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Title: Reserve Bank of India : A Review

Reserve Bank of India : A Review

Reserve Bank of India

The Reserve Bank of India (RBI) is India s central bank that controls the issuance and delivery of the Indian rupee. RBI is the regulator for all banking in India. The RBI plays an important role in the Indian government s development strategy.

RBI regulates commercial banks and non-bank financial companies operating in India. It is a leader in the banking system and on the money market. It regulates the money supply and credit in the country. RBI carries out India s monetary policy and supervises and controls banks and non-bank financial companies in India. The RBI was founded in 1935 under the Reserve Bank of India Act 1934.

Until the establishment of the Monetary Policy Committee in 2016, he also controlled monetary policy in India. It began operating on April 1, 1935 in accordance with the Reserve Bank of India Act of 1934. The original share capital was fully paid in shares of 100 each. After India gained independence on August 15, 1947, the RBI was nationalized on January 1, 1949.

It is a member bank of the Asian Clearing Union. General supervision and management of the RBI is entrusted to the 21-member central board: the governor; four deputy governors; two representatives from the Ministry of Finance (usually the Economic Secretary and the Financial Services Secretary); ten government-appointed directors representing key elements of the Indian economy; and four directors representing local bodies based in Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local bodies consists of five members who represent regional interests, the interests of cooperative banks and indigenous banks.

The central bank is an independent Apex monetary authority that regulates banks and provides key financial services such as currency reserve storage, inflation control and monetary policy reporting through August 2016. A central bank is known under different names in different countries. The functions of a central bank can vary from country to country and are autonomous or corporate and fulfill or through another agency important money functions in the country. A central bank is a major financial spike in an economy, and the main objectives of central banks may vary from country to country, but they perform activities and functions designed to maintain economic stability and growth in an economy.

The bank also promotes financial inclusion policies and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to as "Mint Street". RBI is also known as a banker bank.


The Reserve Bank of India preamble describes the basic functions of the Reserve Bank as follows:

"regulate banknote issuance and hold reserves to ensure currency stability in India and generally operate the country s currency and credit system to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while taking into account the goal of growth. "


The Reserve Bank of India was established under the Reserve Bank of India Act of 1934. Although it was originally privately owned, it was nationalized in 1949 and has been wholly owned by the Indian government (GoI) since then.


The Reserve Bank of India was founded on April 1, 1935 to respond to economic problems after the First World War. The Reserve Bank of India was designed based on the guidelines submitted by the Central Legislative Assembly, which passed those guidelines as the RBI Act1934. The RBI was designed in accordance with the guidelines, work style and outlook that Dr. B. R. Ambedkar in his book "The Problem of the Rupee - Its Origin and Solution" and presented it to the Hilton Young Commission. The bank was founded on the recommendations of the Royal Commission on Indian Currency and Finance in 1926, also known as the Hilton-Young Commission. The original choice for the RBI seal was the East India Company Double Mohur with the sketch of the lion and the palm tree. However, it was decided to replace the lion with the tiger, the national animal of India. The RBI preamble describes its basic functions to regulate the issuance of banknotes, hold reserves, ensure currency stability in India and operate the currency and credit system in the country s best interests in general. The RBI central office was founded in Kolkata (now Kolkata), but moved to Bombay (now Mumbai) in 1937. The RBI also functioned as the central bank in Burma (now Myanmar) until April 1947 (except during the years of the Japanese occupation). 1942–45)), although Burma left the Indian Union in 1937. After the division of India in August 1947, the bank served as the central bank for Pakistan until June 1948, when the Pakistani state bank began operating. Although RBI was founded as a shareholder bank, it has been wholly owned by the Indian government since it was nationalized in 1949. The RBI has the monopoly of issuing notes.


In the 1950s, the Indian government, under its first prime minister, Jawaharlal Nehru, developed a centrally planned economic policy that focused on the agricultural sector. The administration nationalized commercial banks and established a central bank regulation as part of the RBI based on the 1949 Banking Act (later referred to as the Banking Regulation Act). The central bank was also instructed to support the economic plan with loans.


As a result of bank crashes, RBI was asked to set up and monitor a deposit guarantee scheme. To restore confidence in the national banking system, it was initialized on December 7, 1961. The Indian government set up funds to promote the economy and used the slogan "Developing Banking". The Indian government has restructured the national banking market and nationalized many institutions. As a result, RBI had to play the central role in controlling and supporting this public banking sector.


In 1969, the government led by Indira Gandhi nationalized 14 large commercial banks. Six more banks were nationalized after Indira Gandhi s return to power in 1980. Regulation of the economy, and especially the financial sector, was strengthened by the Indian government in the 1970s and 1980s. The central bank became a key player and significantly increased its policy for various tasks such as interest, reserve requirements and visible deposits. These measures aimed at better economic development and had an enormous impact on the corporate policies of the institutes. Banks lend money in selected sectors such as agriculture and small trading companies. The Banking Commission was established on Wednesday, January 29, 1969, to analyze banking costs, the effects of laws and banking procedures, including non-bank financial intermediaries and indigenous banks, on the Indian government s economy. with Mr. R.G. Saraiya as chairman.

The branch had to set up two new offices in the country for each newly established office in a city. The 1973 oil crisis led to rising inflation and the RBI restricted monetary policy to reduce the impact.


Many committees analyzed the Indian economy between 1985 and 1991. Their results affected RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India examined the national economy as a whole, and the Security and Exchange Board proposed better methods for more effective markets and protecting investor interests. The Indian financial market was a leading example of so-called "financial repression" (McKinnon and Shaw). The Discount and Finance House of India began operating in the money market in April 1988. The National Housing Bank, founded in July 1988, was forced to invest in the real estate market and a new finance law improved the versatility of direct deposits through more security measures and liberalization.


The economy shrank in July 1991 when the Indian rupee depreciated. The currency lost 18% of its value against the US dollar, and the Narsimham Committee recommended restructuring the financial sector through a time-restricted reserve ratio and legal liquidity. In 1993, new guidelines for setting up a private banking Sector released. This turning point was intended to strengthen the market and was often referred to as neoliberal. The central bank has deregulated banking interests and some sectors of the financial market such as the fiduciary and real estate markets. This first phase was a success and the central government forced diversity liberalization in 1998 to diversify ownership structures.

The National Stock Exchange of India started trading in June 1994, and the RBI allowed nationalized banks to interact with the capital market in July to strengthen their capital base. On February 3, 1995, the central bank founded a subsidiary - the Bharatiya Reserve Banknote Mudran Private Limited - for the production of banknotes.

Since 2000

The Foreign Exchange Management Act 1999 came into force in June 2000. It should improve the position in 2004-2005 (National Electronic Fund Transfer). The Security Printing & Minting Corporation of India Ltd., an association of nine institutions, was founded in 2006 and produces banknotes and coins. The growth rate of the economy declined to 5.8% in the last quarter of 2008-2009 and the central bank is promoting economic development.

In 2016, the Indian government amended the RBI law to set up the Monetary Policy Committee (MPC). This limited the role of the RBI in setting interest rates, as MPC membership is equally divided between members of the RBI (including the RBI governor) and government-appointed independent members. However, in the event of a tie, the RBI governor s vote is decisive.

 In April 2018, RBI announced that "RBI regulated companies should not treat or provide services to, or handle, any individual or company dealing with or processing virtual currencies", including Bitcoin. While the RBI later clarified that it "had not banned" virtual currencies, a three-judge panel of the Supreme Court of India issued a ruling on March 4, 2020, stating that the RBI "could not demonstrate at least an appearance of damage sustained by." its regulated companies "by using virtual currencies to justify its decision. The legal challenge was filed by the Internet and Mobile Association of India, which includes some cryptocurrency exchanges whose companies suffered under the 2018 RBI order.


The central board is the central bank s main committee. The Indian government appoints the directors for a four-year term. The board consists of one governor and no more than four deputy governors. four directors to represent the regional boards; two - usually the economic secretary and the financial services secretary - from the Ministry of Finance and ten other directors from different areas. The Reserve Bank - led by Raghuram Rajan - wanted to create a position as Chief Operating Officer (COO) in the rank of deputy governor and work between the five of them (four redistribute deputy governors and COO). The bank is headed by the governor, currently Shaktikanta Das. There are four deputy governors, B.P. Kanungo, N.S. Vishwanathan, Mahesh Kumar Jain and Michael Patra. Two of the four deputy governors traditionally come from RBI ranks and are selected by the bank s executive directors. One is nominated among the heads of public sector banks, the other is an economist. An Indian civil servant can also be appointed RBI s deputy governor and later RBI s governor, as in the case of Y. Venugopal Reddy and Duvvuri Subbarao. Other people on the central board of RBI are Dr. Nachiket Mor, Y. C. Deveshwar, Prof. Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Uma Shankar, Chief General Manager (CGM), responsible for the financial inclusion and development department of the Reserve Bank of India, has taken over the management (ED) of the central bank.

Sudha Balakrishnan, former vice president of National Securities Depository Limited, assumed responsibility as the Reserve Bank s CFO on May 15, 2018. She was given the rank of managing director.

Branches and Support Bodies

RBI has four regional offices: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations consist of five members who are appointed by the central government for four years and, on the advice of the central council, serve as a forum for regional banks and deal with delegated tasks of the central council. It has two training facilities for its officers, namely. Reserve Bank Staff College, Chennai and College of Agricultural Banking, Pune. There are three autonomous institutions operated by the RBI, namely the National Institute for Bank Management (NIBM), the Indira Gandhi Institute for Development Research (IGIDR) and the Institute for Development and Research in Banking Technology (IDRBT). There are also four zonal training centers in Mumbai, Chennai, Kolkata and New Delhi.

The Board of Financial Supervision (BFS) formed in November 1994 serves as a CCBD committee for the control of financial institutions. It has four members, who are appointed for two years, and takes measures to strengthen the role of auditors in the financial sector, in external monitoring and in internal control systems. The Tarapore Committee was set up by the Reserve Bank of India under the chairmanship of former RBI governor S. S. Tarapore to set the road map for convertibility of capital accounts. The five-member committee recommended a period of three years for full convertibility until 1999-2000.

On December 8, 2017, Surekha Marandi, Executive Director (ED) of the Reserve Bank of India, said RBI would open an office in northeastern Arunachal Pradesh


A country s central bank performs many functions, such as: These include monitoring monetary policy, issuing currencies, managing foreign exchange, working as a bank for the government, and as a banker for planned commercial banks. It also works for the country s overall economic growth. The Reserve Bank of India s preamble describes its main functions as follows:

.. regulate the issue of banknotes and the holding of reserves to ensure currency stability in India and to operate the country s currency and credit system in general to its advantage.

Financial Supervision

The main objective of RBI is the consolidated monitoring of the financial sector, which includes commercial banks, financial institutions and non-bank financial companies. The board of directors consists of the co-opting of four directors from the central board as members for a term of two years and is headed by the governor. The Reserve Bank s deputy governors are ex officio members. A deputy governor, usually the deputy governor responsible for banking regulation and supervision, is appointed deputy chairman of the board. The board usually has to meet once a month. It takes into account inspection reports and other regulatory issues submitted to it by the oversight departments.

The FSO through the audit subcommittee also aims to improve the quality of the functions of the statutory audit and internal audit in banks and financial institutions. The Audit Subcommittee includes the Deputy Governor as Chairman and two Directors of the Central Council as members. The FSO monitors the functioning of the Department of Banking Supervision (DBS), the Department of Non-Banking Supervision (DNBS) and the Department of Financial Institutions (FID) and provides instructions on regulatory and supervisory issues.

Financial Regulator and Regulator

The institute is also the regulatory and supervisory authority of the financial system and prescribes broad parameters of the banking business within which the country s banking and financial system operates. The aim is to maintain public trust in the system, to protect depositors  interests and to offer the public low-cost banking services. The Banking Ombudsman Scheme was formulated by the Reserve Bank of India (RBI) for the effective handling of complaints from bank customers. The RBI controls the money supply, monitors economic indicators such as gross domestic product and has to determine the design of the rupee banknotes and the coins.

Supervisory Authority and Supervisor of Payment and Processing Systems

Payment and settlement systems play an important role in improving overall economic efficiency. The Payment and Settlement Systems Act 2007 (PSS Act) gives the reserve bank the supervisory authority, including regulation and supervision, for which Payment and settlement systems in the country. In this role, RBI focuses on the development and functioning of secure and efficient payment and processing mechanisms. Two payment systems, National Electronic Fund Transfer (NEFT) and Real-Time Gross Settlement (RTGS), enable individuals, companies and businesses to transfer money from one bank to another. These facilities can only be used for money transfers within the country.

NEFT works on a DNS basis (Deferred Net Settlement) and processes transactions in batches. All transactions received are settled up to a certain cut-off time. It operates every hour - there are twelve settlements from 8 a.m. to 7 p.m. on weekdays and six from 8 a.m. to 1 p.m. on Saturdays.

 Any transaction initiated after the specified time must wait until the next settlement time. In RTGS, transactions are processed continuously throughout business hours. RBI s billing time is 9:00 AM to 4:30 PM on weekdays and 9:00 AM to 2:00 PM on Saturdays.

Banker and Debt Manager to the Government

Just as individuals need a bank to carry out their financial transactions effectively and efficiently, governments also need a bank to carry out their financial transactions. The RBI serves this purpose for the Indian government (GoI). As a banker to the Indian government, RBI maintains, receives payments to, and makes payments to, those accounts. RBI also helps the Indian government raise money from the public by issuing bonds and government-approved securities. In September 2019, the RBI Directors  meeting decided to change RBI s accounting year to March through April to align it with the central government s calendar from June through July instead of the current year.

Manage Foreign Exchange

The central bank has achieved several goals in the Foreign Exchange Management Act of 1999. Its goal is to facilitate foreign trade and payment, and to promote the proper development and maintenance of the foreign exchange market in India.

With the increasing integration of the Indian economy into the world economy due to larger trade and capital flows, the foreign exchange market has become a key segment of the Indian financial market, and RBI plays an important role in regulating and managing this segment. The RBI manages the nation s foreign exchange and gold reserves.

On a given day, the exchange rate reflects the demand for and the supply of foreign exchange resulting from trading and capital transactions. RBI s financial market division (FMD) participates in the foreign exchange market by making foreign currency sales / purchases to reduce volatility in times of excessive demand / supply of foreign currencies.

Output The Currency

In addition to the Indian government, the Reserve Bank of India is the only agency authorized to issue banknotes in India. The bank also destroys banknotes if they are not suitable for circulation. All money spent by the central bank is their monetary liability, i.e. H. The central bank is required to hedge the currency with equivalent assets to strengthen public confidence in the paper currency. The aim is to issue banknotes and provide the public with adequate supplies, to maintain the country s currency and credit system in order to make the best use of it, and to preserve the reserves.

RBI maintains the country s economic structure so that it can achieve the goal of price stability and economic development, since the two goals are different in themselves.

The RBI uses four functions to print notes:

India Limited s Security Printing and Minting Corporation (SPMCIL), a wholly owned company of the Indian government, has printing presses in Nashik, Maharashtra and Dewas, Madhya Pradesh.

• The Bharatiya Reserve Banknote Mudran Private Limited (BRBNMPL), owned by RBI, has printing facilities in Mysore, Karnataka and Salboni, West Bengal.

For coin minting, SPMCIL has four mints in Mumbai, Noida, Kolkata and Hyderabad for coin production.

While coins are minted by and INR1 banknotes are issued by the Indian government (GoI), RBI works as an agent of GoI for the distribution and handling of coins. The RBI is also working to prevent counterfeiting by regularly updating the currency s security features.

RBI is authorized to issue banknotes with a face value of up to INR 10,000 and coins of up to INR 1,000 rupees.

On November 8, 2016, new INR500 and INR2,000 banknotes were issued. The old series of INR1,000 and INR500 banknotes was demonstrated on November 8, 2016 from midnight.

Earlier INR1,000 banknotes were discarded by the RBI.

Banker Bank

The Reserve Bank of India also acts as a central bank where commercial banks are account holders and can deposit money. RBI maintains bank accounts of all planned banks. Commercial banks create loans. It is RBI s duty to control the credit through the CRR, repo rate and open market operations. As the banker s bank, RBI makes it easier to cash checks between commercial banks and helps transfer funds between banks. It can provide financial accommodation. Schedule banks. It acts as a lender of last resort by granting emergency advances to banks.

Banking System Regulator

The RBI is responsible for regulating the nation s financial system. As the regulatory and supervisory authority of the Indian banking system, it ensures financial stability and public confidence in the banking system. RBI uses methods such as on-site inspections, off-site surveillance, controls and regular meetings to monitor new banking licenses, set capital requirements and regulate interest rates in specific areas. RBI is currently concentrating on the implementation of standards.

Counterfeit Currency Detection

To curb the problem of counterfeit money in India, RBI has launched a website to raise awareness among the masses of counterfeit banknotes on the market. provides information to identify counterfeit currencies.

On January 22, 2014; RBI announced in a press release that after March 31, 2014 it will completely withdraw all banknotes issued before 2005. From April 1, 2014, the public will have to contact the banks to exchange these banknotes. The banks will exchange these banknotes until further communication. The reserve bank has also clarified that the bonds issued before 2005 continue to be legal tender. This would mean that banks have to exchange banknotes for both their customers and non-customers. However, as of July 1, 2014, in order to exchange more than 15 pieces of 500 and 1000 banknotes, non-customers must provide proof of identity and residence and Aadhar to the bank branch where they wish to exchange.

This move from the reserve bank is expected to reveal black money held in cash. As the new banknotes expanded security features, they would help mitigate the threat of counterfeit currencies.


Development Role

The central bank must perform a wide range of advertising functions to support national goals and industries. The RBI faces many cross-sectoral and local inflation problems. Some of these problems are due to the dominant part of the public sector.

Key instruments in these efforts include senior sector loans such as agriculture, micro and small business (MSE), housing and education. RBI works to strengthen and support small local banks and encourages banks to open branches in rural areas in order to involve a large part of society in the banking network.

Related Functions

The RBI is also a government banker and acts as a merchant banking function for the central government and the state government. It also acts as your banker. The National Housing Bank (NHB) was founded in 1988 to promote the acquisition of private real estate. The institute also maintains bank accounts of all scheduled banks. The RBI said on August 7, 2012 that that Indian banking system is robust enough to deal with the stress caused by the drought-like situation due to the bad monsoons this year. [71]

Custodian to Foreign Exchange

The reserve bank holds the country s international currency reserves, and this enables the reserve bank to deal with the crisis associated with an unfavorable balance of payments.

Demonstration 2016

 On November 8, 2016, the Indian government, on the recommendation of the Reserve Bank of India (RBI), announced the demonstration of all INR500 and INR1,000 banknotes of the Mahatma Gandhi series. The government claimed the action would limit the underground economy and curb the use of illegal and counterfeit cash to fund illegal activities and terrorism.

The Reserve Bank of India established a detailed procedure for exchanging the demonized banknotes for new INR500 and INR2,000 banknotes from the Mahatma Gandhi New Series and INR100 banknotes from the previous Mahatma Gandhi Series. The main points were:

Long line in front of the SBI ATM in Paravur near the city of Kollam in Kerala, November 19, 2016.

• Citizens had until December 30, 2016 to submit their old banknotes in an RBI office or bank branch and to credit the value to their respective bank accounts.

• Cash withdrawals from bank accounts were limited to INR 10,000 (USD 140) per day and INR 20,000 (USD 280) per week and account from November 10-13, 2016. This limit has been increased to INR 24,000 (USD 340) per day week after November 14th. For immediate cash needs, the old banknotes could be exchanged for the new banknotes INR500 and INR2.000 as well as INR100 via the counter of the bank branches by filling out a request form together with a valid ID. It has been announced that this facility will be available through December 30, 2016.

o Originally, the limit was set at INR 4,000 (USD 56) per person from November 8-13, 2016.

o This limit was increased to INR 4,500 (US $ 63) per person from November 14th to 17th, 2016.

o As of November 18, 2016, the limit was reduced to INR 2,000 (USD 28) per person.

o The entire exchange of banknotes was abruptly stopped on November 25, 2016. [

Initially, all ATMs issued banknotes with a face value of only INR 50 and INR 100, and ATM cash withdrawals were limited to INR 2,000 (USD 28) per day. As of November 14, ATMs have been recalibrated to issue new INR500 and INR2,000 banknotes and to allow a maximum payout of INR2,500 (US $ 35) per day during other ATMs that issue banknotes with only INR50 and INR100 denominations allow a maximum payout of INR2,000 (US $ 28) per day.

 However, exemptions have been granted to petrol, CNG, and gas stations, government hospitals, railroad and airline booking counters, government-recognized dairies and grocery stores, and crematoriums to retire the old INR 500 and INR 1,000 banknotes by November 11, 2016 Accept later extended until November 14, 2016 and again until November 24, 2016. International airports have also been instructed to facilitate the exchange of banknotes totaling INR 5,000 (USD 70) for foreign tourists and outgoing passengers.

According to the revised November 17, 2016 guidelines, families were allowed to withdraw INR 250,000 ($ 3,500) for wedding expenses from an account if it was KYC compliant. The rules have also been changed for farmers who are allowed to withdraw INR 25,000 ($ 350) per week from their accounts against harvest loans.

Cash Crunch and Effects

People stand in front of a private bank to deposit and exchange old banknotes of 500 INR and 1000 INR on November 10, 2016 in Kolkata.

The shortage of money due to demonization created chaos, and most of the people who had old banknotes in hand had difficulty exchanging them because there were endless queues outside banks and ATMs across India, which is what millions of people do Waiting to deposit or exchange the INR500 and INR1, 000 banknotes has become a daily routine since November 9th. ATMs ran out of cash after a few hours of operation, and around half of the country s ATMs were inoperable. Sporadic violence has been reported in New Delhi, but there have been no reports of serious injuries, people attacking bank buildings and ATMs, and a grocery store has been ransacked in Madhya Pradesh after the shopkeeper refused to accept INR500 banknotes.


Reverse Repo Rate (RRR)

As the name suggests, the reverse repo set is exactly the opposite of the repo set. The reverse repo rate is the short-term lending rate at which RBI borrows money from banks. The reserve bank uses this tool if it has the impression that too much money is flowing in the banking system. An increase in the reverse repo rate means that the banks receive a higher interest rate from the RBI. As a result, banks prefer to lend their money to RBI, which is always safe, rather than lending it to others (people, companies, etc.), which is always risky.

The repo rate is the rate at which the RBI injects liquidity into the banking system, while the reverse repo rate is the rate at which the central bank draws liquidity from the banks. The reverse repo rate is currently set at 0.25% (or 25 bps) below the repo rate.

Statutory Liquidity Ratio (SLR)

Except for the CRR, banks must hold cash, gold, cash, and approved securities. A higher liquidity ratio forces commercial banks to keep more of their resources in liquid form, reducing their ability to grant loans and advances. This affects inflation. A higher liquidity ratio distracts bank funds from loans and advances on investments in government and approved securities.

In well-developed economies, central banks use open market operations - buying and selling allowable securities by the central bank on the money market - to influence the volume of cash reserves at commercial banks and thus the volume of loans and advances they can grant to the commercial and industrial sectors. Government bonds are traded on the open money market at market-related interest rates. In recent years, RBI has increasingly resorted to open market business. Generally the RBI uses

1. Minimum margins for lending to certain securities.

2. A cap on loan amounts for certain purposes.

3. The discriminatory interest rate for certain types of advances.

There are three types of direct credit control in India:

1. Part of the interest structure, d. H. On small savings and pension funds, is determined administratively.

2. Banks are obliged to hold 19.50% of their NDTL (net demand and time liabilities) in the form of liquid funds.

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

The percentage of net demand and time liabilities that banks must hold in safe and liquid assets such as government bonds, cash and gold. The July 2014 gold swap should be mentioned here. The current SLR camera is 18.75%.

Bank Rate

The bank rate is defined in section 49 of the RBI Act of 1934 as the "default rate at which RBI is willing to buy or discount bills of exchange or other commercial paper". If banks want to borrow long-term funds from the RBI, this is the interest rate that the RBI charges them. It is currently set at 5.40%. The bank interest rate is not used to control the money supply, but the penalty interest rates are still linked to the bank interest rate. If a bank does not meet the SLR or CRR requirements, the RBI imposes a penalty of 300 basis points above the bank interest rate.

 Liquidity Adjustment Facility (LAF)

 The liquidity adjustment facility was introduced in 2000. LAF is a Reserve Bank of India facility for planned commercial banks to use liquidity when needed or to park excess funds with RBI overnight against collateral from government securities.

RBI accepts applications for a minimum of INR5 crore ($ 700,000) and then in multiples of INR5 crore.

Cash Reserve Ratio (CRR)

CRR refers to the ratio of the bank s cash reserves to RBI in relation to net demand and the bank s time commitments to ensure the planned banks  liquidity and solvency. The proportion of net demand and time liabilities that banks have to hold at RBI as cash. The RBI has set the CRR at 4%. A 1% change in CRR affects the economy by 1,000,000 crore ($ 140 billion). An increase pulls this amount out of the economy, while a decrease brings this amount into the economy. If a bank has INR 200 billion (USD 28 million) in NDTL, it must hold INR 8 billion (USD 1.1 million) in cash with RBI. The RBI does not pay interest on CRR.

Let us assume that the economy shows inflation trends and the RBI wants to control this situation by adjusting the SLR and CRR. If the RBI increases the SLR to 50% and the CRR to 20%, the bank has only INR 60 crore (USD 8.4 million) left to operate. Now it will be very difficult for the bank to maintain profitability with so little capital. The bank has no choice but to raise its interest rate, which increases the cost of borrowing from its customers. This in turn will reduce overall demand and therefore prices will ultimately decrease.

Open Market Business (OMO)

Open market operation is the activity of buying and selling government bonds on the open market to control money supply in the banking system. When there is an oversupply of money, the central bank sells government bonds, which uses up excess liquidity. Similarly, if liquidity is scarce, RBI will buy government bonds and thus give the economy money.


Marginal Standing Facility (MSF)

This system was introduced in May 2011 and all planned commercial banks can participate in this program. Banks can borrow up to 2.5% of their respective net needs and time liabilities. Under this facility, the RBI receives an application for a minimum amount of Rs. 1 crore and in multiples of Rs. 1 crore thereafter.

The important difference to the repo rate is that the bank can pledge government bonds from its SLR ratio (up to one percent). Even if the SLR falls below 20.5% due to the pledging of SLR quotas under MSF, the bank does not have to pay a penalty. The MSF rate is 100 basis points above the bank rate and is currently 5.65% on August 7, 2019.

Qualitative Tools Margin Requirements

Loan-to-value (LTV) is the ratio of the loan amount to the actual value of the asset acquired.

The RBI regulates this ratio to control the amount a bank can lend to its customers. For example, a person would like to buy a car with borrowed money and the value of the car is INR 10 lakh (US $ 14,000). If the LTV is set at 70%, it can borrow a maximum of INR7 lakh (US $ 9,800).

The RBI can decrease or increase to curb inflation or deflation.

Selective Credit Control

As part of this measure, RBI can explicitly instruct banks to deal with certain goods, e.g. Sugar, cooking oil, etc.

This prevents speculation / hoarding of goods with money borrowed from banks.

Moral persuasion

As part of this measure, the RBI tries to convince banks through meetings, conferences and media statements to do certain things under certain economic trends. If the RBI lowers the repo rate, for example, it asks the banks to cut their key interest rate as well. Another example of this measure is to ask banks to reduce their non-performing assets.

Monetary Policy Restrictions

In developing countries like India, monetary policy shows no immediate or no results for the following reasons:

1. People don t use alternative investment opportunities. Much of society still relies on savings accounts, time deposits and public pension funds for investments. Commercial banks have large deposits. The RBI is not the main or even prominent money supplier for these banks. Regardless of which monetary measures the central bank takes, this has little or late impact on the economy.

2. Many people in rural areas have no banking network, and whatever RBI does has no impact on their financial activities.

3. The uncertainty of the monsoon affects food production and thus leads to food inflation. Monetary policy has no impact on food inflation.

Fee Removal for RTGS and NEFT Transactions

RBI has decided to cut fees for RTGS (Real Time Gross Settlement System) and NEFT (National Electronic Funds Transfer).

Regulation of Variable Remuneration for Bank Management

In November, RBI presented a series of draft guidelines to regulate the variable remuneration of CEOs and top management at private banks. The new rules are in line with the solid remuneration practices issued by the Financial Stability Board in April 2009. The rules apply to CEOs, holistic directors and key risk takers at private banks, small financial banks and domestic managers of foreign banks. According to the new rules, at least 50% of the remuneration should be based on an individual, uniform, business and company-wide performance assessment, which is limited to 300% of the fixed remuneration. For variable remuneration over 200%, at least 50% of this amount should be made using non-cash instruments. Share-linked instruments are part of the variable remuneration. The guaranteed bonus should not be part of the compensation package, except in the case of an entry bonus. The RBI has also introduced clauses on recovery / abuse in the event of a deterioration in performance. The bank must establish a representative set of conditions under which the recovery / abuse recovery clause can be enforced.


A report entitled "Trend and Progress in Banking in India" is published annually as required by the Banking Regulation Act of 1949. The report summarizes trends and developments across the state s financial sector. From April 2014, the Reserve Bank of India will publish bimonthly policy updates.

  • 08/04/2020
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Paridhi IT Service Private Limited, formerly known as Let’s Go Enterprise, started in the last of year 2016, with Brand Name “Let’s Go”. Now Paridhi IT Service Private Limited starting its Local Search Engine and Online Business Web Directory providing comprehensive information on Business & Business websites worldwide. Serving as an online platform for Business owners and online consumers. Lists Business & Business websites under popular categories and relevant sub categories for easy navigation. Each and every Business & Business websites is manually reviewed and most of the sites are handpicked by our experienced editors to make the business directory more useful and resourceful to general internet users.