Role of Reserve Bank of Role of Reserve Bank of IndiaIndia ( (RBIRBI) )

Benjamen ArwadeBenjamen ArwadePF1102PF1102

SIMSREE, Mumbai SIMSREE, Mumbai

Main functions of RBI Main functions of RBI

Main functions

Bank of Issue Monetary authority Manager of

exchange control Issuer of currency

Developmental role

Related functions

Bank Rate Cash Reserve

Ratio (CRRSLR

• Bank of Issue : Bank of Issue :  The Reserve Bank of India Act,  The Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all the Bank has the sole right to issue bank notes of all denominations.denominations.

  • Monetary authority : Monetary authority : It formulates, implements and It formulates, implements and

monitors the monetary policy as well as it has to monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectorsensure an adequate flow of credit to productive sectors

• Manager of exchange controlManager of exchange control : :   To facilitate To facilitate external trade and payment and promote orderly external trade and payment and promote orderly development and maintenance of foreign exchange development and maintenance of foreign exchange market in India.market in India.

• Issuer of currency : Issuer of currency : The basic objectives of RBI The basic objectives of RBI are to issue bank notes, to maintain the currency are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its and credit system of the country to utilize it in its best advantage, and to maintain the reservesbest advantage, and to maintain the reserves

• Developmental role : Developmental role : The central bank had to The central bank had to perform a wide range of promotional functions to perform a wide range of promotional functions to support national objectives and industriessupport national objectives and industries

What is Monetary Policy?What is Monetary Policy?

• Monetary policy is the process by which the Monetary policy is the process by which the monetary authority of a country controls the monetary authority of a country controls the supply of moneysupply of money

• Targeting the Rate of interest Targeting the Rate of interest • The purpose of which is economic growth & The purpose of which is economic growth &

reduce the unemployment.reduce the unemployment.

Instruments of Monetary Instruments of Monetary policypolicy

Money supplyMoney supply

• The money stock, is the total amount of The money stock, is the total amount of moneymoney available in an available in an economyeconomy at a at a specific timespecific time

• It is measures usually include currency It is measures usually include currency in circulation and demand depositsin circulation and demand deposits

Higher Economic GrowthHigher Economic Growth

• Economic growth is the increase in the amount Economic growth is the increase in the amount of the goods and services produced by an of the goods and services produced by an economyeconomy over time over time

• The concern about economic growth focuses on The concern about economic growth focuses on the desire to improve a country's standard of the desire to improve a country's standard of livingliving

InflationInflation

• Inflation is a rise in the general level Inflation is a rise in the general level of prices of goods and services in an of prices of goods and services in an economy over a period of time.economy over a period of time.

Price StabilityPrice Stability

• Inflation increases price deflation Inflation increases price deflation decreasesdecreases

• Inflation: Fixed income group face Inflation: Fixed income group face economic problem. Problem in every economic problem. Problem in every sector of economysector of economy

• Deflation: It is a decrease in the Deflation: It is a decrease in the general price of level of goods and general price of level of goods and servicesservices

Types of Monetary Types of Monetary PolicyPolicy

  

• Inflation targeting : Inflation targeting : Under this policy approach the Under this policy approach the target is to keep inflation, under a particular target is to keep inflation, under a particular definition such as Consumer Price Index, within a definition such as Consumer Price Index, within a desired rangedesired range..

• Price level targeting : Price level targeting : Price level targeting is Price level targeting is similar to inflation targeting except that CPI growth in similar to inflation targeting except that CPI growth in one year over or under the long term price level one year over or under the long term price level target is offset in subsequent years such that a target is offset in subsequent years such that a targeted price-level is reached over timetargeted price-level is reached over time

• Monetary aggregates : Monetary aggregates : ItIt is a tendency is a tendency in economic thought that emphasizes the role of in economic thought that emphasizes the role of governments in controlling the amount of money governments in controlling the amount of money in  circulation.in  circulation.

• Fixed exchange rate : Fixed exchange rate : Under a system of Under a system of fiat fixed rates, the local government or monetary fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-rate. Instead, the rate is enforced by non-convertibility measures. convertibility measures.

• Gold standard : Gold standard : The gold standard is The gold standard is a system under which the price of the a system under which the price of the national currency is measured in units national currency is measured in units of gold bars and is kept constant by of gold bars and is kept constant by the government's promise to buy or the government's promise to buy or sell gold at a fixed price in terms of the sell gold at a fixed price in terms of the base currency.base currency.

    Monetary policy toolsMonetary policy tools

• Monetary base :Monetary base : Monetary policy can be Monetary policy can be implemented by changing the size of the monetary implemented by changing the size of the monetary base. Central bank use open market operations to base. Central bank use open market operations to change the monetary basechange the monetary base..

• Reserve requirements Reserve requirements :  :  Banks only Banks only maintain a small portion of their assets as cash maintain a small portion of their assets as cash available for immediate withdrawal; the rest is available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loansinvested in illiquid assets like mortgages and loans

• Discount window lending : Discount window lending : Discount Discount

window lending is where the commercial banks, window lending is where the commercial banks, and other depository institutions, are able to and other depository institutions, are able to borrow reserves from the Central Bank at a borrow reserves from the Central Bank at a discount rate.discount rate.

• Interest rates : Interest rates : The contraction of the monetary The contraction of the monetary supply can be achieved indirectly by increasing supply can be achieved indirectly by increasing the nominal interest rates.the nominal interest rates.

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