RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) was setup in 1935 as a private bank with two extra functions, regulation and control of the banks in India and being the banker of the government.
» After nationalisation in 1949, it emerged as the central banking body of India.
» The governments have been handing over different function to the RBI which stand today as given below.
i) It is the issuing agency of the currency and coins other than rupee one currency and coin.
ii) Distributing agent for currency and coins issued by the government of India.
iii) Banker of the government.
iv) Bank of the banks/ Bank of last resort.
v) Announces the credit and monetary policy for the economy.
vi) Stabilising the rate of inflation.
vii) Stabilising the exchange rate of rupee.
viii) Keeper of the foreign currency reserves.
ix) Agent of the Government of India in the IMF.
x) Performing a variety of developmental and promotional functions under which it did set up institutions like IDBI, SIDBI, NABARD, NHB, etc.,
CREDIT AND MONETARY POLICY
The policy by which the desired level of money flow and its demand is regulated is known as the credit and monetary policy.
» All over the world it is announced by the central banking body of the country.
» As the RBI announces it in India.
» In India there has been a tradition of announcing it twice in a financial year.
» Before the starting of the busy and the slack seasons.
» There are many tools by which the RBI regulates the desired/ Required kind of the credit and monetary policy.
» CRR, SLR, Bank Rate, Repo Rate, Reverse Repo, PLR, Exim interest rate, small saving scheme's interest rates (SSS's), interest changes for the instruments of the money market, etc.,
CRR
The cash reserve ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in the form of cash.
» This was fixed to be in the range of 3 to 15 percent.
» At present it is 4 percent.
» Following the recommendations of the Narasimham Committee on the Financial System (1991) the government started two major changes concerning the CRR.
i) Reducing the CRR was set as the medium term objective and it was reduced gradually from its peak of 15 percent in 1992 to 4.5 percent by June 2003.
ii) Payment of interest by the RBI on the CRR money to the scheduled banks started in financial year 1999 - 2000.
» Though the RBI discontinued interest payments from mid - 2007.
SLR
The Statutory Liquidity Ratio (SLR) is the ratio fixed by the RBI of the total deposits of a bank which is to be maintained by the bank with itself in non - cash form prescribed by the government to be in the range of 25 to 40 percent.
Bank Rate
The interest rate which the RBI charges on its long - term lending is known as the Bank Rate.
» The rate has direct impact on the long - term lending activities of the concerned lending bodies operating in the Indian Financial System.
Repo Rate
The rate of interest the RBI charges from its clients on their short - term borrowing is the Repo rate in India, which at present 6.50 percent.
» In western economies it is known as the rate of discount.
» It is not called an interest rate but considered a discount on the dated government securities which are deposited by institution to borrow for the short term.
» When they get their securities released from the RBI.
» The value of the securities is lost by the amount of the current repo rate.
» This rate functions as the benchmark rate for the inter-bank short-term market (i.e., call money market) in India.
» The repo rate was introduced in December 1992.
Reverse Repo Rate
It is the rate of interest the RBI pays to its clients who offer short-term loan to it.
» At present the rate is at 6.00 percent.
» It is reverse of the repo rate and this was started in November 1996 as part of Liquidity Adjustment Facility (LAF) by the RBI.
» It has a direct bearing on the interest rates charged by the banks and the financial institutions on their different forms of loans.
» This tool was utilised by the RBI in the wake of over money supply with the Indian banks and lower loan disbursal to serve twin purposes of cutting down banks losses and the prevailing interest rate.
MARGINAL STANDING FACILITY (MSF)
MSF is a new scheme announced by the RBI in its Monetary Policy, 2011-12 which came into effect from May, 2011.
» Under this scheme, banks can borrow over night upto 1 percent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 percent
» Now it stands at 6.75 percent
» The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate (i.e, reporate) of interest in comparison with the MSF.
» Banks can borrow through MSF on all working days except saturdays, between 3 : 30 and 4 : 30 pm in mumbai where RBI has it's headquarters.
» The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiple of Rs. 1 crore.
» MSF represents the upper band of the interest corridor.
BASE RATE
Base rate is the interest rate below which scheduled commercial banks (SCBS) will lend no loans to its customers.
» It means it is like prime lending rate (PLR) and the benchmark prime lending rate (BPLR) of the past and is basically a floor rate of interest.
» It replaced the existing idea of BPLR on july 1, 2010.
» The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates.
» Now, all categories of loans are priced with reference to the base rate only, except
a) Differential rate of interest (DRI) loans
b) Loans to bank's own employees, and
c) Loans to bank's depositors against their own deposit
