Reserve Bank of India 1

7/27/2019 Reserve Bank of India 1

1/32

Presentation on


2/32

RESERVE BANK OF INDIA

*RBI established in 1935 as a non profitableinstitution and the Controller of Indiancurrency & the banker to the government.*RBI acts as an apex institution, the leader

and symbol of economic development.*closely monitors developments in the wholefinancial sector.*plays an important part in the development

strategy of the Government of India.
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Government_of_India


3/32

*member bank of theAsian Clearing Union. Thegeneral superintendence and direction of the RBI isentrusted with the 20-member-strong Central Boardof Directorsthe Governor(currently DuvvuriSubbarao), four Deputy Governors, one FinanceMinistryrepresentative, ten Government-nominatedDirectors to represent important elements fromIndia's economy, and four Directors to representLocal Boards headquartered at Mumbai, Kolkata,Chennai and New Delhi.

*Each of these Local Boards consist of five memberswho represent regional interests, as well as theinterests of co-operative and indigenous banks.
http://en.wikipedia.org/wiki/Asian_Clearing_Unionhttp://en.wikipedia.org/wiki/Governor_of_Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Governor_of_Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Asian_Clearing_Union


4/32

FUNCTIONS OF RBI

Monetary Authority

Regulator and supervisor of the financial system

Manager of Foreign Exchange

Issuer of currency Developmental role

Related Functions


5/32

ROLE OF RBI


6/32

RBI, was established in 1935 as a non profitable institutionand the Controller of Indian currency & the banker to thegovernment. Present functions and roles of RBI as an apex

institution of monetary and banking system have evolvedover a period of time.

RBI

CONTROLLEROF CURRENCY

BANKERSBANK

LENDERS OFTHE LASTRESORT

BANKERS TOGOVERNMENT

SUPERVISINGAUTHORITY

ANDREGULATOR


7/32

1. CONTROLLER OF CURRENCY

ISSUES CURRENCY NOTES.

CHECKS FAKE CURRENCY AND ENSURE THATIT IS NOT REDISTRIBUTED.

IS THE OWNER OF CURRENCY CHEST.


8/32

2. BANKERS BANK

REGULATES AND ENSURES STABILITY.

CONTROLS VOLUMES OF THEIR RESERVES(SLRs and CRRs).

EXTENDS CREDIT FACILITIES TO BANKS.


9/32

3. LENDER OF THE LAST RESORT

RAISE DEPOSITS AND BORROW MONEY TOMEET COMMITMENTS.

BORROWING AGAINST GOVERNMENTSECURITIES.

MERGING WEAK BANK WITH STRONG BANKSTO ENSURE LONG TERM GROWTH.


10/32

4. BANKERS TO GOVERNMENT

MANTAINS ACCOUNTS OF VARIOUSMINISTRIES.

ISSUER OF SECURITIES.

SHORT TERM CREDIT TO GOVERNMENT.


11/32

5. SUPERVISING AUTHORITY/REGULATORAND SUPERVISOR

REGULATES THE BANKS AND NBFCs IN INDIA.

ADVICES GOVERNMENT FOR SALE ANDPURCHASE OF SECURITIES.

ADVICES GOVERNMENT ON HOW MUCHINTEREST TO BE ALLOWED ON SHORT/LONGTERM CREDIT.


12/32

OTHER FUNCTIONS

CUSTODIAL OF NATIONAL METALLIC

RESERVES.

CLEARING FUNCTION.


13/32


14/32

Quantitative InstrumentsOpen market operations

The Open market operationrefers to thepurchase and/or sale of short term and longterm securities by the RBI in the open market.

The OMOis used to wipe out shortage of moneyin the money market, to influence the term andstructure of the interest rate and to stabilize the

market for government securities, etc


15/32

A Tool used to influence Interest rates, Inflation andcredit availability through changes in supply ofmoney available in the economy .

Expansionary policy Expansionary policy increases the total supply of money in the

economy

used to combat unemployment in a recession by loweringinterest rates,

Contractionary policy contractionary policy contractionary policy decreases the total

money supply involves raising interest ratesin order to combat inflation increasing interest rates slows the economy by making funds

more expensive to firms, and promotes consumer savingswhich decreases revenues by firms.

MONETARY POLICY
http://en.wikipedia.org/wiki/Expansionary_monetary_policyhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Expansionary_monetary_policyhttp://en.wikipedia.org/wiki/Expansionary_monetary_policy


16/32

Bank rate Policy

The Bank raterefers to rate at which the centralbank (i.e RBI) rediscounts bills and prepares ofcommercial banks or provides advance tocommercial banks against approved securities.

The Bank Rateaffects the actual availability andthe cost of the credit.

Current Bank Rate is 9.00%.


17/32

Cash Reserve Ratio (CRR): The share ofnet demand and time liabilities that banks mustmaintain as cash balance with the Reserve Bank.

CRR is 4.75%

Statutory Liquidity Ratio (SLR): The

share of net demand and time liabilities that banksmust maintain in safe and liquid assets, such as,government securities and gold. SLR is 24%.

Lender Of Last Resort:


18/32

Qualitative InstrumentsFixing Margin Requirements

The margin refers to the "proportion of the loanamount which is not financed by the bank".

This method is used to encourage credit supply forthe needy sector and discourage it for other non-necessary sectors.


19/32

DEFINITIONS OF REPO ANDREVERSE REPO

Repo rate-

Repo is a collateralized lending i.e. the banks whichborrow money from Reserve Bank to meet short term

needs have to sell securities, usually bonds to ReserveBank with an agreement to repurchase the same at apredetermined rate and date.

Reserve bank charges some interest rate on the cashborrowed by banks. This interest rate is called repo rate.


20/32

Reverse repo rate-

In a reverse repo, Reserve Bank borrows money frombanks by lending securities. The interest paid by Reserve

Bank in this case is called reverse repo rate.

Banks park their short-term excess liquidity with the RBI.

The banks use this tool when they feel that they are stuckwith excess funds and are not able to invest anywhere forreasonable returns.


21/32

Repo rate 8%

Reverse repo rate 7%

The increase in Repo Rate and Reverse Repo Rate is asymbol of tightening of the policy


22/32

Effect of repo rate on rate of interest

As lending interest rateincreases, borrowing of money

decreases.

Banks unable to borrow at repo

rate

Increase in the deposit interest rate,to attract depositors

When REPO RATE increases

Banks lend from RBI at a higher

rates of interest

They lend it to the borrowers at ahigh rate of interest


23/32

.

. Short term effects of high lending interest rates-Companies(high debt)

Long term effects of high lending interest rates-

Automobile, Real estate and other capital intensive industries areaffected as investment decreases because of high interest rates.

Effect of high interest rates on borrowers-

When the interest rates are on a rise, the borrowers who had alreadyborrowed money have to pay more EMI (floating interest rates)

If interest rate continues to rise for a longer duration then it will have an allround negative impact on the economy, leading it into a recessionary mode

Profit & EPS dcrsesso M.P dcrses

pay high interest


24/32

.When REPO RATE is very low

Lending and deposit interestrates will be low

As a result deposits will be lessattractive

(consuming more, saving less)

Bank left with lessmoney to lend,

profitability reduces

Fall in investment in the

economy

Govt prints currency to infuse money

Leads to inflationary situation

And also FIIs Capital inflow

decreases


25/32

.FFII VS INFLATION

1$=50 rsinvestment of 1000$; which is 50,000rs.

After a year, he earned a profit of 13,000 rs.

Now he has a total of 63,000 rs.

But due to inflation, the Indian currency got depreciated, its now 1$=70rs.

So when he takes his money back, he would be getting only 900$.

A loss of 100$.


26/32

.

Lower rates are seen as an aid to economic growth, signal to boosteconomic growth.

Reason

Finance is accessible at less cost, helps people borrow money cheap to invest

Positive reactions in the equity market especially Automobile, Real Estateand other capital intensive industries


27/32

EFFECT OF REPO RATE ON INFLATION The way in which changes in the repo rate affect inflation and the rest of the

economy is known as the transmission mechanism.


28/32

Mechanism

CreditChannel

Interest RateChannel

ExchangeRate Channel


29/32

Credit Channel

If the interest rate rises, banks choose to decrease their

lending and instead buy bonds.

Companies find it more difficult to borrow money.

Companies that are either unable or unwilling to borrow

must cut back their activities, postpone investment and

so on, and this dampens activity in the economy.


30/32

Interest Rate Channel

The interest rate channel affects the demand for

goods and services.

Higher interest rates normally lead to a reduction inhousehold consumption.

Higher interest rates make it more attractive to

save. Consumption also falls because existing loans now

cost more in terms of interest payments.

It becomes more expensive for firms to finance

investment and curtail investment. If consumptionand investment fall, so does aggregate demand.


31/32

Exchange Rate Channel

The exchange rate is the price of a countrys currencyexpressed in terms of another countrys currency.

The exchange rate channel describes how monetary policyaffects the value of the currency.

Higher interest rates make Indian assets more attractivethan investments denominated in other currencies.

The result is a capital inflow and increased demand forRupees, which strengthens the exchange rate.


32/32

Effect of rise in rates on Forex

Rise in rates willresult in

appreciation incurrency.

will reduceimported inflationand curb demand.

Reserve Bank of India 1

Documents

Transcript of Reserve Bank of India 1