RBI, India’s Central Bank came into existence on 1st April 1935 as a private shareholders bank. Note : 1st Central Bank in the world : Rick’s Bank Sweden in 1656. But in the light of functions, Bank of England is the 1st Central Bank 1694.
Functions of RBI :
• Monopoly of Note issue
• Banker, Adviser and Agent to the Govt. of India
• Banker to Banks
• Custodian of Foreign exchange and gold.
• Re-discounts bills of exchange and hundis.
• Lender of last Resort
• Maintains stability of foreign value of Rupee.
• Acts as clearing house
• Credit control
Here are some important points to remember about RBI :
• RBI’s central office is in Mumbai.
• RBI has 22 regional offices.
• It was nationalized on 1st January 1949.
• It prints Currency in 15 Languages.
• Its predecessor was Imperial Bank of India (1921).
• RBI came into existence on the recommendation of Hilton Young (Royal) commission as per RBI act 1934.
• It is the member bank of Asian Clearing Union (ACU) and IMF (International Monetary Fund).
• RBI has Board of Directors with 21 (Governor and 4 Deputy Governors etc)
• The present is Dr. Raghuram Rajan.
• Deputy Governors :
• Urjit Patel
• Anand Sinha
• Harun Rashid Khan.
• Currency notes are issued by RBI under “Minimum Reserve System 1957″ with backing of Rs. 200 Cr Reserve (Gold : Rs. 115 Cr + Foreign Securities Rs. 85 Cr)
• RBI Invests foreign exchange reserves in multi-currency, multi-market portfolios such as securities, other central banks and Bank of International Settlements (BIS) and deposits in foreign commercial banks. The yield on such investments is low.
• RBI does not pay interest on Govt. deposits with it.
• The following monetary instruments are in the hands of RBI to control credit and to bring economic stability in the economy :
o Bank Rate : Rate of rediscount at which the RBI discounts the first class bills of exchange brought by the banks.
o Repo Rate : Injection of liquidity by the RBI is termed as ” Repo Rate” . This was introduced in Dec. 1992 and Reverse Repo Rate in Nov. 1996. RBI buys Govt. Securities for a short period usually a fortnight, with an agreement to sell it later. Thus repo rate is a short-term money market instrument to stabilize short term liquidity in the economy.
Reverse Repo Rate, Repo rate, CRR and SLR
1. Repo Rate is the rate at which the RBI lends to commercial banks where as the Reverse Repo Rate is the rate at which the RBI borrows from the commercial banks against securities for a very short period.
2. Repo and Reverse Repo rates are used as policy instruments for day-to-day liquidity management under the liquidity adjustment facility.
3. Cash Reserve Ratio (CRR) : It refers to the percentage of net demand and time deposits which the scheduled commercial banks have to keep with RBI at zero interest Rate as per RBI act 1934.
4. Statutory Liquidity Ratio (SLR) : It refers to the percentage of net demand and time deposits which the scheduled commercial banks have to keep with themselves. i.e. by purchasing Govt. Securities or in the form of cash or gold as per Banking Regulation Act 1949, Sec 24.
>> SLR is a mechanism used by Commercial Banks for providing credit to the Govt.
o Open market operations : RBI buys or sells Govt. Bonds in the second Ratio.
• RBI Amendment Bill 2005 provides flexibility to RBI in fixing the CRR and SLR.
• Though RBI is responsible for the safety and stability of the Banking sector, it is not legally independent.
To read more about these rates in hindi, click here.