RBI BASICS

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 RBI BASICS

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• Ambedkar was one of the first generation of professionally trained economists in India. 
• He was also the first Indian political leader with formal training in economics, with research papers published in noted academic journals. He came back from the US in 1916, taught economics at a Mumbai college for three years, and then went to London to do his doctorate at the London School of Economics under Edwin Canaan. The London doctorate was awarded in 1923 and the Columbia one in 1927. 
• Dr Ambedkar was an economist, politician, and social reformer who was known for his campaigns against social discrimination against Dalits, women and labour.
• He was the first ‘untouchable’ to pass matriculation and become first Indian to pursue an Economic doctorate degree abroad.
• The Reserve Bank of India was conceptualised in accordance with the guidelines presented by Dr Ambedkar to the Hilton Young Commission (also known as Royal Commission on Indian Currency and Finance) 
• Guidelines were based on his book, The Problem of the Rupee – Its Origin and Its Solution. 
• Download here – http://drambedkar.co.in/wp-content/uploads/books/category1/13the-problem-of-the-rupee.pdf 
• RBI basics
• Basics : The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
• Preamble : The Preamble of the RBI is – "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." 
• RBI’s board : The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act. Appointed/nominated for a period of four years
• Constitution : Functions – General superintendence and direction of the Bank's affairs
• Official Directors - Full-time : Governor and not more than four Deputy GovernorsNon-Official Directors : Nominated by Government: ten Directors from various fields and two government Officials Others: four Directors - one each from four local boards
• Financial Supervision : The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. Its primary objective 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. 
• BFS meetings : 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 Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. As on date, the BFS focusses on supervision of financial institutions, consolidated accounting, legal issues in bank frauds, divergence in assessments of non-performing assets and supervisory rating model for banks.
• Main Functions : 

1. Monetary Authority
1. Formulates, implements and monitors the monetary policy
2. Objective: maintaining price stability while keeping in mind the objective of growth
2. Regulator and supervisor of the financial system
1. Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
2. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
3. Manager of Foreign Exchange
1. Manages the Foreign Exchange Management Act, 1999.
2. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
4. Issuer of currency
1. Issues and exchanges or destroys currency and coins not fit for circulation.
2. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
5. Developmental role
1. Performs a wide range of promotional functions to support national objectives.
6. Related Functions
1. Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
2. Banker to banks: maintains banking accounts of all scheduled banks.

• Instruments of Monetary Policy – Ratios and Rates
• There are several instruments used for implementing monetary policy.

1. Liquidity Adjustment Facility (LAF): RBI's liquidity adjustment facility (LAF) helps banks to adjust their daily liquidity mismatches. It has two parts - (1) repo (repurchase agreement) & (2) reverse repo. When banks need liquidity to meet its daily requirement, they borrow from RBI through repo. When banks are flush with funds, they deposit those with RBI through the reverse repo mechanism at reverse repo rate. This helps manage liquidity pressures and ensures basic financial-market stability.  The RBI transacts within its open market operations (OMOs). Liquidity adjustment is used to help banks overcome any short-term cash shortages during periods of economic uncertainty or any other stress.
2. Repo Rate: The rate at which RBI lends money to commercial banks in order to help them meet short-term liquidity needs is Repo Rate. Banks sell their securities to the RBI to borrow money, followed by a repurchase agreement. The agreement states that the bank will repurchase the securities at a later date at a price decided in advance. Repo rate is the “policy rate”. A higher Repo Rate will make credit costlier, so reduce its offtake, thereby bringing inflation down (contractionary monetary policy). A lower repo rate will push credit down the channel, thereby increasing liquidity (expansionary monetary policy).
3. Reverse Repo Rate: It is the (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

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