2. Acknowledgement
The success and final outcome of this project
required alotof guidance and assistance from many
people and Iam extremely privileged to have got
this all along the completion of myproject. Allthat I
have done is onlydue to such supervision and
assistance and I would not forget to thank them.
I would like to express myspecial thanks of
gratitude to myteacher Mrs. Lavita who gave me
the golden opportunity to do this wonderful
project on the topic Central Bank and its Functions,
which also helped me in doing a lotofResearch and
icame to know aboutso many new things Iam
really thankful to them.
Secondly Iwould also liketo thank myparents and
3. friends who helped me alotin finalizing this project
within the limited time frame.
4. Central Bank
A CentralBank, Reserve Bank, or Monetary Authority is an
institution that manages a state's currency, money supply, and interest rates. Central
banks also usually oversee the commercial banking system of their respective
countries. In contrast to a commercial bank, a central bank possesses a monopoly on
increasing the monetary base in the state, and usually also prints the national
currency, which usually serves as the state's legal tender. Central banks also act as a
"lender of last resort” to the banking sector during times of financial crisis. Most central
banks usually also have supervisory and regulatory powers to ensure the solvency of
member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by
member banks.
Central banks in most developed nations are institutionally designed to be
independent from political interference. Still, limited control by the executive and
legislative bodies usually exists.
“A Central Bank is the bank in any country to which has been entrusted the
duty of regulating the volume of currency and credit in that country” -Bank of
International Settlement.
Bank of England was the world’s first effective central bank that was
established in 1694. As per the resolution passed in Brussels Financial Conference,
1920, all the countries should establish a central bank for interest of world cooperation.
Thus, since 1920, central banks are formed in almost every country of the world. In
India, RBI operates as a central bank.
Most central banks are governed by a board consisting of its member banks. The
country's chief elected official appoints the director. The national legislative body
approves him or her. That keeps the central bank aligned with the nation's long-term
policy goals. At the same time, it's free of political influence in its day-to-day operations.
The Bank of England first established that model. Conspiracy theories to the contrary,
that's also who owns the U.S. Federal Reserve.
ReserveBankofIndia
Reserve Bank is the Central Bank of India Established in “1st
April 1935” under the “RESERVE BANK OF INDIA ACT”. Its head quarter is in Mumbai
5. (Maharashtra). Its present governor is Urjit Ravindra Patel . It has 22 Regional Offices,
most of them in State capitals.
It was set up on the recommendations of the “Hilton Young Commission”. It was
started as Share-Holders Bank with a paid up capital of 5 crores. Initially it was located
in Kolkata. It moved to Mumbai in 1937. Initially it was Privately Owned. Since
Nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
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."
Objectives Of R.B.I
To manage the monetary and credit system of the country.
To stabilizes internal and external value of rupee.
For balanced and systematic developmentof banking in the country.
For the developmentof organized money market in the country.
For properarrangement of agriculture finance.
For properarrangement of industrial finance.
For propermanagement of public debts
To establish monetary relations with other countries of the world and
international financial institutions.
For centralization of cash reserves of commercialbanks.
To maintain balance between the demand and supply of currency.
FUNCTIONSOF RBI
Issue of currency
Development role
Banker to government
6. Banker to bank
Role of RBI in inflation control
Formulate monetary policy
Manager of foreign reserve
Clearing house functions
Regulations of banking system
Issue and management of public debts
Development of financial institutions
Cash reserve
Counseling services
Acts as Lender of last resort
Issue of Currency:
To ensure adequate quantity of supplies of currency notes and coins of good
quality the RBI issues new currency and destroys currency and coins not fit for
circulation. It has to keep in forms of gold and foreign securities as per statutory rules
against notes & coins issued.
DevelopmentalRole:
To develop the quality of banking system in India RBI performs a wide range of
promotional functions to support national objectives. To establish financial institutions of
national importance, for e.g: NABARD,IDBI etc.
BankertotheGovernment:
RBI Performs all banking function for the central and the state governments and
also acts as their banker excepting that of Jammu and Kashmir. It makes loans and
advances to the States and local authorities. It acts as adviser to the Government on all
monetary and banking matters.
Bankertobanks:
7. Maintains banking accounts of all scheduled banks. RBI also regulates the opening
/installation of ATM Fresh currency notes for ATMs are supplied by RBI. RBI regulates
the opening of branches by banks. It ensures that all the N.B.F.S follow the Know Your
Customer guidelines. The Reserve Bank of India also regulates the trade of gold.
Currently 17 Indian banks are involved in the trade of gold in India. RBI has invited
applications from more banks for direct import of gold to curb illegal trade in gold and
increase competition in the market. Collection and publication of data. It issues
guidelines and directives for the commercial banks.
RoleofRBIininflationcontrol
Inflation arises when the demand increases and there is a shortage of
supply.There are two policies in the hands of the RBI.Namely;
Monetary Policy: It includes the interest rates. When the bank increases the
interest rates than there is reduction in the borrowers and people try to save more as
the rate of interest has increased.
Fiscal Policy: It is related to direct taxes and government spending. When
direct taxes increased and government spending increased than the disposable Income
of the people reduces and hence the demand reduces.
Formulatemonetarypolicy
Maintain price stability and ensuring adequate flow of credit in the economy. It
formulates implements and monitors the monetary policy.
Instruments: qualitative & quantitative.
Quantitative Measures:
Quantitative Measures “BANK RATE ” also called “Discount Rate”. It also
includes “Repo Rate ”. “Open Market Operations” buying and selling of government
securities. “Variable Reserve Ratio” it includes C.R.R and S.L.R.
BANK RATE : It’s the interest rate that is charged by a country’s central bank on
loans and advances to control money supply in the economy and the banking
sector.
Cash Reserve Ratio (CRR): It is the amount of Cash(liquid cash like gold)that
the banks have to keep with RBI.
SLR (Statutory Liquidity Ratio) : It is the amount a commercial bank needs to
maintain in the form of cash, or gold or govt. approved securities (Bonds) before
providing credit to its customers.
8. Qualitative Measures
1. Direct Action: The central bank may take direct action against commercial
banks that violate the rules, orders or advice of the central bank.
2. Moral persuasion: It is another method by which central bank may get credit
supply expanded or contracted.
3. Legislation: The central bank may also adopt necessary legislation for
expanding or contracting credit money in the market.
4. Publicity: The central bank may resort to massive advertising campaign in the
news papers, magazines and journals depicting the poor economic conditions of the
country suggesting commercial banks and other financial institutions to control credit
either by expansion or by contraction.
Managerof ForeignExchange :
To facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India. It acts as a custodian and Manages
the Foreign Exchange Management Act, (FEMA) 1999. RBI buys and sells foreign
currency to maintain the exchange rate of Indian Rupee v/s foreign currencies like the
US Dollar, Euro, Pound and Japanese yen.
ClearingHouseFunctions:
The RBI operates clearing houses to settle banking transactions. The RBI
manages 14 major clearing houses of the country situated in different major cities. The
State Bank of India and its associates look after clearing houses function in other parts
of the country as an agent of RBI.
Regulation Of BankingSystem:
The prime duty of the reserve Bank is to regulate the banking system of our
country in such a way that the people of the country can trust in the banking Up to
perform its duty. The Reserve Bank has following powers in this regard:
Licensing : According to the section 22 of the Banking Regulation Act, every
bank has to obtain license from the Reserve Bank. The Reserve Bank issues
such license only to those banks which fulfill condition of the bank.
9. Management : Section 10 of the Banking Regulation Act embowered the
Reserve Bank to change manager or director of any bank if it considers it
necessary or desirable.
Branch Expansion : Section 23 requires every bank to take prior permission
from Reserve Bank to open new places of business in India.
Power of inspection of Bank: Under Section 35, the Reserve Bank may inspect
any bank and its books and accounts either at its own initiative or at the instance
of the Central Government.
Issueandmanagement of publicdebts:
Central bank manage issue of debts, payment of interest and retirement. Pay annual
interest and return the principal amount on maturity.
Developmentof FinancialInstitutions:
Central bank is responsible to develop financial institution which play vital role in
industrial, agriculture and capital development of economy. It also facilitates the
establishment and running of money market and stock exchange.
Cashreserve :
Every bank is bound to deposited a certain percentage of all its deposits with the
central bank. In this manner central bank finds itself in better position to control credit
money.
Counselingservices:
The central bank offers advice and counseling services in the light of experts and
advice commercial banks to formulates and readjust their polices.
ActsasLenderoflast resort:
The commercial banks approach the Central Bank for its financial needs as it is the
lender of the last resort or the ultimate source of finance.
It lends to the commercial banks by rediscounting the eligible bills. The rediscounting
facilities given by the Central Bank impart elasticity and liquidity to the entire credit
10. structure of the country. It helps the commercial banks in a big way to prevent them
from bank failures.
Moreover, a commercial bank is not entitled to financial accommodation simply because
it has eligible paper or approved securities. Unless it is conducting its business ac-
cording to sound banking principles, the Central Bank refuses accommodation.
The Central Bank is also regarded as performing the function of last resort when it
grants accommodation to the government in times of monetary stringency.
Methods of issuing currency
1. Minimum reserve system
2. Fixed fiduciary system
3. Proportional reserve system
4. Simple deposit method
I. MINIMUM RESERVE SYSTEM
Certain level of gold reserve is fixed against which any amount of currency can be
issued.
Advantages:
• Facilitates saving of gold
• Flexible and allow contraction and expansion of money supply.
Limitations:
• This system cause inflation
• It may lose public confidence for over-issue of the currency.
II. FIXED FIDUCIARY SYSTEM
Currency is issued up to a certain amount without any reserve of gold. Currency
is needed more than the fixed level it must be backed by gold penny for penny. This
method was adopted by Japan and Norway.
11. Merits
• It is safe system
• Inflation is well controlled
• It enjoys public confidence to the highest.
Demerits :
• The system is inelastic
• It adversely affects industrial growth.
• It lacks frugality because it requires much gold
• It is a costly system
III. PROPORTIONAL RESERVE SYSTEM
This system call for a proportionate gold and silver reserve to the total issue of
currency. Due to its strong benefits it has become internationally accepted currency-
issuing system.
Counties depositedreserve ratio:
o U.S 40%
o France 35%
o Germany 40%
o Russia 25%
o Pakistan 30%
o India 40%
Advantages:
• It is flexible.
• It is helpful in industrial growth.
• Gold and silver are required in comparatively small amount.
Disadvantages:
• Inflation to some extent is possible
• Keynes declared it an extravagant and wasteful system
• Government have tendency to violate the system.
12. IV. SIMPLE DEPOSIT SYSTEM
This systemrequiresahundredpercentgoldreserve forthe issue of currency.
Pros :
• It is safe
• Inflation is not possible
Cons :
• It is inelastic and cannot be changed to the requirement.
• It restricts business and industrial growth.
• A large amount of gold and silver is needed.
• Costly and wasteful.
• Risk of deflation.
• It is impracticable
Limitations oftheworkingofRBI
1. Lack of a well organized and well integrated money market.
2. Stability in the internal and external value of the rupee has not been
maintained.
3. The Reserve Bank of India is not as yet a Completely Autonomous
Institution.
4. The unorganized money market of India is still out of the control of RBI.
RepoRateandReverseRepoRate:
Repo rate:
Repo rate is the rate at which the Reserve Bank of India lends the banks
for a very short period. The central bank can make necessary changes in the
13. repo rate according to the present economic situation. It can also be used as a
tool of credit control by RBI.
Reverse Repo Rate:
It is the rate at which Reserve Bank of India borrows from the banks.
Generally there is 1% gap between the Repo rate and Reverse Repo rate. (Reverse
repo rate is always lower than repo rate).
RelationshipbetweenthecentralBank
andCommercialBanks
The Central Bank is the head of the financial system. All financial institutions including
commercial banks are regulated and monitored by the Central Bank.
All commercial banks must keep an account with the Central Bank. These balances are
used for cheque clearing purposes between banks. Payments for cheques between
banks are set off at the Central Bank’s clearing house. The Central Bank can also
demand commercial banks to deposit a certain percentage of their total deposits with
the central bank in order to control the money supply.
The Central Bank dictates the interest rate that commercial banks can offer by setting
the bank rate. This is the interest rate set by the Central Bank and the rate at which
commercial banks and the Central Bank do business, e.g. loans offered by the Central
Bank to commercial bank.
Shaktikanta Das
14. Shaktikanta Das (born 26 February 1957) is a retired 1980 batch Indian
Administrative Service (IAS) officer of Tamil Nadu cadre. Currently serving as the
25th governor of the Reserve Bank of India (RBI), he was earlier a member of
the Fifteenth Finance Commission and India's Sherpa to the G20.
During his career as an IAS officer, Das served in various capacities
for Indian and Tamil Nadu governments, including as Economic Affairs
Secretary, Revenue Secretary, Fertilizers Secretary.
Das was appointed Governor of the Reserve Bank of India by the ACC on 11 December
2018 for a period of three years, replacing Urjit Patel who had resigned the day before.
Das' appointment as RBI governor received mostly positive responses, with DBS Bank's
head of markets for India at Singapore, Ashish Vaidya, saying that previous governors
of the RBI with an IAS background, such as Y. Venugopal Reddy and Duvvuri
Subbarao, had been successful and that Das' "cordial relations with the government [...]
[would] likely help policy negotiations."S. S. Mundra, a former deputy governor of the
RBI, said Das was a "good and balanced choice" for RBI governorship and had "a good
understanding of the whole of the financial sector both from the ministry and also in his
interactions with the RBI." A former Governor of the Reserve Bank of India C.
Rangarajan, said Das had "experience in economic affairs" and would "make a good
governor". Gaurav Shah, a senior vice president at Geojit Financial Services, said "a
name like Shaktikanta Das carries track record, experience, credentials, credibility and
respect along with him.
Das assumed charge as RBI governor on 12 December 2018.Reactions of the markets
to Das' appointment was positive, with BSE SENSEX gaining 629 points and NIFTY
50 increasing by 188 points.
As RBI governor, Das serves as the ex-officio chairperson of the Monetary Policy
Committee of the central bank.