic Control: Adjusted by RBI to manage inflation and growth.

✓ Short-Term Borrowing: Banks borrow from RBI for a maximum of 90

days.
 DIFFERENCE BETWEEN BANK RATE AND REPO RATE
Point of Difference Bank Rate Repo Rate

Meaning ✓ Bank Rate is the rate of interest, which is ✓ The rate at which the Central bank grants
charged by the Central bank on the loans, it short term loans to commercial banks,
advanced to commercial banks and other against collateral are known as Repo Rate.
financial institutions.

Repurchase ✓ No. ✓ Yes.

Agreement

Collateral ✓ Not involved. ✓ Involved.

Which is higher? ✓ Higher. ✓ Relatively lower.

Deals with ✓ Loans. ✓ Securities.

Time Frame ✓ Long Term. ✓ Short Term.

 REVERSE REPO RATE

✓ Reverse Repo Rate: RBI's fixed interest rate for absorbing

overnight liquidity from banks.

✓ Collateral: Banks provide eligible government securities

for short-term deposits.

✓ Rate Difference: Opposite of the Repo Rate.

✓ Higher Rate: An increase in reverse repo rate makes

lending to RBI more attractive for banks.

✓ Safety Preference: Banks choose RBI over riskier lending

to individuals and businesses.

✓ Monetary Control: Used by RBI to manage money supply

and influence market rates.
 DIFFERENCE BETWEEN REPO RATE AND REVERSE REPO RATE
Point of Difference Repo Rate Reverse Repo Rate

Meaning ✓ Repo Rate is a benchmark interest rate, at ✓ Reverse repo rate is the interest rate offered by
which money is lent to commercial bank by the RBI, to the commercial banks on the
the Central bank, for short period, against deposits, who park their surplus funds with RBI.
collateral.

What is it? ✓ It is the rate at which liquidity is injected into ✓ It is the rate at which liquidity is absorbed in the
the economy. economy.

Charged on ✓ Repurchase Agreement. ✓ Reverse Repurchase Agreement.

Impact of the increase ✓ It will make commercial bank borrow less ✓ It encourages commercial banks to transfer more
in the rate from the Central bank, due to high-interest money to the central bank and earn interest.
rate.

Purpose ✓ To fulfill the deficiency of funds. ✓ To manage liquidity in the economy.

Rate ✓ High. ✓ Comparatively less.

Controls ✓ Inflation. ✓ Money supply in the economy.

MARGINAL STANDING FACILITY

✓ Marginal Standing Facility (MSF): Banks can borrow overnight

funds from RBI using their SLR portfolio as collateral.

✓ Penalty Rate: Borrowing is at a higher interest rate, acting as a

safety net for liquidity emergencies.

✓ Eligibility: Scheduled Commercial Banks with Current and SGL

Accounts in RBI Mumbai can access MSF.

✓ Operational Hours: Available on Mumbai working days, except

Saturdays, from 3.30 PM to 4.30 PM.

✓ Minimum Amount: Borrowing starts at Rs. One crore and

increases in one crore increments.

✓ Collateral: SLR-eligible government securities, Treasury Bills,

and State Development Loans can be used as collateral.
 DIFFERENCE BETWEEN BANK RATE AND MSF RATE
Point of Difference Bank Rate MSF Rate

Meaning ✓ Bank Rate is a discount rate at which RBI grants ✓ MSF Rate is a rate at which the commercial
long term loans to commercial banks. banks borrow funds overnight from the central
bank.

Eligibility ✓ All commercial banks. ✓ All Scheduled Commercial Banks (SCBs) having
their current account and Subsidiary General
Ledger (SGL) with an RBI.

Objective ✓ To manage and control credit supply in the ✓ To provide funds to the banks overnight, when
country. they face an acute shortage of funds.

Meant for ✓ Long term Lending. ✓ Overnight Lending.

Collateral ✓ The loan can be raised without pledging the ✓ The loan is given against security within the
securities. limits of SLR and up to a certain percentage of
NDTL.
 DIFFERENCE BETWEEN REPO RATE AND MSF RATE
Point of Difference Repo Rate MSF Rate

Meaning ✓ It is the discounting rate at which the ✓ It is the discounting rate at which the
commercial banks borrow money from the commercial banks borrow money from the
central bank at the time of deficiency of central bank overnight against securities.
funds.

Aim ✓ To control inflation. ✓ To maintain permanency in overnight lending

rates.

Pledging of security ✓ Pledging of government bonds is done, ✓ Pledging of securities of SLR quota which is in
which is further repurchased by the banks. excess of the current SLR can be pledged. Banks
can also sell the securities to the central bank.

Eligibility ✓ All commercial banks are eligible. ✓ All scheduled commercial banks having their
Current Account and Subsidiary General Ledger
with the central bank are eligible.

Applicable from ✓ 2005. ✓ 2011.

Rate ✓ Less. ✓ Comparatively high.

 RESERVE RATIOS: CASH RESERVE RATIO (CRR)

✓ CRR (Cash Reserve Ratio): Mandated portion of a bank's daily

balance to be held with RBI.

✓ Restrictions: Banks can't lend or invest the CRR funds, keeping

it in a non-earning current account.

✓ Role: Acts as a financial buffer and liquidity control tool for RBI.

✓ Statutory Requirement: Scheduled banks must maintain a CRR

of 4% of Net Demand and Time Liabilities (NDTL).

✓ Monetary Control: Increasing CRR reduces available funds,

helping RBI control excess liquidity.

✓ Economic Stabilization: Used to manage inflation and regulate

money supply.
 RESERVE RATIOS: STATUTORY LIQUIDITY RATIO
✓ SLR (Statutory Liquidity Ratio): Banks must maintain a portion of their NDTL in
safe assets like government securities; currently at 19.5% (June 2018).

✓ CRR (Cash Reserve Ratio): Banks must maintain a fixed percentage of their daily
balances with RBI; currently at 4%.

✓ Asset Type: SLR requires assets in the form of government securities, cash, and
gold, while CRR restricts banks from lending a portion of their deposits. SLR
(Statutory
✓ Control Focus: SLR influences bank credit expansion and economic growth by
Liquidity Ratio)
changing liquidity in the system, while CRR directly controls liquidity.

✓ Impact on Lending: Changes in SLR affect bank lending resources, while CRR
changes influence a bank's cash availability.

✓ Adjustment Power: RBI can vary both SLR and CRR to regulate the economy;
SLR's potential range is wider (up to 40%) than CRR (4%).
 DIFFERENCE BETWEEN CRR AND SLR
Point of Difference Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)

Meaning ✓ CRR is the amount of money that the banks ✓ SLR is the amount of funds which the banks
are obligated to park with the central bank, in are required to maintain as liquid assets, i.e.
the form of cash. cash, gold, approved securities. etc.

Regulates ✓ Monetary stability in the country. ✓ Bank's leverage for credit expansion.

Form ✓ Cash and cash equivalents. ✓ Liquid Assets.

Return ✓ Banks don't earn any interest as return on the ✓ Banks usually earn interest as return on the
money kept as CRR. funds kept as SLR.

Use ✓ To drain out excess money out of the ✓ To ensure the solvency of the commercial
economic system. bank.

Maintenance With ✓ Central Bank of India i.e. RBI. ✓ Bank itself.

 OPEN MARKET OPERATIONS

✓ OMOs: RBI's market operations involving G-Secs for rupee

liquidity control.

✓ Excess Liquidity: RBI sells securities to reduce liquidity.

✓ Tight Liquidity: RBI buys securities to inject liquidity.

✓ Durable Adjustment: Aims for lasting liquidity impact.

✓ Market-Based Tool: Influences money supply and interest rates.

✓ Economic Stabilization: Helps manage inflation and economic

stability.
MARKET STABILIZATION SCHEME (MSS)

✓ Purpose: Initiated in 2004 to manage excess liquidity.

✓ Tool: RBI issues securities (e.g., Treasury Bills) on behalf of the

government.

✓ Separate Account: Funds raised go to the MSS Account, not for

government spending.

✓ Excess Liquidity Control: Used to absorb surplus funds from the

market.

✓ Ceiling Increase: The MSS ceiling was significantly raised to Rs 6

lakh crore from Rs 30,000 crore.

✓ YV Reddy's Initiative: Introduced during Governor YV Reddy's

tenure at RBI.
 QUALITATIVE OR SELECTIVE METHODS

✓ Since the objectives of credit control are not

served by the quantitative methods, the
economists rely on selective control methods to
fulfill the purpose.

✓ The credit objectives may include rationing the

credit, directing the flow of credit from least
important sectors to the most important sectors,
controlling a speculating tendency based on the
availability of bank credit.

✓ Thus, these objectives are very well served by the

selective control methods.
MARGINAL REQUIREMENT
✓ Definition: It's the value of security offered for a loan or total
loans granted.

✓ Credit Flow Control: Used to limit credit for specific economic

activities.

✓ RBI's Approach: Implemented since 1956 to influence lending

practices.

✓ Margin Percent: Higher margin percent restricts loans, while

lower percent increases loan availability.

✓ Security Importance: Reflects the relationship between loan

value and the security provided.

✓ Economic Impact: Affects lending decisions and credit access in

the economy.
 REGULATION OF CONSUMER CREDIT

✓ Definition: Selling consumer goods on credit to customers.

✓ Regulation: Used by the government or RBI to enforce rules on

credit sales.

✓ Money Supply Increase: Central bank boosts money supply

with relaxed consumer credit policies.

✓ Money Supply Reduction: Tightens consumer credit to reduce

money supply.

✓ Economic Impact: Influences consumer spending and liquidity

in the economy.

✓ Monetary Tool: Used to control money flow for economic

stability.
 RATIONING OF CREDIT
✓ Maximum Limit: Commercial banks have a set maximum limit
on loans and advances, fixed by RBI.

✓ Categories: RBI sets specific ceilings for different loan

categories.

✓ Credit Control: Used to curb excessive credit flow, especially

for speculative activities.

✓ Capital Ratio: RBI can also mandate a minimum "capital: total

assets" ratio.

✓ Risk Mitigation: Ensures banks manage risk and lending within

defined limits.

✓ Regulatory Tool: RBI employs this method to maintain financial

stability and manage credit risk.
DIRECT ACTION
✓ Regulatory Authority: Central bank (RBI) can take stringent
measures against banks that don't follow its directives.

✓ Loan Restrictions: RBI may impose limitations on loan

advancements for non-compliant banks.

✓ Enforcement: It's a tool to ensure banks adhere to RBI's

guidelines.

✓ Example: RBI imposed restrictions on Metropolitan cooperative

banks.

✓ Compliance: Ensures banks operate in accordance with

regulatory requirements.

✓ Regulatory Power: A means to maintain banking discipline and

safeguard the financial system.
 MORAL SUASION
✓ Persuasion Method: RBI encourages banks to follow its credit
flow guidelines through persuasion.

✓ Apex Bank Influence: Part of meetings between RBI and

commercial banks.

✓ Inflation Control: Encourages limits on credit during inflation

and promotes lending during deflation.

✓ Voluntary Compliance: Aims to guide banks to voluntarily

adopt RBI's monetary policies.

✓ Soft Approach: Uses influence and dialogue, not regulations, to

shape bank behavior.

✓ Economic Stability: Helps maintain financial stability by

influencing credit practices.
 MONETARY POLICY COMMITTEE (MPC)
✓ Monetary policy pertains to the strategies employed by the Reserve Bank of India (RBI) to control the use of monetary
tools in order to achieve specific economic objectives, such as GDP growth and controlling inflation.

[Link] MPC Key Points Description

1. Definition and Purpose ✓ RBI strategies to control monetary tools for economic objectives like GDP
growth, inflation.

2. MPC Composition ✓ Six-member committee chaired by the RBI Governor.

3. Legal Framework ✓ Established under the amended RBI Act of 2016, Section 45ZB.

4. Inflation Target Setting ✓ Government sets inflation target in consultation with RBI every five years.

5. Current Inflation Target ✓ 4% CPI target with 2% lower and 6% upper tolerance, set from April 1, 2021, to
March 31, 2026.

6. Failure Condition ✓ Failure if inflation exceeds 6% or falls below 2% for three consecutive quarters.