Role Of RBI In Economic And Social

Development

A Project submitted to

University of Mumbai for partial completion of the degree of

Master in Commerce

Under the Faculty of commerce

By

Ms. Priya Ramesh Mishra

M.COM Part II (Accountancy)
Semester III

Roll no. – 47

Under the Guidance of

Prof. YOGITA MAHIMKAR

RAJASTHANI SAMMELAN’S

Ghanshyamdas Saraf College

Of Arts & Commerce

Affiliated to University of Mumbai

Reaccrediated by NAAC With ‘A’ Grade

S.V.Road, Malad (West), Mumbai-400064.

Academic Year- 2019-20

 Role Of RBI In Economic And Social
Development

A Project submitted to

University of Mumbai for partial completion of the degree of

Master in Commerce

Under the Faculty of commerce

By

Ms. Priya Ramesh Mishra

M.COM Part II (Accountancy)
Semester III

Roll no. – 47

Under the Guidance of

Prof. YOGITA MAHIMKAR

RAJASTHANI SAMMELAN’S

Ghanshyamdas Saraf College

Of Arts & Commerce

Affiliated to University of Mumbai

Reaccrediated by NAAC With ‘A’ Grade

S.V.Road, Malad (West), Mumbai-400064.

Academic Year- 2019-20

 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Dr. Jayant Apte for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Prof. Lipi Mukharjee for her moral
support and guidance.

I would also like to express my sincere gratitude towards my Project Guide Prof.
Yogita Mahimkar Whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
in the completion of the project especially My Parents and Peers who supported me
throughout my project.
 RAJSTHANI SAMMELAN’S
GHANSHYAMDAS SARAF COLLEGE OF ARTSANDCOMMERCE
S.V. Road, Malad(West), Mumbai-400064

Reaccredited by NAAC with “A” Grade

Affiliated to University of Mumbai

CERTIFICATE

This is to certify that Miss. PRIYA RAMESHCHANDRA

MISHRA, Roll No. 48 and Seat No. has worked and duly
completed her Project Work for the degree of Master in Commerce in
Semester III under the Faculty of Commerce in the subject Advanced
Accountancy and her project is entitled, “ROLE OF RBI IN ECONOMIC &
SOCIAL DEVELOPMENT” under my supervision for the Academic year 2019-
2020.
I further certify that the entire work has been done by the the learner umder my
guidance and that no part of it has been submitted previously for any Degree or Diploma
of the any University.
It is her own work and facts reported by her personal findings and investigations.

Project Guide: Principal:

Date:

External Examiner: College Seal:

Date:
 DECLARATION BY LEARNER

I the undersigned Miss. Priya Ramesh Mishra here by,declare that the work
embodied in this project work titled “Role of RBI In Economic And Social
Development”, forms my own contribution to the research work carried out under the
guidance of Prof.Yogita Mahimkar is result of my own research work and has not
been previously submitted to any other University for any other Degree/ Diploma to this
or any other University.

Wherever reference has been made to previuos works of others, it has been clearly
indicated as such and included in the bibiliography.

I here by further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by
Name and Signature of the Guiding Teacher
 EXECUTIVE SUMMARY

RBI is regulator for financial and banking system, and formulates monetary policy and
prescribes exchange control norms. The Banking Regulations Act, 1949 and the Reserve
Bank of India Act, 1934 authorize the RBI to regulate the Banking sector in India. Bank
is a financial institution and a financial intermediary that accepts and deposits and
channels those deposits into lending activities, either directly or through capital market. A
bank connects customers that have capital deficits to customers with capital surpluses.

The Indian Economy is driven by strong fundamentals with GDP growth 9.1% for HI
FY07- strongest growth in any six months since HI FY04 and updated in industrial cycles
with Average index of industrial production growth at 10.2%being the strongest run in
the past 11 years.

The banking system in India is one of the most rapidly growing areas in the financial
sector. bank with an efficient credit appraisal and loan recovery system will be able to
survive in this highly competitive industry such bank are good management control and
also inherent strengths in terms of highly motivated staff, which are further enhanced by
a regulatory and supervisory system.

Credit is the core activity of the banks & important source of their earning which go to
pay interest to depositors, salaries to employees & dividend to shareholders. Bank’s main
function is to lend funds/provide finance but it appears that norms are taken as guidelines
not as as a decision making banker’s task is to identify/assess the risk factors/parameters
& manage/ mitigate them on continuous basis.
 INDEX

Chapter Title Of Chapter Page

No No
1 Introduction 1-4
1.1 Objective And Methodology 2

1.2 Scope of Study 3

1.3 Limitations of Study 3-4

2 Review Of Literature 5-7

3 Role Of RBI In Economic And Social 8-63
Development
3.1 Preamble 8
3.2 History 8-11
3.3 Structure 12-13
3.4 Branch and support bodies 13-14
3.5 Function 14-21
3.6 2016 Demonetization 22-24
3.7 Policy Rates and Reserve Ratio 25-39
3.8 Qualitative Tools 30
3.9 Limitations of Financial Sector in India 30-31

3.10 Growth Of Financial Sector In India 31-33

3.11 Role of Finance of Banks in Economic 34-37

Development
3.12 The Increasing Importance of The RBI 38-40

3.13 Importance of Economic Growth 41

3.14 Why Economic Growth is Important 42-43
3.15 Virtuous Cycle of Economic Growth 44-45
3.16 RBI’s Responsibilities Towards Social 46-47
Development
 3.17 Development Promotional Function Of RBI 47-48

3.18 Supervisory Function of RBI 56

3.19 Financial Markets Regulation Department 50-54

3.20 Financial Market Operations Departments 54-58

3.21 Foreign Exchange Department 58-63

4 Data Analysis And Interpretation 64-71

5 Suggestions And Recommendation 72-76

5.1 Conclusion 74-76

5.2 Bibliography

5.3 Appendix
 1. INTRODUCTION

The Reserve Bank of India (RBI) is India's central banking institution, which
controls the issuance and supply of the Indian rupee. Until the Monetary Policy
Committee was established in 2016, it also controlled monetary policy in India. It
commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India
Act, 1934. The original share capital was divided into shares of 100 each fully paid,
which were initially owned entirely by private shareholders. Following India's
independence on 15 August 1947, the RBI was nationalized on 1 January 1949.

The RBI plays an important part in the Development Strategy of the Government of
India. It is a member bank of the Asian Clearing Union. The general superintendence and
direction of the RBI is entrusted with the 21-member central board of directors:
the governor; four deputy governors; two finance ministry representatives (usually
the Economic Affairs Secretary and the Financial Services Secretary); ten government-
nominated directors to represent important elements of India's economy; and four
directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the
capital New Delhi. Each of these local boards consists of five members who represent
regional interests, the interests of co-operative and indigenous banks.

The central bank was an independent apex monetary authority which regulates
banks and provides important financial services like storing of foreign exchange reserves,
control of inflation, and monetary policy report till August 2016. A central bank is known
by different names in different countries. The functions of a central bank may vary from
country to country and are autonomous or body and perform or through another agency
vital monetary functions in the country. A central bank is a vital financial apex institution
of an economy and the key objects of central banks may differ from country to country
still they perform activities and functions with the goal of maintaining economic stability
and growth of an economy.

1
 The bank is also active in promoting financial inclusion policy and is a leading
member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the
name 'Mint Street'. RBI is also known as banker's bank.

 Objectives and Research Methodology

 Objectives of study:

1. To explore the evolution of Reserve Bank of India (RBI).

2. To analyze the role and functions of RBI.
3. To assess the Monetary Control Methods of RBI.

 Research Methodology

It is always important to be critical of the information presented in sources, especially

since the material might have been gathered to address a different International Journal of
Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1
(2017), Research India Publications http://www.ripublication.com 47 problem area.
Moreover, many secondary sources do not clearly describe issues such as the purpose of
a study, how the data has been gathered, analyzed and interpreted making it difficult for
the researcher to assess their usefulness. In order to address this problem I have tried to
triangulate the secondary data by using numerous independent sources.

The information about the problem is collected from the Research Journals, Trade
Magazines, Annual Reports of Banks and the Internet. For evaluating „Role, Functions
and Monetary Control Methods of RBI ‟, we have focused on as recent material as
possible. In order to get access to the latest developments in this area we have used a
number of article s published in academic journals and trade magazines. We have also
used secondary information from Internet based discussion forums.

2
 Scope of the study:-

1) This study is limited to the consumers with in Mumbai city. The study will able to
reveal the preference, needs, and satisfaction of the customers regarding the banking
services.

2) It also help bank to know whether the existing product or services they are offering are
really satisfying the customer needs.

 Limitation of the study:-

Due to constraints of time and resources the study is likely to suffer from certain
Limitation.

The limitations of the study are –

1) The research were carried out in short period of time. Therefore the sample size were
selected accordingly so as to finish the work is given time frame.

2) The information given by the respondent might be biased because some of them might
not be interested in providing correct information.

3) Some of the respondent of the survey were unwilling to share information.

 Collection of primary data

The primary data has been collected from various source which are as follow:-

 Questionnaire method
 Survey method
 Collection of secondary data:-

The secondary data has been collected from various source which are as follow:-

 Various books related to banking system in India.

 Website
 Data collection :-

3
 During my data collection, data was collected from:-

 Bank customer

Sample size:-100

4
 2. Review of Literature

Banking is a prime mover in the economic development of a nation and research is so

essential to improve its working results. The management without any right policy is like
"building a house on sand". It means an effective management always needs a thorough
and continuous search into the nature of the reasons for, and the consequences of
organization. In line with this, some related earlier studies conducted by individuals and
institutions are reviewed to have an in-depth insight into the problem and exploring the
reformation of banking policy. The main theme and essence of few relevant studies are
presented below.

Domar and Tinbergen (1946) measured the profitability of banks for the economic
development purpose and settled the theoretical framework in expanded form which was
first introduced by Jorgenson and Nishimizudin for international economic growth
comparison and development.

Sharma (1974) said, "The expansion of banking facilities was uneven and lopsided and
banks were concentrating their operations in metropolitan cities and towns. A fairly large
number of rural and semi urban center with reasonable potentialities of growth failed to
attract the attention of commercial banks. As far as the deposit mobilization in the rural
areas is concerned, much remains to be done.” This gives emphasis on the rural and semi
urban growth of banks.

Gopal Karkal (1977) said, "Some regions have done well in spreading the banking
facilities, while some regions have still very backward. Further, our clients are larger
merchants and big industrialists. They approach with their demand for larger loans and
advances, and in return give large business. If we transfer our limited resources to small
industry, agriculture etc., how can we increase our deposits, advances etc., and how can
we survive." As it give emphasis on a policy of planned and systematic branch expansion
laying stress not only on opening branches in the underdeveloped and neglected areas but
also in the providing additional banking facilities to the growing metropolitan and urban

5
areas to cope with the ever-increasing requirements of trade, industry and commerce is
more desirous.

Raghupathy (1977) gave his view on the system of banking sector that "if the objectives
are not fully achieved, the fault does not lie entirely with the bankers. The fault lies in
our, not being able to integrate all powerful instruments of development into an effective
system".

Shah (1977) gave his view regarding bank profitability and productivity. He has
expressed concern about increased expenses and overheads. Slow growth in productivity
and efficiency is due to wasteful work of the banks. He concludes that the higher
profitability can be result from increased spread and innovations have a limited role. He
favored written job descriptions for improvement of staff productivity.

He also emphasized reduction of costs, creation of a team spirit improvement in the

management for improving bank profitability and productivity.

V.N. Saxena (1978) analyses that "Improvement in the systems and procedures of
inspection of stocks, maintenance of stock register is required. Reforms should be
initiated in extension of sponsorship schemes, recovery, and consultancy". This can be
supporting tools for banks.

Desai (1978) conducted a study entitled "Measuring Staff Productivity in Bank - A New
Approach" in 1981, covering a regional office of a premier bank having 155 branches in
the region. Primary objective of the study was to detect and correct staffing Imbalances.
The study emphasized on providing for the management of productivity related staff
development technique. He followed it up with another study of Patna Circle of the bank
having 607 branches, in 1982. The main objective again was to provide management with
the productivity based technique for rational manpower development. It identified 'Labor-
intensive and less Labor-Intensive' banking sector and identified pockets of staffing
imbalances. He felt that a services industry like banking with wide variations in work
mix, a universally applicable and fully scientific formula is difficult to involve in any
area of management.

6
Divatia and Venkatachalam (1978) in their study of operational efficiency and
performance. They recognized the problems in creating such a composite index, some of
which will be due to understanding of the term: operational efficiency. This study divided
the chosen indicators into operational efficiency in terms of productivity, operational
efficiency in terms of social objectives, and profitability. The approach was taking to the
approach profitability of banks proposed to create a composite index that would explore
certain indicators that would suitably represent varied aspects of banks of PEP
Committee.

Kulkarni (1979) examined his study on developmental responsibility and profitability of

banks stated that while considering banks costs and profits-social benefits arising out of
bank operations cannot be ignored. He claimed that profit maximization approach is out
of place while referring to profitability of banks. He recognized that while fulfilling the
social responsibility, banks should try to make the developing business as successful as
possible, to reduce costs, improve banking system and increase the overall productivity.

Venkatachalam (1979 give the reasons for erosion in bank profits and profitability in
recent years. This study is purely based on published figures. They argued that there is a
trade-off between social obligations to be performed by the banks and increasing profits.

Mumupilly (1980) examined the cost and profitability of commercial banks in India. The
study provides an analytical view of the trends in the components of cost of earnings of
different groups of Indians commercial banks since nationalization. The study mainly
focuses on the cost and profitability of banking industry as whole rather than individual
banks.

K.S. Krishnaswamy (1980) Chairman of the Working Group appointed by Reserve

Bank of India in his report on the 'Role of Banks in Priority Sector Lending and the 20-
Point Economic Programme' has suggested modifications in the definition of priority
sector lending. It also recommended that the private 11 Chapter 1 Introduction sector
commercial banks should actively participate in extending assistance under the priority
sector and the 20-Point Economic Programme.

7
 3. Role of RBI Economic and Social Development

 Preamble

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

“to regulate the issue of Bank notes and 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; to have a modern monetary policy framework to meet the
challenge of an increasingly complex economy, to maintain price stability while keeping
in mind the objective of growth.”

 History
The Reserve Bank of India was established following the Reserve Bank of India Act of
1934. Though privately owned initially, it was nationalized in 1949 and since then fully
owned by Government of India (GoI).

1935–1949

8
The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles
after the First World War. The Reserve Bank of India was conceptualized based on the
guidelines presented by the Central Legislative Assembly which passed these guidelines
as the RBI Act 1934.[15] RBI was conceptualized as per the guidelines, working style and
outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee –
Its origin and its solution” and presented to the Hilton Young Commission. The bank was
set up based on the recommendations of the 1926 Royal Commission on Indian Currency
and Finance, also known as the Hilton–Young Commission.[16] The original choice for
the seal of RBI was the East India Company Double Mohur, with the sketch of the Lion
and Palm Tree. However, it was decided to replace the lion with the tiger, the national
animal of India. The Preamble of the RBI describes its basic functions to regulate the
issue of bank notes, keep reserves to secure monetary stability in India, and generally to
operate the currency and credit system in the best interests of the country. The Central
Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay
(now Mumbai) in 1937. The RBI also acted as Burma's (now Myanmar) central bank
until April 1947 (except during the years of Japanese occupation (1942–45)), even hough
Burma seceded from the Indian Union in 1937. After the Partition of India in August
1947, the bank served as the central bank for Pakistan until June 1948 when the State
Bank of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI
has been fully owned by the Government of India since its nationalization in
1949.[17] RBI has monopoly of note issue.

1961–1968

As a result of bank crashes, the RBI was requested to establish and monitor a deposit
insurance system. Meant to restore the trust in the national bank system, it 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 in controlling and supporting this public banking sector.

9
1969–1985

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

Upon Indira Gandhi's return to power in 1980, a further six banks were nationalized. 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 a lot for various tasks like interests, reserve ratio and visible
deposits. These measures aimed at better economic development and had a huge effect on
the company policy of the institutes. The banks lent money in selected sectors, like
agricultural business and small trade companies. The Banking Commission was
established on Wednesday, 29 January 1969, to analyze banking costs, effects of
legislations and banking procedures, including non-banking financial intermediaries and
indigenous banking on Government of India economy; with Mr. R.G. Saraiya as the
chairman.

The branch was forced to establish two new offices in the country for every newly
established office in a town. The oil crises in 1973 resulted in increasing inflation, and
the RBI restricted monetary policy to reduce the effects.

1985–1990

A lot of committees analyzed the Indian economy between 1985 and 1991. Their results
had an effect on the RBI. The Board for Industrial and Financial Reconstruction,
the Indira Gandhi Institute of Development Research and the Security & Exchange Board
of India investigated the national economy as a whole, and the security and exchange
board proposed better methods for more effective markets and the protection of investor
interests. The Indian financial market was a leading example for so-called "financial
repression" (McKinnon and Shaw). The Discount and Finance House of India began its
operations in 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 liberalization.

10
1991–1999

The national economy contracted in July 1991 as the Indian rupee was devalued. The
currency lost 18% of its value relative to the US dollar, and the Narsimham
Committee advised restructuring the financial sector by a temporal reduced reserve ratio
as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish
a private banking sector. This turning point was meant to reinforce the market and was
often called neo-liberal. The 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.

The National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalized banks in July to interact with the capital market to reinforce their
capital base. The central bank founded a subsidiary company—the Bharatiya Reserve
Bank Note Mudran Private Limited—on 3 February 1995 to produce banknotes.

Since 2000

The Foreign Exchange Management Act, 1999 came into force in June 2000. It should
improve the item 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.

In 2016, the Government of India amended the RBI Act to establish the Monetary Policy
Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the
MPC membership is evenly divided between members of the RBI (including the RBI
governor) and independent members appointed by the government. However, in the event
of a tie, the vote of the RBI governor is decisive.

11
 Structure

RBI runs a monetary museum in Mumbai

The central board of directors is the main committee of the central bank. The
Government of India appoints the directors for a four-year term. The board consists of a
governor, and not more than four deputy governors; four directors to represent the
regional boards; two — usually the Economic Affairs Secretary and the Financial
Services Secretary — from the Ministry of Finance and ten other directors from various
fields. The Reserve Bank — under Raghu ram Rajan's governorship — wanted to create a
post of a chief operating officer (COO), in the rank of deputy governor and wanted to re-
allocate work between the five of them (four deputy governor and COO).

The bank is headed by the governor, currently Shaktikanta Das. There are four deputy
governors BP Kanungo, N. S. Vishwanathan, and Mahesh Kumar Jain. Currently there
are 3 deputy governors. Viral Acharya resigned from the post in July.

Two of the four deputy governors are traditionally from RBI ranks and are selected from
the bank's executive directors. One is nominated from among the chairpersons of public
sector banks and the other is an economist. An Indian Administrative Service officer can
also be appointed as deputy governor of RBI and later as the governor of RBI as with the
case of Y. Venugopal Reddy and Duvvuri Subbarao. Other persons forming part of the

12
 central board of directors of the RBI are Dr. Nachiket MOR, Y. C. Deveshwar, Prof
Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Uma Shankar, chief general manager (CGM) in charge of the Reserve Bank of India's
financial inclusion and development department has taken over as executive director
(ED) in the central bank.

Sudha Balakrishnan, a former vice president at National Securities Depository Limited,

assumed charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May
2018; she was given the rank of an executive director.

 Branches and Support Bodies

RBI Headquarters in Mumbai

The RBI 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 with the advice of the central
board of directors serve as a forum for regional banks and to deal with delegated tasks
from the Central Board.

13
 It has two training colleges for its officers, viz. Reserve Bank Staff College, Chennai and
College of Agricultural Banking, Pune. There are three autonomous institutions run by
RBI namely National Institute of Bank Management (NIBM), Indira Gandhi Institute of
Development Research (IGIDR), Institute for Development and Research in Banking
Technology (IDRBT).There are also four zonal training centers at Mumbai, Chennai,
Kolkata, and New Delhi.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD
committee to control the financial institutions. It has four members, appointed for two
years, and takes measures to strength the role of statutory auditors in the financial sector,
external monitoring, and internal controlling systems. The Tara pore committee was set
up by the Reserve Bank of India under the chairmanship of former RBI deputy governor
S. S. Tara pore to "lay the road map" to capital account convertibility. The five-member
committee recommended a three-year time frame for complete convertibility by 1999–
2000.

On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of

India, said RBI will open an office in the north-eastern state of Arunachal Pradesh

 Functions

14
 Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture
depicting "Prosperity through agriculture".

The regional office of RBI (right) in front of GPO (left) at Dalhousie

Square, Kolkata

The central bank of any country executes many functions such as overseeing monetary
policy, issuing currency, managing foreign exchange, working as a bank for government
and as a banker of scheduled commercial banks. It also works for overall economic
growth of the country. The preamble of the Reserve Bank of India describes its main
functions as:

To regulate the issue of Bank Notes and 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.

15
 Financial supervision

The primary objective of RBI is to undertake consolidated supervision of the financial

sector comprising commercial banks, financial institutions, and non-banking finance
companies.

The board is constituted by co-opting four directors from the Central Board as members
for a term of two years and is chaired by the governor. The deputy governors of the
reserve bank are ex-officio members. One deputy governor, usually, the deputy governor
in charge of banking regulation and supervision, is nominated as the vice-chairman of the
board. The board is required to meet normally once every month. It considers inspection
reports and other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory
audit and internal audit functions in banks and financial institutions. The audit sub-
committee includes deputy governor as the chairman and two directors of the Central
Board as members. The BFS oversees the functioning of the Department of Banking
Supervision (DBS), the Department of Non-Banking Supervision (DNBS) and the
Financial Institutions Division (FID) and gives directions on the regulatory and
supervisory issues.

 Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes
broad parameters of banking operations within which the country's banking and financial
system functions. Its objectives are to maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the public.
The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India
(RBI) for effective addressing of complaints by bank customers. The RBI controls the
monetary supply, monitors economic indicators like the gross domestic product and has
to decide the design of the rupee banknotes as well as coins.

16
 Regulator and supervisor of the payment and settlement systems

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

NEFT operates on a deferred net settlement (DNS) basis and settles transactions in
batches. The settlement takes place for all transactions received until a particular cut-off
time. It operates in hourly batches — there are twelve settlements from 8 am to 7 pm on
weekdays and six between 8 am and 1 pm on Saturdays. Any transaction initiated after
the designated time would have to wait until the next settlement time. In RTGS,
transactions are processed continuously, all through the business hours. RBI's settlement
time is 9 am to 4:30 pm on weekdays and 9 am to 2 pm on Saturdays.

 Banker and debt manager to 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 Government of India (GoI). As a banker to the GoI, the
RBI maintains its accounts, receive payments into and make payments out of these
accounts. The RBI also helps the GoI to raise money from the public via issuing bonds
and government-approved securities. In Sep 2019, a decision at RBI directors meet was
taken to change the RBI financial accounting year to March–April to align itself with the
central government calendar instead of the current June–July year.

17
 Managing foreign exchange

The central bank manages to reach different goals of the Foreign Exchange Management
Act, 1999. Their objective is to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.

With increasing integration of the Indian economy with the global economy arising from
greater trade and capital flows, the foreign exchange market has evolved as a key
segment of the Indian financial market and the RBI has an important role to play in
regulating and managing this segment. The RBI manages forex and gold reserves of the
nation.

On a given day, the foreign exchange rate reflects the demand for and supply of foreign
exchange arising from trade and capital transactions. The RBI's Financial Markets
Department (FMD) participates in the foreign exchange market by undertaking
sales/purchases of foreign currency to ease volatility in periods of excess demand
for/supply of foreign currency.

Issue of currency

Other than the Government of India, the Reserve Bank of India is the sole body
authorized to issue banknotes in India.

The bank also destroys banknotes when they are not fit for circulation. All the money
issued by the central bank is its monetary liability, i.e., the central bank is obliged to back
the currency with assets of equal value, to enhance public confidence in paper currency.
The objectives are to issue bank notes and give the public an adequate supply of the
same, to maintain the currency and credit system of the country to utilize it in its best
advantage, and to maintain the reserves.

The RBI maintains the economic structure of the country so that it can achieve the
objective of price stability as well as economic development because both objectives are
diverse in themselves.

For the printing of notes, RBI uses four facilities:

18
 The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly
owned company of the Government of India, has printing presses at Nasik,
Maharashtra and Dewas, Madhya Pradesh.
 The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by
the RBI, has printing facilities in Mysore, Karnataka and Salboni, West Bengal.

For the minting of coins, SPMCIL has four mints

at Mumbai, Noida, Kolkata and Hyderabad for coin production.

Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI),
the RBI works as an agent of GoI for the distribution and handling of coins. RBI also
works to prevent counterfeiting of currency by regularly upgrading security features of
currency.

The RBI is authorized to issue notes with face values of up to ₹10,000 and coins up
to ₹1,000 rupees.

New ₹500 and ₹2,000 notes were been issued on 8 November 2016. The old series
of ₹1,000 and ₹500 notes were demonetized from midnight on 8 November 2016.

Earlier ₹1,000 notes have been discarded by the RBI.

 Banker's Bank

Nagpur branch holds most of India's gold deposits.

Reserve Bank of India also works as a central bank where commercial banks are account
holders and can deposit money. RBI maintains banking accounts of all scheduled
banks. Commercial banks create credit. It is the duty of the RBI to control the credit
through the CRR, bank rate and open market operations. As banker's bank, the RBI

19
facilitates the clearing of cheques between the commercial banks and helps the inter-bank
transfer of funds. It can grant financial accommodation to schedule banks. It acts as the
lender of the last resort by providing emergency advances to the banks.

 Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system. As a regulator and
supervisor of the Indian banking system it ensures financial stability & public confidence
in the banking system. RBI uses methods like On-site inspections, off-site surveillance,
scrutiny & periodic meetings to supervise new bank licenses, setting capital requirements
and regulating interest rates in specific areas. RBI is currently focused on implementing
norms.

 Detection of fake currency

In order to curb the counterfeit money problem in India, RBI has launched a website to
raise awareness among masses about fake banknotes in the
market. www.paisaboltahai.rbi.org.in provides information about identifying fake
currency.

On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will
completely withdraw from circulation of all banknotes issued prior to 2005. From 1 April
2014, the public will be required to approach banks for exchanging these notes. Banks
will provide exchange facility for these notes until further communication. The reserve
bank has also clarified that the notes issued before 2005 will continue to be legal tender.
This would mean that banks are required to exchange the notes for their customers as
well as for non-customers. From 1 July 2014, however, to exchange more than 15 pieces
of `500 and `1000 notes, non-customers will have to furnish proof of identity and
residence as well as show aadhar to the bank branch in which he/she wants to exchange
the notes.

This move from the reserve bank is expected to unearth black money held in cash. As the
new currency notes have added increased security features, they would help in curbing
the menace of fake currency.

20
 Developmental Role

The central bank has to perform a wide range of promotional functions to support
national objectives and industries. The RBI faces a lot of inter-sectoral and local
inflation-related problems. Some of these problems are results of the dominant part of the
public sector.

Key tools in this effort include Priority Sector Lending such as agriculture, micro and
small enterprises (MSE), housing and education. RBI work towards strengthening and
supporting small local banks and encourage banks to open branches in rural areas to
include large section of society in banking net.

 Related functions

The RBI is also a banker to the government and performs merchant banking function for
the central and the state governments. It also acts as their banker. The National Housing
Bank (NHB) was established in 1988 to promote private real estate acquisition. The
institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012
said that Indian banking system is resilient enough to face the stress caused by the
drought-like situation because of poor monsoon this year.

 Custodian to foreign exchange

The Reserve Bank has custody of the country's reserves of international currency, and
this enables the Reserve Bank to deal with crisis connected with adverse balance of
payments position

21
 2016 Demonetization

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following
deposit of demonetized currency notes in bank on 15 November 2016.

On 8 November 2016, the Government of India announced the demonetization of

all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series on the recommendation of
the Reserve Bank of India (RBI).The government claimed that the action would curtail
the shadow economy and crack down on the use of illicit and counterfeit cash to fund
illegal activity and terrorism.

The Reserve Bank of India laid down a detailed procedure for the exchange of the
demonetized banknotes with new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi
New Series and ₹100 banknotes of the preceding Mahatma Gandhi Series. The key points
were:

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

 Citizens had until 30 December 2016 to tender their old banknotes at any office of the
RBI or any bank branch and credit the value into their respective bank accounts.

22
 Cash withdrawals from bank accounts were restricted to ₹10,000 (US$140) per day
and ₹20,000 (US$290) per week per account from 10 to 13 November 2016. This
limit was increased to ₹24,000 (US$350) per week from 14 November.
 For immediate cash needs, the old banknotes could be exchanged for the new ₹500
and ₹2,000 banknotes as well as ₹100 banknotes over the counter of bank branches
by filling up a requisition form along with a valid ID proof. It was announced that this
facility would be available until 30 December 2016.
o Initially, the limit was fixed at ₹4,000 (US$58) per person from 8 to 13
November 2016.
o This limit was increased to ₹4,500 (US$65) per person from 14 to 17 November
2016.
o The limit was reduced to ₹2,000 (US$29) per person from 18 November 2016.
o All exchange of banknotes was abruptly stopped from 25 November 2016.
 Initially, all ATMs were dispensing banknotes of only ₹50 and ₹100 denominations
and cash withdrawals from ATMs were restricted to ₹2,000 (US$29) per day. From
14 November onwards, ATMs were recalibrated to dispense new ₹500 and ₹2,000
notes and to allow a maximum withdrawal of ₹2,500 (US$36) per day, while other
ATMs dispensing banknotes of only ₹50 and ₹100 denominations will allow a
maximum withdrawal of ₹2,000 (US$29) per day.

However, exceptions were given to petrol, CNG and gas stations, government
hospitals, railway and airline booking counters, state-government recognized dairies and
ration stores, and crematoriums to accept the old ₹500 and ₹1,000 banknotes until 11
November 2016, which was later extended to 14 November 2016 and once again to 24
November 2016. International airports were also instructed to facilitate an exchange of
notes amounting to a total value of ₹5,000 (US$72) for foreign tourists and outbound
passengers.

Under the revised guidelines issued on 17 November 2016, families were allowed to
withdraw ₹250,000 (US$3,600) for wedding expenses from one account provided it
was KYC compliant. The rules were also changed for farmers who are permitted to
withdraw ₹25,000 (US$360) per week from their accounts against crop loan.

23
 Cash crunch and effects

Queue at an ATM for ₹100 banknotes in Howrah, on 8 November 2016, 22:23 (IST)

People queue outside a private bank to deposit and exchange old ₹500 and ₹1,000
banknotes in Kolkata on 10 November 2016.

The scarcity of cash due to demonetization led to chaos, and most people holding old
banknotes faced difficulties exchanging them due to endless lines outside banks and
ATMs across India, which became a daily routine for millions of people waiting to
deposit or exchange the ₹500 and ₹1,000 banknotes since 9 November. ATMs were
running out of cash after a few hours of being functional, and around half the ATMs in
the country were non-functional. Sporadic violence was reported in New Delhi, but there
were no reports of any grievous injury, people attacked bank premises and ATMs, and a
ration shop was looted in Madhya Pradesh after the shop owner refused to accept ₹500
banknotes.

24
 Policy Rates And Reserve Ratios

Rates as of third bi-monthly monetary policy meet of FY1920 (7 August 2019)

Policy rates

Policy repo rate 5.40 %

Reverse repo rate 5.15 %

Marginal standing facility rate 5.65 %

Bank rate 5.65 %

Reserve ratios

Cash reserve ratio (CRR) 4.00 %

Statutory liquidity ratio (SLR) 18.75 %

Lending and deposit rates

Base rate 8.95%–9.40%

Marginal Cost of funds based overnight Lending Rate (MCLR) 8.05%–8.50%

Savings deposit rate 3.50%–4.00%

Term deposit rate for > 1 year 6.25%–7.50%

 Repo Rate

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the
RBI lends money to the commercial banks for a short-term (a maximum of 90 days).
When the repo rate increases, borrowing from RBI becomes more expensive. If RBI
wants to make it more expensive for the banks to borrow money, it increases the repo rate

25
similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo
rate. If the repo rate is increased, banks can't carry out their business at a profit whereas
the very opposite happens when the repo rate is cut down. Generally, repo rates are cut
down whenever the country needs to progress in banking and economy.

If banks want to borrow money (for short term, usually overnight) from RBI then banks
have to charge this interest rate. Banks have to pledge government securities as collateral.
This kind of deal happens through a re-purchase agreement. If a bank wants to
borrow ₹100 crore (US$14 million), it has to provide government securities at least
worth ₹100 crore (could be more because of margin requirement which is 5%–10% of
loan amount) and agree to repurchase them at ₹106.5 crore (US$15 million) at the end of
borrowing period. So the bank has paid ₹6.5 crore (US$940,000) as interest. This is the
reason it is called repo rate.

The government securities which are provided by banks as collateral cannot come
from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).

To curb inflation, the RBI increases repo rate which will make borrowing costly for
banks. Banks will pass this increased cost to their customers which make borrowing
costly in whole economy. Fewer people will apply for loans and aggregate demand will
be reduced. This will result in inflation coming down. The RBI does the opposite to fight
deflation. When the RBI reduces the repo rate, banks are not legally required to reduce
their own base rate.

The present repo rate is 5.40%.

 Reverse Repo Rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate
is the short term borrowing rate at which RBI borrows money from banks. The reserve
bank uses this tool when it feels there is too much money floating in the banking system.
An increase in the reverse repo rate means that the banks will get a higher rate of interest
from RBI. As a result, banks prefer to lend their money to RBI which is always safe
instead of lending it to others (people, companies, etc.) which is always risky.

26
Repo rate signifies the rate at which liquidity is injected into the banking system by RBI,
whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity
from the banks. Currently, reverse repo rate is pegged to be 0.25% (or 25 bit/s) below the
repo rate.

 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 the 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 increasing to open market operations in recent years. Generally, the RBI uses

1. Minimum margins for lending against specific securities.

2. A ceiling on the amounts of credit for certain purposes.
3. The 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, is
administratively set.
2. Banks are mandatory required to keep 19.50% of their NDTL (net demand and
time liabilities) in the form of liquid assets.
3. Banks are required to lend to the priority sectors to the extent of 40% of their
advances.

27
The share of net demand and time liabilities that banks must maintain in safe and liquid
assets, such as government securities, cash, and gold. Here it would be pertinent to
mention the gold swap of July 2014. The present SLR is 18.75%.

 Bank Rate
Bank rate is defined in Section 49 of the RBI Act of 1934 as the ‘standard rate at which
RBI is prepared to buy or rediscount bills of exchange or other commercial papers
eligible for purchase'. When banks want to borrow long term funds from the RBI, it is the
interest rate which the RBI charges to them. It is currently set to 5.65%.The bank rate is
not used to control money supply, but penal rates continue to be linked to the bank rate. If
a bank fails to meet SLR or CRR requirements then the RBI will impose a penalty of
300 basis points above bank rate.

 Liquidity Adjustment Facility (LAF)

Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the
Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need
or to park excess funds with the RBI on an overnight basis against the collateral of
government securities.

RBI accepts applications for a minimum amount of ₹5 crore (US$720,000) and in

multiples of ₹5 crore thereafter.

 Cash Reserve Ratio (CRR)

CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the
bank's net demand and time liabilities to ensure the liquidity and solvency of the
scheduled banks. The share of net demand and time liabilities that banks must maintain
as cash with the RBI. The RBI has set CRR at 4%. A 1% change in CRR affects the
economy by ₹1,000,000 crore (US$140 billion). An increase draw this amount from the
economy, while a decrease injects this amount into the economy. So if a bank has ₹200

28
crore (US$29 million) of NDTL then it has to keep ₹8 crore (US$1.2 million) in cash
with RBI. RBI pays no interest on CRR.

Let's assume the economy is showing inflationary trends and the RBI wants to control
this situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to
20% then bank will be left only with ₹60 crore (US$8.7 million) for operations. Now it
will be very difficult for the bank to maintain profitability with such a small amount of
capital. The bank will be left with no choice but to raise its interest rate which will make
borrowing by its customers more costly. This will in turn reduce the overall demand and
hence prices will eventually come down.

 Open Market Operation (OMO)

Open market operation is the activity of buying and selling of government securities in
open market to control the supply of money in banking system. When there is excess
supply of money, central bank sells government securities thereby sucking out excess
liquidity. Similarly, when liquidity is tight, RBI will buy government securities and
thereby inject money supply into the economy.

 Marginal Standing Facility (MSF)

This scheme was introduced in May 2011 and all the scheduled commercial bank can
participate in this scheme. Banks can borrow up to 2.5% percent of their respective net
demand and time liabilities. The RBI receives application under this facility for a
minimum amount of Rs. 1 crore and in multiples of Rs. 1 crore thereafter.

The important difference from repo rate is that bank can pledge government securities
from its SLR quota (up to one percent). So even if SLR goes below 20.5% by pledging
SLR quota securities under MSF, the bank will not have to pay any penalty. The MSF
rate is set to 100 basis points above bank rate and currently is at 5.65% as of 7 August
2019.

29
 Qualitative Tools

 Margin Requirements or LTV

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

The RBI regulates this ratio so as to control the amount a bank can lend to its customers.
For example, an individual wants to buy a car using borrowed money and the car's value
is ₹10 lakh (US$14,000). If the LTV is set to 70% he can borrow a maximum of ₹7
lakh (US$10,000).

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

 Selective Credit Control

Under this measure, the RBI can specifically instruct banks not to give loans to traders of
certain commodities e.g. sugar, edible oil, etc.

This prevents the speculation/hoarding of commodities using money borrowed from

banks.

 Moral Suasion
Under this measure, the RBI try to persuade banks through meetings, conferences, media
statements to do specific things under certain economic trends. For example, when the
RBI reduces repo rate, it asks banks to reduce their base rate as well. Another example of
this measure is to ask banks to reduce their non-performing assets.

 Limitations Of Monetary Policy

In developing countries like India, monetary policy fails to show immediate or no results
because the following factors:

1. People do not employ alternative investment options. A large section of society still
depends on saving accounts, fixed deposits, Public Provident Fund for investment.

30
 Commercial banks have large deposits. RBI is not the main or even prominent money
supplier for these banks. So whatever monetary action central bank takes has little or
late impact on the economy.
2. Many people in rural areas are out of the banking net and whatever the RBI does has
no impact on their financial activities.
3. Monsoon uncertainty adversely affects food production and thereby cause food
inflation. Monetary policy has no impact on food inflation.

 Growth Of Financial Sector In India

The growth of financial sector in India at present is nearly 8.5% per year. The rise in
the growth rate suggests the growth of the economy. The financial policies and the
monetary policies are able to sustain a stable growth rate.

The reforms pertaining to the monetary policies and the macroeconomic policies over
the last few years has influenced the Indian economy to the core. The major step
towards opening up of the financial market further was the nullification of the
regulations restricting the growth of the financial sector in India. To maintain such a
growth for a long term the inflation has to come down further.

The financial sector in India had an overall growth of 15%, which has exhibited
stability over the last few years although several other markets across the Asian
region were going through a turmoil. The development of the system pertaining to the
financial sector was the key to the growth of the same. With the opening of the
financial market variety of products and services were introduced to suit the need of
the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth
of the financial sector of India.

31
The growth of financial sector in India was due to the development in sectors

 Growth of the banking sector in India

The banking system in India is the most extensive. The total asset value of the entire
banking sector in India is nearly US$ 270 billion. The total deposits is nearly US$ 220
billion. Banking sector in India has been transformed completely. Presently the latest
inclusions such as Internet banking and Core banking have made banking operations
more user friendly and easy.

 Growth of the Capital Market in India

 The ratio of the transaction was increased with the share ratio and deposit system
 The removal of the pliable but ill-used forward trading mechanism
 The introduction of InfoTech systems in the National Stock Exchange (NSE) in order
to cater to the various investors in different locations
 Privatization of stock exchanges

 Growth in the Insurance sector in India

 With the opening of the market, foreign and private Indian players are keen to convert
untapped market potential into opportunities by providing tailor-made products.

 The insurance market is filled up with new players which has led to the introduction
of several innovative insurance based products, value add-ons, and services. Many

32
 foreign companies have also entered the arena such as Tokyo Marine, Aviva, Allianz,
Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life.

 The competition among the companies has led to aggressive marketing, and distribution
techniques.

 The active part of the Insurance Regulatory and Development Authority (IRDA) as a
regulatory body has provided to the development of the sector.

 Growth of the Venture Capital market in India

 The venture capital sector in India is one of the most active in the financial sector inspite
of the hindrances by the external set up.

 Presently in India there are around 34 national and 2 international SEBI registered
venture capital funds

 Financial Sector of India

 Analysis of Indian Financial Sector
 Bond Market in India
 Centrum Finance Limited
 CIL Securities Limited
 Growth of Financial Sector in India
 Karvy Group
 L& T Finance Limited
 Major Financial Companies in India
 PNB Gilts Limited
 Stock Market in India

33
 Role Of Finance Of Banks In Economic Development

The functioning of an economy depends on the financial system of a country. The

financial system includes banks as a central entity along with other financial services
providers. The financial system of a country is deeply entrenched in the society and
provides employment to a large population. According to Baily and Elliott, there are three
major functions of the financial system:

Credit Provision – Credit supports economic activity. Governments can invest in

infrastructure projects by reducing the cycles of tax revenues and correcting spends,
businesses can invest more than the cash they have and individuals can purchase homes
and other utilities without having to save the entire amount in advance. Banks and other
financial service providers give this credit facility to all stakeholders.

Liquidity provision – Banks and other financial providers protect businesses and
individuals against sudden cash needs. Banks provide the facility of demand deposits
which the business or individual can withdraw at any time. Similarly, they provide credit
and overdraft facility to businesses. Moreover, banks and financial institutions offer to buy
or sell securities as per need and often in large volumes to fulfil sudden cash requirements
of the stakeholders.

Risk management services – Finance provides risk management from the risks of financial
markets and commodity prices by pooling risks. Derivative transactions enable banks to
provide this risk management. These services are extremely valuable even though they
receive a lot of flak due to excesses during financial crisis.

 Savings-Investment Relationship
The above three major functions are important for the running and development activities
of any economy. Apart from these functions, an economy’s growth is boosted by the
savings-investment relationship. When there are sufficient savings, only then can there be
sizeable investment and production activity. This savings facility is provided by financial
institutions through attractive interest schemes. The money saved by the public is used by

34
the financial institutions for lending to businesses at substantial interest rates. These funds
allow businesses to increase their production and distribution activities.

 Growth of Capital Markets

Another important work of finance is to boost growth of capital markets. Businesses need
two types of capital – fixed and working. Fixed capital refers to the money needed to
invest in infrastructure such as building, plant and machinery. Working capital refers to
the money needed to run the business on a day-to-day basis. This may refer to the ongoing
purchase of raw materials, cost of finishing goods and transport of finished goods to stores
or customers. The financial system helps in raising capital in the following ways:

Fixed capital – Businesses issue shares and debentures to raise fixed capital. Financial
service providers, both public and private, invest in these shares and debentures to make
profits with minimal risk.

Working capital – Businesses issue bills, promissory notes etc. to raise short term loans.
These credit instruments are valid in the money markets that exist for this purpose.

 Foreign Exchange Markets

In order to support the export and import businessmen, there are foreign exchange markets
whereby businesses can receive and transmit funds to other countries and in other
currencies. These foreign exchange markets also enable banks and other financial
institutions to borrow or lend sums in other currencies. Moreover, financial institutions
can invest and reap profits from their short term idle money by investing in foreign
exchange markets. Governments also meet their foreign exchange requirements through
these markets. Hence, foreign exchange markets impact the growth and goodwill of an
economy in the international markets.

35
 Government Securities
Governments use the financial system to raise funds for both short term and long term
fund requirements. Governments issue bonds and bills at attractive interest rates and also
provide tax concessions. Budget gaps are taken care of by government securities. Thus,
capital markets, foreign exchange markets and government securities markets are essential
for helping businesses, industries and governments to carry out development and growth
activities of the economy.

 Infrastructure and Growth

The economic growth depends on the growth of infrastructural facilities of the country.
Key industries such as power, coal, oil determine the growth of other industries. These
infrastructure industries are funded by the finance system of the country. The capital
requirement for infrastructure industries is huge. Raising such a huge amount is difficult
for private players and hence, traditionally, governments have taken care of infrastructure
projects solely. However, the economic liberalization policy led to the private sector
participation in infrastructure industries. Development and Merchant banks such as IDBI
in India help fund these activities for the private sector.

 Trade Development
Trade is the most important economic activity. Both, domestic and international trade are
supported by the financial system. Traders need finance which is provided by the financial
institutions. Financial markets on the other hand help discount financial instruments such
as promissory notes and bills. Commercial banks finance international trade through pre
and post-shipment funding. Letters of credit are issued for importers, thereby helping the
country to earn important foreign exchange.

36
 Employment Growth
Financial system plays a key role in employment growth in an economy. Businesses and
industries are financed by the financial systems which lead to growth in employment and
in turn increases economic activity and domestic trade. Increase in trade leads to increase
in competition which leads to activities such as sales and marketing which further
increases employment in these sectors.

 Venture Capital
Increase in venture capital or investment in ventures will boost growth in economy.
Currently, the extent of venture capital in India is less. It is difficult for individual
companies to invest in ventures directly due to the risk involved. It is mostly the financial
institutions that fund ventures. An increase in the number of financial institutions
supporting ventures will boost this segment.

 Balances Economic Growth

The growth of different sectors of an economy is balanced through the financial system.
There are primary, secondary and tertiary sector industries and all need sufficient funds for
growth. The financial system of the country funds these sectors and provides sufficient
funds for each sector – industrial, agricultural and services.

Thus, finance plays a key role in the development of any economy and no economy can
run successfully without a sound financial system.

37
 The Increasing Importance of the Reserve Bank of India

The Reserve Bank of India is India’s central bank and is wholly owned by the
Government of India. Established on April 1, 1935, the RBI’s main office is located in
India’s capital of Mumbai. Active management of the Reserve Bank of India (RBI) is
provided by the central board of directors, which includes the bank’s governor, a
maximum of four deputy governors, and a few directors of relevant local boards. The
central board delegates specific functions through its committees and sub-committees,
including: the committee of central board, which oversees the current business of the
central bank; the board for financial supervision, which regulates and
supervises commercial banks, finance companies, and financial institutions; and the
board for payment and settlement systems.

The main functions of the RBI include:

Monetary authority: formulates, implements, and monitors India’s monetary policy.

The main objectives of which are maintaining price stability, ensuring adequate flow
of credit to productive sectors, and financial stability.

Issuer of currency: issues currency and coins, and exchanges or destroys currency
notes and coins unfit for circulation

Banker and debt manager to government of India: performs merchant

banking functions for central and state governments and also acts as their banker,
determines how best to raise money in debt markets to help the government finance
its requirements

Banker to banks: enables clearing and settlement of inter-bank transactions,

maintains banks’ accounts for statutory reserve requirements, and acts as a lender of
last resort

38
 Regulator and supervisor of the financial system: protects the interests of depositors,
facilitates orderly development and conduct of banking operations, and maintains
financial stability through preventive and corrective measures

Manager of foreign exchange: regulates transactions related to the external

sector, enables the development of the foreign exchange market (forex), ensures
smooth functioning of the domestic forex market, and manages India’s foreign
currency assets and gold reserves

Regulator and supervisor of payment and settlement systems

Maintaining financial stability: an explicit objective of the RBI since the early 2000s

Development: ensures credit availability to productive economic sectors, establishes

institutions to develop India’s financial infrastructure, expands access to affordable
financial services, and promotes financial education and literacy

India’s Growing Economy

India has reported top gross domestic product (GDP) growth rates across the world. It is
also known as one of the four most powerful emerging market countries, collectively part
of the BRICs which contain Brazil, Russia, India, and China.

The International Monetary Fund (IMF) and World Bank have highlighted India in
several reports showing its high rate of growth. In April 2019, the World Bank projected
India’s GDP growth would expand by 7.5% in 2020. Also in April 2019, the IMF showed
an expected GDP growth rate of 7.3% for 2019 and 7.5% for 2020. Both projections have
India with the highest expected GDP growth in the world over the next two years.

The World Bank’s projection for India’s GDP growth in 2020.

These growth rates make the role of the Reserve Bank of India increasingly important as
the country’s total GDP moves higher. India is a top 10 nation for GDP overall but its
numbers fall far behind the world’s superpowers in the United States and China.

39
India is expected to have a GDP of $2.935 trillion and $3.304 trillion in 2019 and 2020
respectively. This compares to expectations of $21.506 trillion and $22.336 trillion for
the U.S. China’s expected GDP for the same time periods is $14.242 trillion and $15.678
trillion.

The RBI’s Role

As with all economies, the central bank plays a key role in managing and monitoring the
monitory policies affecting both commercial and personal finance as well as the banking
system. As GDP moves higher on the world rankings the RBI’s actions will become
increasingly important.

In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to
6%. The rate cut was the second for 2019 and is expected to help impact the borrowing
rate across the credit market more substantially. Prior to April, credit rates in the country
have remained relatively high, despite the central bank’s positioning, which has been
limiting borrowing across the economy. The central bank must also grapple with a
slightly volatile inflation rate that is projected at 2.4% in 2019, 2.9% to 3% in the first
half of 2020, and 3.5% to 3.8% in the second half of 2020.

The RBI also has control over certain decisions regarding the country’s currency. In
2016, it affected a demonetization of the currency which removed Rs. 500 and Rs. 1000
notes from circulation, mainly in an effort to stop illegal activities. Post analysis of this
decision shows some wins and losses. The demonetization of the specified currencies
caused cash shortages and chaos while also requiring extra spend from the RBI for
printing more money. One of the biggest advantages, however, was the increase in tax
collection which resulted from greater consumer reporting transparency.

In December 2018, the country elected Shaktikanta Das as its new RBI leader. Das is a
supporter of demonetization in line with the top government officials’ views. Das is also
expected to better align with India’s government leadership and amicably support better
access to credit.

40
 The Bottom Line
As one of the fastest growing emerging market countries in the world, India and its
central bank have several unique challenges ahead that will require nimble navigation
from the RBI. Shaktikanta Das will be charged with guiding the monetary policy
direction over the next three years for the country as it continues to take the spotlight for
GDP growth. The country also has a diverse range of goods and services along with a
rising inflation rate. With the Indian economy steadily accounting for a greater share of
the global economy, it is expected that the RBI will gain greater attention from world
leaders while also growing in stature as one of the world’s most-watched central banks.

 Importance of Economic Growth

Economic growth means a rise in real GDP; effectively this means a rise in national
income, national output and total expenditure. Economic growth should enable a rise in
living standards and greater consumption of goods and services. As a result, economic
growth is often seen as the 'holy grail' of macroeconomics

However, this simplistic emphasis on economic growth is often criticised because living
standards depend on many more factors than just increasing real GDP. Some economists
have suggested that a more useful measure is to look at a wider range of factors, such as
the Human Development Index (HDI) which measures GDP but also statistics such as
literacy and healthcare standards. Some also argue we should not be using GDP but,
a happiness index. (Does economic growth increase happiness?)

41
 Why economic growth is important

Economic growth can help various macroeconomic objectives

 Reduction in poverty. Increased national output means households can enjoy

more goods and services. For countries with significant levels of poverty, economic
growth can enable vastly improved living standards. For example, in the nineteenth
century, absolute poverty was widespread in Europe; a century of economic growth has
lifted nearly everyone out of this state of poverty. Economic growth is particularly
important in developing economies.

 Reduced Unemployment. A stagnant economy leads to higher rates of

unemployment and the consequent social misery. Economic growth leads to higher
demand and firms are likely to increase employment.

 Improved public services. Higher economic growth leads to higher tax revenues
(even with tax rates staying the same). With higher growth, incomes and profit, the
government will receive more income tax, corporation tax and expenditure taxes. The
government can then spend more on public services.

 Reduced debt to GDP ratios. Economic growth helps reduce debt to GDP ratios.
In the 1950s, the UK had a national debt of over 200% of GDP. Despite very few years of
budget surplus, economic growth enabled a reduction in the level of debt to GDP.

42
 Political aspect. Elected politicians have a vested interest in higher economic
growth. Higher growth enables vote pleasing policies such as tax cuts and/or more public
spending.

43
 Virtuous cycle of economic growth

 Countries with positive rates of economic growth will create a virtuous cycle

 Economic growth will encourage inward investment as firms seek to benefit from
rising demand

 Higher growth leads to improved tax revenues which can be spent on long-term
public sector works, such as improved transport and communication. This helps long-
term growth.

 Confidence to invest. Higher growth encourages firms to take risks - innovate and
invest in future products and productive capacity

44
 Limitations of economic growth

Inequality and distribution. Economic growth doesn't necessarily reduce relative

poverty, it depends on the distribution of incomes. Economic growth could bypass the
poorest in society. For example in the 1980s, the Gini coefficient rose sharply - the
richest 1% gained dis proportionality more.
Negative externalities. Economic growth can cause negative externalities such as
pollution, higher crime rates and congestion which actually reduce living standards.
For example, China has experienced very rapid economic growth but is now
experience very serious levels of air pollution in major cities.
Economic growth may conflict with the environment. e.g. increased carbon
production is leading to global warming. Economic growth may bring benefits in the
short-term, but costs in the long-term.
It depends on what is produced. The Soviet Union has fantastic rates of economic
growth, but, often through producing a lot of steel and pig iron that was not actually
very useful.
Economic growth can be unsustainable. If growth is too rapid, it will cause
inflation, current account deficit and can lead to boom and bust.
Does happiness actually increase? Theories of hedonistic relativism suggest (beyond
a certain level) increasing output has no effect on changing life quality or happiness.

45
 RBI’S Responsibilities Towards Social Development

As per RBI Act there is no social responsibility specified for RBI

But it had promoted several institutions for development of socio economic conditions
.Some of them are-

1. For agricultural development it created a department -Agricultural Credit Department

and later Agricultural Re Finance Development Corporation which became later
NABARD.

2. For promoting savings it formed first mutual fund Unit Trust of India

3. To protect small depositors of banks Deposit Insurance Corporation as subsidiary

.After USA India was second country to provide deposit insurance.

4. The Small Industries Development Bank and IDBI were established to promote
industrial development

5. Set up National Housing Bank to promote housing loans.

6. Promoted State Finance Corporations and provided refinance facilities

7. Bank established College of Agricultural Banking and Bankers Training College for
training bank staff including those from other banks

8. Established MICR mechanised clearing houses at various places to speed up clearing

9. Established IBRDT at Hyderabad to improve and research in Banking Technology

10. Established RTGS and other fast fund transfer systems

11. Bank established efficient Banking Supervision -There is no bank failure in India
since 1965, when banks failed even in USA

12. Bank forced branch expansion policy for spreading branches all over India

46
 13. Bank introduced priority sector lending to small borrowers.

14. Bank was instrumental in spreading banking literacy

15. Bank introduced Lead Bank Scheme for Development of Districts

16. Introduced regulation of co -operative banks

17. Bank established its own note printing press.

18. Bank assisted in formulating CBS and installation of ATMs.

19. Introduced Indian Debit card RuPAY.

 Development / Promotional Functional Of RBI

Along with the routine traditional functions, central banks especially in the developing
country like India have to perform numerous functions. These functions are country
specific functions and can change according to the requirements of that country. Some of
the major development functions of the RBI are given below.
 Development of the Financial System

The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid
economic development of the nation. The RBI has encouraged establishment of main
banking and non-banking institutions to cater to the credit requirements of diverse sectors
of the economy.

 Development of Agriculture

In an agrarian economy like ours, the RBI has to provide special attention for the credit
need of agriculture and allied activities. It has successfully rendered service in this
direction by increasing the flow of credit to this sector. It has earlier the Agriculture

47
Refinance and Development Corporation (ARDC) to look after the credit, National Bank
for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

 Provision of Industrial Finance

Rapid industrial growth is the key to faster economic development. In this regard, the
adequate and timely availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in setting up special
financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

 Provisions of Training

The RBI has always tried to provide essential training to the staff of the banking industry.
The RBI has set up the bankers' training colleges at several places. National Institute of
Bank Management i.e. NIBM, Bankers Staff College i.e BSC and College of Agriculture
Banking i.e. CAB are few to mention.

 Collection of Data

Being the apex monetary authority of the country, the RBI collects process and
disseminates statistical data on several topics. It includes interest rate, inflation, savings
and investments etc. This data proves to be quite useful for researchers and policy
makers.

 Publication of the Reports

The Reserve Bank has its separate publication division. This division collects and
publishes data on several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on
Trend and Progress of Commercial Banks India., etc. This information is made available
to the public also at cheaper rates.

48
 Supervisory Function of RBI

RBI has authority to regulate and administer the entire banking and financial system.
Some of its supervisory functions are given below.

 Granting license to banks

The RBI grants license to banks for carrying its business. License is also given for
opening extension counters, new branches, even to close down existing branches.

 Bank Inspection

The RBI grants license to banks working as per the directives and in a prudent manner
without undue risk. In addition to this it can ask for periodical information from banks on
various components of assets and liabilities.

 Control over NBFIs

The Non-Bank Financial Institutions are not influenced by the working of a monitory
policy. However RBI has a right to issue directives to the NBFIs from time to time
regarding their functioning. Through periodic inspection, it can control the N

BFIs.

 Implementation of the Deposit Insurance Scheme

The RBI has set up the Deposit Insurance Guarantee Corporation in order to
protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured
with this corporation. The RBI work to implement the Deposit Insurance Scheme in case
of a bank failure.

49
  FINANCIAL MARKETS REGULATION DEPARTMENT (FMRD)

FMRD is entrusted with the development, regulation and surveillance of money, government
securities (G-secs), and foreign exchange and derivatives markets. During 2018-19, the
Department undertook several measures to broaden participation in financial markets, both
domestic and foreign - ease access and transaction norms for participants, widen the range of
financial products, improve financial market infrastructure and pursue rigorous surveillance to
maintain market integrity.

Agenda for 2018-19: Implementation Status

The ‘When Issued’ market in the G-sec was introduced in May 2006 to strengthen the debt
issuance framework via management and distribution of auction risk. With the objective to
further deepen the G-sec market, the ‘When Issued’ directions were revised in July 2018 to
liberalize eligible participants’ base and to relax entity-wise limits for taking positions.

Short sale in G-secs was introduced in February 2006 to provide participants with a tool to
express two-way views on interest rates and thereby enhance price discovery. In July 2018, the
participants’ base was liberalized and entity-wise and security category-wise limits for short
selling in G-secs were relaxed in order to further develop and deepen the G-sec and repo market.

In July 2018, comprehensive directions for repo in G-sec and corporate debt were issued to
simplify and harmonies the regulations across different types of collateral and also to encourage
wider participation, especially for corporate debt repos.

Payments Banks and Small Finance Banks were permitted to participate in the call money
market both as borrowers and lenders, which would expand the participation base in the call
money market and provide an avenue for liquidity management for these entities.

Non-residents have been permitted to access the onshore Over-the-counter (OTC) rupee interest

50
rate derivatives market for hedging and other purposes in order to develop a deep and liquid
interest rate derivatives market by broadening the participation base. Non-residents can also trade
in any product for hedging and can transact in the Overnight Index Swaps (OIS) market for
purposes other than hedging, subject to a regulatory limit.

The exposure limit of 20 per cent of Foreign Portfolio Investors’ (FPI) corporate bond portfolio to
a single corporate was removed in February 2019 to provide more flexibility to FPIs for
managing their debt investment portfolios. With the objective of having a more predictable
regime for investment by FPIs, the FPI limits are now being revised on a half yearly basis under
the Medium-Term Framework (MTF) as alluded to earlier in Section II.4 of the chapter on
Economic Review. Accordingly, the investment limits for FPIs were revised in March 2019.

A separate channel called the Voluntary Retention Route (VRR) was introduced with more
operational flexibility in terms of both instrument choices as well as exemptions from regulatory
limits to encourage FPIs to undertake long-term debt investment in India (Box V.1).

Draft directions on facilities for hedging foreign exchange risk by residents and non-residents
were issued for public feedback in February 2019. These draft directions proposed to merge the
facilities for residents and non-residents into a single unified facility for all users and allow them
to hedge their exposure by using any available instrument. Users could also hedge their
anticipated exposures. Furthermore, it was also proposed to simplify the procedures for
authorized dealers to offer foreign exchange derivatives.

A Task Force on Offshore Rupee Markets was set up in February 2019 with the objective to
provide incentives for non-residents to move to domestic markets for their hedging requirements
and to improve market liquidity to promote hedging activity onshore. The Task Force would
examine the reasons for development of offshore rupee markets and to recommend policy
measures to address domestic constraints, if any.

Market abuse regulations were introduced in March 2019, in line with the best global practices
with the objective of putting in place a fair, open and transparent market underpinned by high
ethical standards. The regulations cover market manipulation, benchmark manipulation, misuse
of information or any other similar practice under its ambit.

51
Participating FPIs are provided special facilities such as permission to carry out
repo/reverse repo transactions for cash management and the use of currency/ interest rate
derivatives to hedge currency/ interest rate risks. They are also given the flexibility to
modulate their investments between 75 - 100 per cent of CPS. Besides, investments through
the VRR are exempt from some macro-prudential measures, viz., minimum residual
maturity requirement, concentration limit and single/group investor-wise limits. At the end
of the retention period, an FPI may (a) liquidate its portfolio and exit, or (b) continue its
investment under VRR for an identical retention period, or (c) shift its investment to
General Investment Limit subject to availability of limits therein, or (d) hold its investments
until its date of maturity or sale whichever is earlier. FPIs can also exit before the
committed retention period by selling their investments, fully or partly, to other FPI/FPIs
which would need to abide by the same terms and conditions. FPIs can invest the income
from their investments through the route at their discretion, and such investments will be
permitted even in excess of the CPS.

The first tranche of investment limits (₹400 billion for VRR-Govt and ₹350 billion for
VRR-Corp) were made available for allotment ‘on tap’ between March 11, 2019 and April
30, 2019. Allotments amounting to ₹203.93 billion were made to FPIs under VRR-Corp
under the aforesaid tranche. The second tranche of investment limits (₹546.06 billion for
VRR-Combined) was opened on May 27, 2019, and will remain open for allotment till
December 31, 2019 or till the exhaustion of the limits, whichever is earlier.

Electronic Trading Platform (ETP) Directions were issued to put in place a framework for
authorization of ETPs for financial market instruments regulated by the Reserve Bank, with the
objective to improving transparency, reducing transaction time and costs, facilitating efficient
audit trails, improving risk controls and enhancing market monitoring. It also includes detailed
eligibility criteria, technology requirements and reporting standards. All new ETPs as well as
existing ones are required to obtain authorization from the Reserve Bank under this framework.

52
The Legal Entity Identifier (LEI) system was implemented in June 2017 for non-individual
participants in OTC markets for rupee interest rate derivatives, foreign currency derivatives and
credit derivatives. The LEI mechanism was expanded to financial market transactions undertaken
by non-individuals, including non-resident entities, in money, G-sec and forex markets regulated
by the Reserve Bank in November 2018. A phased approach to have smooth implementation has
been adopted wherein entities with net worth exceeding ₹2,000 million have to obtain the LEI
before December 31, 2019, and those with net worth lower than that are given time till March 31,
2020.

Draft Directions on Financial Benchmark Administrators were released in February 2019 for
public comments to improve the governance of the benchmark processes in markets regulated by
the Reserve Bank. The draft directions were based on the report of the Committee on Financial
Benchmarks (Chairman: Shri P. Vijaya Bhaskar) set up in February 2014 by the Reserve Bank
and were guided by international best practices such as the Principles for Financial Benchmarks
of International Organization of Securities Commissions (IOSCO) as well as laws/regulations put
in place in other jurisdictions.

Agenda for 2019-20

International settlement of central government securities by International Central Securities

Depositories (ICSDs) will be implemented to permit non-resident clients of ICSDs to transact in
central government securities offshore. This would open up a new channel for non-residents to
undertake transactions in central government securities.

An Internal Group was set up in August 2018 to comprehensively review timings of various
markets and necessary payment infrastructures, and recommend revisions to market timings.
Based on its recommendations, steps will be taken to revise the market timings across products
and funding markets to avoid any frictions.

The Department would continue to further develop and deepen the money, G-sec, foreign
exchange and especially the interest rate and currency derivative markets in order to promote
better risk management by banks and other market players. Steps will also be taken to expand the
participation base, introduce new products and simplify procedures. Ensuring the integrity of the

53
financial markets and eradication of market abuse would continue to be the priority of the
Department.

The Department has initiated steps to develop an IT enabled Integrated Market Surveillance
System (IMSS) for augmenting its surveillance capacities. The broad objectives of the proposed
system are surveillance of markets regulated by the Reserve Bank, trend analysis and compliance
monitoring.

 FINANCIAL MARKETS OPERATIONS DEPARTMENT (FMOD)

FMOD is entrusted with two primary responsibilities: first, conduct of liquidity management
operations for maintaining an appropriate level of liquidity in the financial system; and second,
ensuring orderly conditions in the forex market through operations in the spot, forward and
futures segments.

Agenda for 2018-19: Implementation Status

Money Market and Liquidity Management

System liquidity shifted from surplus to deficit during the year as the overhang of demonetization
waned. Large-scale capital outflows, coupled with above-trend expansion in currency in
circulation continued to exert pressure on liquidity conditions, especially during the first half of
the year. The Reserve Bank operated the Liquidity Adjustment Facility (LAF) and the Marginal
Standing Facility (MSF) to manage transient liquidity mismatches. Consequently, the weighted
average call rate (WACR) in the call money market - the operating target of monetary policy -
remained broadly anchored to the policy repo rate.

With regard to durable liquidity, the Reserve Bank responded to market conditions by calibrating
the pace of permanent liquidity operations. The frequency and quantum of OMOs was increased
during H2:2018-19 to meet the liquidity needs of the system. During 2018-19, the Reserve Bank
conducted OMO purchase auctions to the tune of about ₹3.0 trillion, of which ₹2.5 trillion worth
of OMO purchases were conducted in H2 alone.

54
The Reserve Bank decided to augment its liquidity management toolkit by adding FX swap
auctions as an instrument to manage durable liquidity (Box V.2). The first buy/sell swap auction
was conducted on March 26, 2019 and the Reserve Bank injected ₹345.6 billion into the system
for a three-year period. The auction had a cooling effect on money market rates and supplemented
the usual year-end funds required by the banking system.

BoxV.2
The USD/INR Buy/Sell Swap: A New Armour in RBI’s Liquidity Management Toolkit

A foreign exchange swap (FX swap) between two parties involves the exchange of one
currency for another on an agreed date, price and tenor, with a subsequent re-exchange of
these two currencies on the maturity date. The FX swap is the most popular over-the-
counter foreign exchange instrument in the global forex market. Nearly 91 per cent of the
FX swaps had the US dollar as one of the currencies.

The main reason for the popularity of FX swaps is the elimination of exchange rate risk, as
the initial and terminal exchange rates are agreed upon at the time of the contract. FX swaps
are usually used by banks/financial institutions and their customers (multinational
companies), institutional investors who want to hedge their foreign exchange positions,
and/or engage in speculation.

Use of FX Swaps by Central Banks

Central banks in both advanced and emerging economies have used FX swaps under
differing circumstances. The Swiss National Bank used them as the main instrument for
management of bank reserves, mainly because of the lack of short-term government
securities. The Monetary Authority of Singapore (MAS) actively uses FX swaps for
liquidity management in addition to direct borrowing/lending, repos on Singapore
Government Securities (SGS) and MAS Bills. The Central Bank of the Russian Federation
introduced the US$/RUB sell/buy FX swaps in September 2014 for providing dollar
liquidity support to Russian credit institutions. Saudi Arabia has used FX swaps to provide
emergency liquidity during a regional crisis, while South Africa conducts special currency
swaps from time to time with banks. Bahrain has also used US dollar swap facility to

55
provide liquidity in special circumstances.

Other countries that have used the FX swap as a tool for managing liquidity include the
Netherlands, Austria, Germany, Belgium, Kuwait, the United Arab Emirates, Oman,
Malaysia and Thailand.

The Reserve Bank conducted two US$/INR buy/sell swaps with Authorised Dealers (ADs)
– Category 1 banks, with the notified amount of US$ 5 billion each for tenor of 3 years on
March 26 and April 23, 2019. The bids received in the two auctions, at US$ 16.3 billion and
US$ 18.7 billion, respectively, amounted to more than three times the notified amount of
US$ 5 billion. The Reserve Bank accepted US$ 5 billion in each of the auctions at the cut-
off premium of ₹7.76 and ₹8.38, respectively, and simultaneously injected ₹345.6 billion
and ₹348.7 billion into the banking system. The US dollar amounts mobilized through the
swap auctions are reflected in the Reserve Bank’s foreign exchange reserves for the tenor of
the swap as well as in the Reserve Bank’s forward liabilities.

Post the swap announcement, the INR MIFOR curve trended lower across tenors with the
maximum softening observed in the 3-year bucket (Chart 1: Panel A). Some volatility was
observed in the long-term Non-Deliverable Forward (NDF) rates at the time of the first
auction and Cash-Tom rates around the two auction dates (Chart 1: Panel B).

56
 References:

1. Bank for International Settlements (2016), Triennial Survey, April 2016, available
at https://www.bis.org/statistics/d11_1.pdf

2. Central Bank of Russian Federation- FX

Swap www.cbr.ru/eng/hd_base/swapinfo/swapinfosellusdvol/.

3. Hooyman, C. (1994), ‘The Use of Foreign Exchange Swaps by Central Banks’, Staff
Papers (International Monetary Fund), 41(1), pp. 149-162.

4. Monetary Authority of Singapore - Monetary Policy and

Economics http://www.mas.gov.sg/Monetary-Policy-and-Economics/Central-Bank-
Operations-and-Liquidity-Management.aspx.

5. Swiss National Bank-Financial

Markets www.snb.ch/en/ifor/finmkt/operat/id/qas_swaps_1#.

Foreign Exchange Market

During the year, the rupee witnessed a general depreciating trend up to mid-October mainly due
to rising crude oil prices, rising interest rates in the US and international trade and geo-political
concerns. However, the rupee recovered subsequently and exhibited an appreciating trend during
the rest of the year as oil prices declined. The Reserve Bank intervened in the forex market

57
through operations in the onshore/offshore OTC and Exchange Traded Currency Derivatives
(ETCD) segments to contain excessive volatility.

Agenda for 2019-20

The Department aims to carry out liquidity management operations effectively in line with the
stance of monetary policy. It will continue to monitor evolving liquidity conditions closely and
will modulate operations to ensure alignment of the WACR with the policy repo rate. It will
continue to conduct foreign exchange operations in an effective manner to curb undue volatility
in the exchange rate. The Department also proposes to continue policy-oriented research on
financial markets.

As part of the Reserve Bank’s commitment for adoption of the principles of ‘FX Global Code’ in
the domestic forex market, the Department will coordinate with India Foreign Exchange
Committee (IFXC) to launch a “Public Register” for India. The “Public Register” will act as a
repository of information to facilitate market participants to publicize their Statements of
Commitment to the FX Global Code and also to assist interested parties in identifying market
participants which have done so.

 FOREIGN EXCHANGE DEPARTMENT (FED)

FED aims at facilitating external trade and payments while enhancing ease of doing business.
During 2018-19, the Department continued its efforts to streamline the operating framework of
the Foreign Exchange Management Act (FEMA) to align it with the current business and
economic environment. It also took steps for improving the ease of doing business and reduce
regulatory costs. The introduction of the Single Master Form (SMF) for reporting of foreign
investments under the Foreign Investment Reporting and Management System (FIRMS) was a
notable development in this regard. The ECB regime was also rationalized during the year.

Agenda for 2018-19: Implementation Status

58
In last year’s Annual Report, FED had undertaken salient objectives in pursuit of its mission.
Key among them were the rationalization of cross-border borrowing and lending regulations,
improving information management in the context of foreign investment inflows while
facilitating outward flows, apart from measures to provide a conducive environment for doing
business in India.

Simplifying Cross-Border Borrowing and Lending

A new soft-coded directive came into force on December 17, 2018 with a view to simplifying and
consolidating regulations related to borrowing and lending between residents and non-residents.
Its salient features are: (a) bringing all debt instruments under a single notification by
consolidating regulations under FEMA 3, 4 and part of 120 (Regulation 21); (b) delineating three
schedules of transactions: ECBs; trade credit; and external commercial lending; and (c) making
regulations principle-based that obviate the need for frequent amendments.

Starting with ECBs, a rule-based dynamic limit for outstanding stock at 6.5 per cent of GDP
(US$ 160 billion for 2018-19) was adopted in consultation with the Government of India. The
framework for ECBs and Rupee Denominated Bonds (RDB) was rationalized to improve the
climate for doing business (Box V.3). In addition, the reporting of ECBs was simplified with the
objective of reducing the reporting burden. Payment of a late submission fee was introduced in
order to encourage prompt reporting.

Foreign Investment Information Management

With effect from June 2, 2018, the Reserve Bank, in consultation with the SEBI, put in place a
system for monitoring foreign investment limits in order to enable listed Indian companies to
comply with various foreign investment limits. Infrastructure and systems for operationalizing the
monitoring mechanism were put in place by the SEBI. Accordingly, the depositories (NSDL and
CDSL) have set up the necessary infrastructure and IT systems for disseminating information on
the available investment headroom in respect of listed Indian companies, within the aggregate
NRI/FPI limits or the sectoral cap. The breach of the aggregate NRI/FPI investment limits or the
sectoral cap for a company would restrict any further purchases by FPI/NRIs. Compulsory
disinvestment by FPIs and NRIs in case of excess holding was also introduced.

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 New Policy Framework for External Commercial Borrowings (ECB)

The main features of the new ECB framework announced on January 16, 2019 are set out
below.

• Instrument neutral borrowing regime: Two routes of borrowing were delineated, viz., a
foreign currency borrowing route and an INR ECB route (INR ECB track and RDBs).

• Liberalization of INR denominated ECBs: Non-applicability of ECB liability to equity

ratio; lesser withholding tax on RDBs issued overseas.

• Expansion of eligible ECB borrowers: The sectoral preferences for raising ECBs were
removed to create a level playing field. All entities eligible to raise FDI are now permitted
to raise ECB.

• Expansion of overseas lenders: Includes all entities from Financial Action Task Force
(FATF) or International Organization of Securities Commissions (IOSCO) compliant
countries; strengthening Anti-Money Laundering and Countering Financing of Terrorism
(AML/CFT) framework.

• Common minimum average maturity for all ECBs: A single slab of minimum three years
prescribed for all ECBs by combining different slabs prevailing in the erstwhile regime.

• ECB for Oil Marketing Companies (OMCs): For working capital purposes and for
resolution applicants under the Corporate Insolvency Resolution Process.

A new online reporting system - Foreign Investment Reporting and Management System
(FIRMS) came into effect from September 1, 2018. It provides for filing of the prescribed nine
returns (viz., FC-GPR, FC-TRS, ESOP, DI, DRR, LLP-I, LLP-II, CN and In Vi) through a Single
Master Form (SMF) on a single online platform.

Also, with effect from September 1, 2018, FDI reporting for issue of capital instruments was
made a single step reporting in SMF (instead of earlier two-steps reporting). The application has
an inbuilt database, reducing manual intervention and involving a novel concept of entity master,

60
which helps in monitoring the extent of total foreign investment in an entity at all times in the
context of sectoral limits.

Overseas Investment by Alternative Investment Funds

As per the SEBI’s recommendations, the overall limit for overseas investment by Alternative
Investment Funds (AIFs)/Venture Capital Funds (VCFs) was enhanced to US$ 750 million from
US$ 500 million with effect from June 2, 2018. The SEBI has put in place suitable reporting and
reconciliation mechanisms to monitor the overall outstanding approvals with instructions to all
AIFs on reporting guidelines. A regular information exchange mechanism between the Reserve
Bank and the SEBI has also been put in place to monitor limits for such overseas investments.

Other Measures for Exchange Liberalization

The limit on outward remittances by non-bank entities (through AD Category-I banks in India)
involving small value transactions (not exceeding US$ 5,000 per transaction) was enhanced to
US$ 10,000 per transaction for overseas education, within the overall ceiling under Liberalized
Remittance Scheme (LRS) of US$ 250,000.

Permission for receiving funds in the Chief Minister’s Distress Relief Fund - Kerala through
exchange houses was given in the wake of floods in Kerala and representations received from AD
Category-I banks, subject to the condition that such remittances are directly credited to the fund
by banks who maintain full details of the remitters.

Post demonetization of ₹1000 and ₹500 currency notes, currencies permitted to be carried to
Nepal or Bhutan have been reviewed. Now, an individual travelling from India to Nepal or
Bhutan is permitted to carry the Reserve Bank currency notes in Mahatma Gandhi (New) Series
of denominations ₹200 and/or ₹500, subject to a total limit of ₹25,000. Instructions regarding
currency notes of the Government of India and the Reserve Bank for any amount in
denominations up to ₹100 shall continue.

With effect from March 28, 2019, no prior approval of the Reserve Bank is required, if
government approval or license/permission by the concerned Ministry/Regulator has already been

61
granted for opening of a Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any
other place of business in India, where the principal business of the applicant falls in the defense,
telecom, private security and information and broadcasting sectors.

In the case of proposals for opening a PO relating to the defense sector, no separate reference or
approval of the Government of India shall be required if the applicant has been awarded a
contract by/entered into an agreement with the Ministry of Defense or Service Headquarters or
Defense Public Sector Undertakings.

A Foreign Portfolio Investor/ Foreign Venture Capital Investor (FPI/FVCI) registered with the
SEBI was allowed to open and maintain a non-interest bearing foreign currency account for the
purpose of making investment in accordance with the Foreign Exchange Management (transfer or
issue of security by a person resident outside India) Regulations, 2017.

A citizen of Bangladesh or Pakistan, who has been granted a long-term visa (LTV) by the central
government, may now open one Non-Resident Ordinary (NRO) Account with an AD bank in
India. Such account can also be opened by a person who has applied for LTV which is under
consideration of the central government, subject to certain conditions.

With effect from March 28, 2019, Special Non-Resident Rupee (SNRR) accounts opened by any
person resident outside India, including those registered with SEBI to make investment in India,
can remain operative beyond the stipulated period of seven years, with the approval of the
Reserve Bank.

With effect from March 28, 2019, Escrow Accounts can be opened by residents and non-residents
for acquisition/ transfer of capital instruments/convertible notes and can also be funded by
guarantee(s).

Agenda for 2019-20

The Department’s strategy for 2019-20 will focus on consolidating and carrying forward all these
initiatives, with emphasis on continuous synchronization of the FEMA operating framework with
the evolving situation, especially rationalization of money changing and merchanting activity,

62
comprehensive review and simplification of reporting requirements of regulated entities and
enhancing the role of Authorized Persons (AP) to reduce transaction costs. Specific action points
in pursuance of this strategy are set out below.

• Review and rationalization of entry norms for being licensed as full-fledged money changer
(FFMC) in alignment with the provisions of the Companies Act, including an online package for
FFMC/upgraded FFMCs (AD Category II) licensing, renewal, inspection, reporting and
cancellation.

• Consolidation and rationalization of FEMA to deal with issuance of guarantees, with a focus on
permitting bonafide transactions; and a coherent and integrated outward direct investment policy.

• A software platform for external commercial borrowings and trade credits reporting and
approval (SPECTRA) encompassing the whole lifecycle from receipt of application to
communication of decision and reporting of transactions would be implemented.

• Rationalization of guidelines relating to Merchanting Trade Transactions (MTT) and provision

of reporting of MTT in Export Data Processing and Monitoring System (EDPMS)/Import Data
Processing and Monitoring System (IDPMS) and guidelines for issue of Letter of Credit (LC) for
import leg.

• A comprehensive review of the reporting requirements would be undertaken, keeping in view

the diverse needs of various stakeholders (including the government).

• Further delegation of powers to APs to reduce transaction costs for users under a standardized
framework through modifications in the IT packages and capacity building at the level of APs.

• Creation of a detailed framework for enhancing FEMA awareness and conducting awareness
programs and creation of digital content on an ongoing basis.

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 4. Data Analysis and Interpretation

CORRESPONDENCE AGE?
CORRESPONDENCE AGE

INTERPRETATION:

 The above pie chart the shows a below 20 age group people 39.8%
 And 21-40 age group people represent 59.2%.
 Rest of the place shows the above 50 age.

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CORRESPONDENCE QUALIFICATION

INTERPRETATION:
 4.1% people are professionals.
 12.2% people are post graduates.
 38.8% people are graduates.
 39.8% people are educated up to HSC.
 4.1% people are educated up to SSC or below.

65
SOURCES WHICH MAKES YOU AWARE ABOUT RBI IN INDIA?

INTERPRETATION:
 In the above pie chart 32.3% percentage shows the people come to get notify
through the advertisement.
 And the 36.55% shows through friends / Relative.
 26% shows the magazines / Newspaper.
 And rest of shows the company sales force.

66
RBI IS DISTRIBUTED AND REGULATE THE FLOW CURRENCY IN
THE ECONOMIC?

INTERPRETATION:
 The above pie chart is shows in 68.4% people are agreed.
 7.1% people disagree of regulate the flow currency in the economy.
 Rests are not sure about the role of RBI in the development of country.

67
RBI IS HELP TO DEVELOP THE COUNTRY?

INTERPRETATION:
 The above pie chart is shows in 80% people are agreed.
 18.9% people disagree to help the country.
 Rests are not sure about the RBI help to the country.

68
RBI’s ROLE OF CURRENCY MANAGEMENT IN COUNTRY?

INTERPRETETION

 87.8% people are agree.

 11.2% are not sure about it
 And rests 1% have other opinion about it.

69
RBI IS BANKER’S BANK?

INTERPRETATION
 86.7% are agree that RBI is banker of the bank.
 4.1% are disagree with that
 And rests 9.2% are not sure about this.

70
RBI IS COVERED UNDER NATIONALIZED BANK?

INTERPRETETION
 68.4% people are agree that RBI is covered under nationalization bank.
 10.2% people are not agree with that.
 And rest 21.4% is not sure about this.

71
 5. SUGGESTIONS AND RECOMMENDATION
On the basis of study of finding the following conclusion and suggestions are
given:
1. The present business environment for banking is highly volatile and uncertain.
It is highly competitive and every bank is finding difficult to service grow,
stabilize and excel in banking business. Further, for better performance
management must keep watch on the emerging trends in business environment.
The proper and timely strategies are to be adopted to improve efficiency of the
whole organization

2. Competition is faced from public, private, foreign and cooperative banks. They
have adopted the strategy for effective workings are use of advance technology
and changes in working procedure. No doubt performance has been improved but
manpower is not maintained and utilized properly. For improvement in human
resources, special focus should be given on selection, training, motivate career
opportunities or employees etc.

3. Manpower is considered as the most important resource but it is day to day

dealing efforts are found for the sufficient efforts are not found for improvement
of competencies and motivation of employees. It is suggest that in this direction
strong steps are to be taken

4. Bank management is interested for performance of employees on paper. When

questions come for implementation and monetary terms the halfhearted efforts are
put. There is need to change the mind set of management further and tune them as
per the need of the hour.

5. Performance management functions are available on papers but actually these

functions are not performed or performed partially. The effectiveness of
performance management is below expectation. Performance management

72
functions should be assigned to a separate cell under HR Head so that
effectiveness of it would improve.

6. The awareness regarding benefits of performance management to banks is not

very high. There is a scope for improvement. The awareness regarding this should
be created further through discussion, circulars and lectures by experts.

7. The employees’ productivity in average is not high in banks. There is a lot of

scope for further improvement and awareness about it should be created through
discussion, meeting and guidance on job among employees working on different
jobs and levels.

8. Management of banks is interested for productivity improvement. This is half

of the way. A big gap is found between actual position and expectations.
Willingness to should the responsibility for productivity improvement is partly
missing. Top level management
Involvement and support can boost the efforts in right direction.

9. Performance appraisal planning and methods used are rightly available on

papers. Regularly appraisals are not carried out properly. The improper appraisal
is creating problems for further actions. Head of HR Department should look into
this, take help of experts’ and implement the performance appraisal strongly. A
lot of irregularities would be overcome.

10. The bankers are aware about the factors affecting productivity improvement.
In private and foreign banks the factors affecting are managed properly but in
public and cooperative banks the situation is of average. These factors are to be
management without any lapse sothat productivity can be improved.

73
 Conclusion

Since the financial sector is not a standalone entity and for its effectiveness various
arrangement and frame works are required among which an effective legal framework is
important. Therefore, financial sector reforms has provided the economic with a lot of
resilience and stability and have boomed nearly every sector of the economy but,
importance must be given to social sector such as, availability of health institutions,
quality of elementary education, literacy rate etc., which areas of more concern in recent
times. And countries like china, Indonesia and even Sri-Lanka are in much better
position. And taking in account the role of RBI as a Regulator and supervisor of the
financial system which have gone under various strategic shifts and RBI has made
significant improvements in the quality of performance of its regulatory and supervisory
function, and as a result our standards are comparable to the worlds. From the data
collected and analyzed the impact of credit policy on nationalized bank and its investors
in Jalgaon district can be given from the findings from bank manager of nationalized
bank and its investors and hypothesis tested:

1. The impact of credit policy upon nationalized bank and its investors is more or less
similar. Credit policy is arrangement of interest rates applicable to deposit & loan and
Regulatory rate like CRR, SLR and Repo rate. Basically from the interest rate point of
view this will discourage investors from banking in Jalgaon District.

2. If we compare the two terms one is high interest rate and Requirement of loan it is
exactly opposite to each other it was seen that when interest rate is high on loan the
requirement is lower and vice-versa. It means interest rates are affecting on demand for
loan or money in the economy.

74
3. Most of investors are not satisfied with earning on deposit in the form of interest. So it
shows that satisfaction level among investors in the banking sector is relatively low
which is in another like land and stock market etc. sector.

4. Credit policy encourages changes in interest rates & amount of money & credit in
economy to minimize price fluctuation and promote economic growth. It is now widely
agreed that credit policy can contribute to sustainable economic growth by maintaining
low and stable inflation. We can say that not only to maintain or control the liquidity but
also central bank should also keep eye on the rate of inflation.

5. Changing in rate of interest also keep away investors from banking operation
particularly deposit segment as well as application for loan. If seen from last few years
rate of interest on deposit and loan is relatively changing this would make a major effect
on banking investors.

6. The principal drawback of reserve requirements is that they impose an indirect tax on
the banking system as an across-the-board levy, which does not take into consideration
the relative liquidity position of the players in the credit markets.

7. The formulation of credit or monetary policy mainly involves preparing a precise plan
aimed at pursuing various objectives, namely, price stability, and output expansion,
maintaining orderly conditions in the financial markets, etc. and setting appropriate
intermediate and operating targets. The implementation of this plan is undertaken by
using various direct and indirect operating instruments such as reserve requirements,
open market operations; refinance facilities, etc. to regulate the operating and
intermediate targets.

75
8. In India, the opening up of the economy in the early 1990s had a significant impact
upon the conduct of Credit or monetary policy. Price stability remains the key objective
of monetary policy and there is virtually a national consensus that high inflation is not
good. Inflation expectations and inflation tolerance have come down. It even affects the
spending decisions and saving pattern of the people.

9. In certain situations, even though there are policy initiations from the RBI, it may not
be fully effective. This is because, even when there are no changes in the money supply,
there may be changes in the price level due to many other reasons.

10. Investors in Jalgaon District may not be fully aware about the detail about banking
operation because they were unknown about various scheme of deposit like recurring etc.
but it would maintain money on their saving account.

76
 Bibliography

Books
• Giriappa Somu (2002), “Impact of Information Technology on Banks”, Mohit
Publication.
• Cooper D. R., Schindler P. S. (2003), “Business Research Methods”, Tata McGrawHill.
• Gupta S. P. (1969), “Statistical Methods”, Sultan Chand and Sons.
• Levin R. I., Rubin D. S. (2002), “Statistics for Management”, Pearson Education
Asia.
• Information Technology, Data communications & electronic banking, 2nd edition,
2007, Banking Course Book, Indian Institute of Banking and Finance, Macmillan
• Design, Development & Implementation of Information systems 2nd edition, 2007,
Banking Course Book, Indian Institute of Banking and Finance, Macmillan
• Security in Electronic Banking, 2nd edition, 2007, Banking Course Book, Indian
Institute of Banking and Finance, Macmillan

Reports
• Reserve Bank of India. (1984). Report of the Committee on Mechanization in Banking
Industry.
• RBI (1989) Report of the committee on computerization in banks (The Rangarajan
Committee) Mumbai: Reserve Bank of India
• RBI (1998) Report of the committee on banking sector reforms (The Narsimham
Committee) Mumbai: reserve bank of India

Websites
• www.rbi.org.in
• www.Banknetindia.com
• http://en.wikipedia.org/wiki/Bank#History.
 APPENDIX

1) WHAT IS YOUR AGE?

 BELOW 20
 21-40
 50- ABOVE
2) WHAT IS YOUR QUALIFICATION?
 SSC / CBSE / ICSE OR BELOW
 HSC
 GRADUATE
 POST GRADUATE
 PROFESSIONALS
3) SOURCES WHICH MAKES YOU AWARE ABOUT RBI IN
INDIA?
 DVAERTISEMENT
 COMPANIES SALES FORCE
 TO DEVELOPED THE COUNTRY?
 FRIENDS / RELATIVES
 MAGAZINES / NEWSPAPER
4) RBI IS DISTRIBUTE AND REGULATE THE FLOW CURRENCY
IN THE ECONOMY?
 Yes
 No
 MAYBE
6) RBI IS ROLE OF CURRENCY MANAGEMENT IN COUNTRY?

 YES
 No
 MAYBE
 Option 4

7) RBI IS BANKER OF THE BANK?

 YES
 NO
 MAYBE

8) RBI IS COVERED UNDER NATIONALIZATION BANK?

 YES
 NO
 MAYBE