Reserve Bank Of India

Seal of RBI

The RBI headquarters in Mumbai

Headquarters Coordinates Established Governor Central bank of Currency ISO 4217 Code Reserves Base borrowing rate

Mumbai, Maharashtra 18.93337N 72.836201ECoordinates: 1 April 1935 Duvvuri Subbarao India Indian Rupee INR US$300.21 billion (2010 8.50% 18.93337N 72.836201E

Base deposit rate Website

6.00% rbi.org.in

The Reserve Bank of India (RBI) is the banking institution of India and controls the monetary policy of the rupee as well asUS$300.21 billion (2010) of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. Reserve Bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks History

19351950 The central bank was founded in 1935 to respond to economic troubles after the first world war. The Reserve Bank of India was set up on the recommendations of the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for another nine years. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937. The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank for Pakistan until June 1948 when the Pakistan commenced operations. Though originally set up as a shareholders bank, the RBI has been fully owned by the government of India since its nationalization in 1949. 19501960 Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the agricultural sector. The administration nationalized commercial banks and established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans. 19601969 As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector. 19691985 Between 1969 and 1980, the Indian government nationalized 6 more commercial banks, following 14 major commercial banks being nationalized in 1969(As mentioned in RBI website). The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s. The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits. The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies. The branch was forced to establish two new offices in the country for every newly established office in a town. The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. 12

19851991 A lot of committees analyzed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indore Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw). The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalization. 19912000 The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal. The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets. This first phase was a success and the central government forced a diversity liberalization to diversify owner structures in 1998. The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce

their capital base. The central bank founded a subsidiary companythe Bharatiya Reserve Bank Note Mudran Limitedin February 1995 to produce banknotes. Since 2000 The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004 - 2005 (National Electronic Fund Transfer. The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins. The national economy's growth rate came down to 5.8% in the last quarter of 2008 - 2009 and the central bank promotes the economic development.

ORGANISATION STRUCTURE

The organization of RBI can be divided into three parts: 1) Central Board of Directors. 2) Local Boards 3) Offices of RBI 1.Central Board of Directors : The organization and management of RBI is vested on the Central Board of Directors. It is responsible for the management of RBI.Central Board of Directors consist of 20 members. It is constituted as follows. a)One Governor: it is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term. b)Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a term of 5 years c)Fifteen Directors :Other fifteen members of the Central Board are appointed by the Central Government. Out of these , four directors, one each from the four local Boards are nominated by the Government separately by the Central Government. Ten directors nominated by the Central Government are among the experts of commerce, industries, finance, economics and cooperation. The finance secretary of the Government of India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of 4 years. The Governor acts as the Chief Executive officer and Chairman of the Central Board of Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chairman of the Central Board. The deputy governors and governments officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank. 2. Local Boards : Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New

Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central board on general and specific issues referred to them and to perform duties which the central board delegates. 3. Offices of RBI: The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmadabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Luck now and Byculla (Mumbai). The RBI can open its offices with the permission of the Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI.

Main objectives of RBI To manage the monetary and credit system of the country. * To stabilizes internal and external value of rupee. * For balanced and systematic development of banking in the country. * For the development of organized money market in the country. * For proper arrangement of agriculture finance. * For proper arrangement of industrial finance. * For proper management of public debts. * To establish monetary relations with other countries of the world and international financial institutions. * For centralization of cash reserves of commercial banks. * To maintain balance between the demand and supply of currency. Preamble of the Reserve Bank of India "...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." The Preamble of the RBI speaks about the basic functions of the bank. It deals with the issuing the bank notes and keeping reserves in order to secure monetary stability in the country. It also aims at operating and boosting up the currency and credit infrastructure of India. Legal Functions of the RBI Given below are the following functions of the RBI:

Umbrella Acts Reserve Bank of India Act, 1934 Banking Regulations Act, 1949

Other RBI Acts

Given below is the list of other RBI Acts that authorizes the bank to govern and control the economic functions of the other banks operating within the country:Specific Functions Public Debt Act, 1944 or Government Securities Act Securities Contract (Regulation) Act, 1956- This Act regulates the securities market of the government Indian Coinage Act, 1906- It governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999- It governs trade and foreign exchange market Banking Operations Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881 Companies Act, 1956 - This Act enables the RBI to govern banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980- It is related to the nationalization of banks Rights related to Individual Institutions The Industrial Development Bank (by the Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (by the Transfer of Undertaking and Repeal) Act, 1993 State Bank of India Act, 1954 National Bank for Agriculture and Rural Development Act National Housing Bank Act Act related to the deposit Insurance and Credit Guarantee Corporation Offices of the Reserve Bank of India The RBI has 22 regional offices in the state capitals throughout the country. The other institutions that are undertaken by the RBI are:

College of Agricultural Banking Banker's Training College Reserve Bank of India Staff College National Institute of Bank Management Indira Gandhi Institute of Development Research (IGIDR) Institute for Development & Research in Banking Technology (IDRBT)

Functions of RBI

1. Issuer of currency -

Except for issuing one rupee notes and coins, RBI is the sole authority for the issue of currency in India. The Indian government issues one rupee notes and coins. Major currency is in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand. Earlier, notes of higher denominations were also issued. But, these notes were demonetized to discourage users from indulging in black-market operations. RBI has two departments - the Issue department and Banking department. The issue department is dedicated to issuing currency. All the currency issued is the monetary liability of RBI that is backed by assets of equal value held by this department. Assets consist of gold, coin, bullion, foreign securities, rupee coins, and the governments rupee securities. The department acquires these assets whenever required by issuing currency. The conditions governing the composition of these assets determine the nature of the currency standard that prevails in India. The Banking department of RBI looks after the banking operations. It takes care of the currency in circulation and its withdrawal from circulation. Issuing new currency is known as expansion of currency and withdrawal of currency is known as contraction of currency.
2. Banker to the Government

RBI acts as banker, both to the central government and state governments. It manages all the banking transactions of the government involving the receipt and payment of money. In addition, RBI remits exchange and performs other banking operations. RBI provides short-term credit to the central government. Such credit helps the government to meet any shortfalls in its receipts over its disbursements. RBI also provides short term credit to state governments as advances. RBI also manages all new issues of government loans, servicing thegovernment debt outstanding, and nurturing the market for governments securities. RBI advises the government on banking and financial subjects, international finance, financing of fiveyear plans, mobilizing resources, and banking legislation.
3. Managing Government Securities

Various financial institutions such as commercial banks are required by law to invest specified minimum proportions of their total assets/liabilities in government securities. RBI administers these investments of institutions. The other responsibilities of RBI regarding these securities are to ensure o Smooth functioning of the market o Readily available to potential buyers o Easily available in large numbers o Undisturbed maturity-structure of interest rates because of excess or deficit supply

o o o

Not subject to quick and huge fluctuations Reasonable liquidity of investments Good reception of the new issues of government loans

4. Banker to Other Banks

The role of RBI as a banker to other banks is as follows: o Holds some of the cash reserves of banks o Lends funds for short period o Provides centralized clearing and quick remittance facilities RBI has the authority to statutorily ensure that the scheduled commercial banks deposit a stipulated ratio of their total net liabilities. This ratio is known as cash reserve ratio [CRR]. However, banks can use these deposits to meet their temporary requirements for interbank clearing as the maintenance of CRR is calculated based on the average balance over a period.
5. Controller of Money Supply and Credit

In a planned economy, the central bank plays an important role in controlling the paper currency system and inflationary tendency. RBI has to regulate the claims of competing banks on money supply and credit. RBI also needs to meet the credit requirements of the rest of the banking system. RBI needs to ensure promotion of maximum output, and maintain price stability and a high rate of economic growth. To perform these functions effectively, RBI uses several control instruments such as o Open Market Operations o Changes in statutory reserve requirements for banks o Lending policies towards banks o Control over interest rate structure o Statutory liquidity ration of banks
6. Exchange Manager and Controller

RBI manages exchange control, and represents India as a member of the international Monetary Fund [IMF]. Exchange control was first imposed on India in September 1939 when World War II started and continues till date. Exchange control was imposed on both receipts and payments of foreign exchange. According to foreign exchange regulations, all foreign exchange receipts, whether on account of export earnings, investment earnings, or capital receipts, whether of private or government accounts, must be sold to RBI either directly or through authorized dealers. Most commercial banks are authorized dealers of RBI. 7. Publisher of Monetary Data and Other Data -

RBI maintains and provides all essential banking and other economic data, formulating and critically evaluating the economic policies in India. In order to perform this function, RBI collects, collates and publishes data regularly. Users can avail this data in the weekly statements, the RBImonthly bulletin, annual report on currency and finance, and other periodic publications.
8. Promotional Role of RBI

Promotion of commercial banking Promotion of cooperative banking Promotion of industrial finance Promotion of export finance Promotion of credit to weaker sections Promotion of credit guarantees Promotion of differential rate of interest scheme Promotion of credit to priority sections including rural & agricultural sector

Monetary Policy: Key factors Shaping Trajectory Subir Gokarn, Deputy Governor, Reserve Bank of India. Published in the www.livemint.com on September 22, 2011. For energy-importing economies such as China and India, monetary policy is going to be influenced by global oil price movements as long as oil remains the predominant incremental source of energy The core objectives of monetary policy in the future will remain what they have been in the past. The primary objective of monetary policy is a low and stable inflation. In achieving this, the economy has to be allowed to maintain growth at the highest possible rate consistent with a low and stable inflation. However, the context in which these objectives are pursued obviously changes over time. In my view, there are three key factors that are playing an important role in the current Indian context. Each of them has a bearing on both the monetary stance and the strength of the monetary transmission process. Non-inflationary rate of growth (NIRG) The first critical factor is the maximum rate of growth that the Indian economy can generate without provoking inflationary pressures. This notion is a core building block in monetary economics, though it is typically labelled the potential growth rate of the economy. The concept is very simple. If the economy is growing faster than its potential, capacities and resources are stretched. Producers and workers find it relatively easy to raise prices and wages in the face of buoyant demand for their goods and services. Rising prices across the board then translate into generalized or broadbased inflationary pressures. On the other hand, if the economy is growing below its potential, resources are idle, making it difficult for workers and producers to ask for higher wages or prices. Inflation is low and will remain so until the economy reaches its potential growth rate. The challenge for monetary policy, then, is to find and maintain a stance that keeps the economy as close as possible to its potential growth rate. Grow any faster and there is a risk of

inflation becoming entrenched; grow any slower and growth is being needlessly sacrificed. Do we know what Indias NIRG is? In the recent past, at what rates of growth have significant inflationary pressures been triggered? Looking back over the past two decades (see chart 1), we have three distinct episodes of accelerating inflation following a growth spurt. The first is in the mid-1990s, when inflation surged during a three-year period of growth slightly above 7%. The second is in the pre-crisis high-growth phase, when inflation around the middle of a five-year period of growth averaged over 8.5%. The third is in the post-crisis period, when rising inflation accompanied the recovery from a growth of 6.8% in 2008-09, the trough of the crisis, to 8% in the following year. Two important implications for the future of monetary policy can be drawn from these three episodes. First, NIRG is not a long-term constant. It can change over relatively short periods of time, as it did from about 7% to about 8.5% in less than a decade, between the first and second episodes. Importantly, in the transition out of the crisis, when the growth rate accelerated from its low 6.7% in 2008-09 to 8% in 2009-10 and, further, to a currently estimated 8.5% in 2010-11, inflationary pressures quickly became quite strong. This might suggest that NIRG is now closer to 8%. Second, the increase in NIRG from 7% to 8.5% seems to have been accompanied by a sharp rise in the investment-GDP (gross domestic product) ratio and a steady decline in the fiscal deficit-GDP ratio. The former suggests that as new capacity is created in the economy, its ability to grow faster without spurring inflation increases. The latter suggests that for a given rate of growth, the composition of spending also matters. Less government borrowing appears to be associated with a rising NIRG, perhaps because it creates more space for investment. Of course, more analysis of these relationships is warranted, but they do suggest that monetary policy will have to take the overall composition of

expenditure into account while assessing NIRG, which in turn will influence the policy stance. Impact of energy prices For energy-importing economies such as China and India, monetary policy is going to be influenced by global oil price movements as long as oil remains the predominant incremental source of energy. The same arguments hold for other important commodities as well, but energy is likely to be the most important factor, so I shall focus on it. Chart 2 demonstrates how important energy prices and their rate of inflation are to domestic inflation. During the economys pre-crisis high-growth phase, the crude oil price, though rising, was doing so relatively slowly. As we saw in the earlier discussion, the domestic inflationary situation was relatively benign during this period. Just before the crisis, it rose sharply, driving domestic inflation to high levels, before crashing during the crisis, accompanied by a sharp fall in domestic inflation. Although it recovered from that low level quite strongly, it was still below $80 per barrel in October 2010. However, from November onwards, on that relatively high base, yearon-year increases of around 30% have clearly contributed significantly to the acceleration of inflation during the current year. In Indias current situation, as shown by the experience of the past few years, high and rising energy prices have a powerful impact on domestic macroeconomic conditions. If they continue to rise, they will have a negative impact on NIRG; in other words, in order to maintain a given rate of inflation, growth may have to slow. Even if they do not rise, high prices in absolute terms will have a bearing on the commercial viability of investments across the board. Investment activity may decline, contributing to a further erosion of NIRG. This perspective has a straightforward implication for monetary policy. When the economy is at or close to its NIRG, an increase in energy prices can trigger inflationary pressures, because there is high capacity utilization and producers can easily pass on higher energy prices to their consumers.

A common argument in the current Indian policy debate is that since rising energy prices are a supply shock, monetary policy, which acts through its impact on demand, should not respond to this shock. It must be emphasized that this argument has merit only when the supply shock is transitory or temporary in nature. If its impact is likely to fade relatively quickly, a monetary policy response is not required. However, a persistent shock, which takes the prices of critical inputs to new highs and keeps them there, does warrant a monetary policy response. Essentially, to go back to the argument made a little earlier, high and rising energy prices may contribute to the lowering of NIRG and this needs to be recognized and acted upon, if inflation is not to get out of hand. Impact of food prices Years of experience have persuaded us that food price inflation is typically a temporary phenomenon, dependent on whether the monsoon has been good or bad. That this is no longer the case has been vividly demonstrated by the record over the past few years, when food price inflation has persisted despite reasonable monsoon performance in some of those years. The simple reason for this is that Indian households have begun to diversify their diets away from, predominantly, cereals to protein sourcespulses, milk, eggs, meat and fish and vegetables and fruits. Chart 3 very clearly shows the sharp increase in the price trend of protein items. The great consumer boommobile phones, television sets, air conditioners, motorcycles and other productsemerged out of sustained increases in the income levels of millions of households. There is no reason why, at relatively lower income levels, this should not be happening to food as well. In fact, the recently published Consumer Expenditure Survey carried out by the National Sample Survey Organisation in 2009-10 demonstrates how significant the shift from cereals to proteins has been in terms of its significance in household food budgets. The country went through a Green Revolution in the late 1960s and early 1970s, during

which time cereal production was increased dramatically to satisfy demand. At this stage of development, the gap between rapidly rising demand and not-so-rapidly rising supply of proteins, vegetables and fruits have led to sustained increases in food inflation, which a good monsoon or two is simply not going to ease. Just as in the case of energy, an often-raised point is that monetary policy cannot directly address food inflation, so it has no role in responding to it. The response is the same. High and rising food prices in a situation where the economy is at or close to its NIRG do tend to work their way through wage contracts and, eventually, to rising prices across the board. Just as in the case of energy, persistently high and rising food prices adversely impact NIRG and, therefore, do warrant a monetary policy response. Concluding comments It is important to highlight the fact that the central bank is the only component of the policy establishment that has an explicit mandate for price stability or inflation management. Consequently, whatever other goals it may pursue, these must be aligned to this primary mandate. This uniqueness will continue to determine the future trajectory of monetary policy. However, other components of the policy establishment have mandates that may indirectly impinge on inflation. In particular, as was illustrated above with reference to food, but is also relevant to other potential bottlenecks, policy initiatives that induce additional supply help to raise NIRG. This means that any given inflation rate will now be consistent with faster growth, or alternatively, any given growth rate will be consistent with a lower inflation rate. From this perspective, the monetary policy stance will be influenced by an assessment of how NIRG itself is being shaped by public and private investment activity and other policy measures, as well as global developments, including, importantly, trends in commodity prices. Finally, there is a new set of considerations emerging after the crisis, which I did not have the space to go into here.

Perhaps the most important of these is the issue of financial stability and how it should be integrated into the broader regulatory mandate and, more narrowly, into the central bank mandate. This is an evolving global debate and it is too early to say how it will impact monetary policy directly, but it is certainly something to watch out for. QUANTITATIVE MEASURES: Measures which aim to control the quantity of money supply directly such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO) Cash Reserve Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy. Cash reserve ratio (CRR) is that slice of a bank's deposits, which the bank has to compulsorily deposit with RBI. A CRR of six per cent means that out of every Rs 100, bank has to deposit Rs. 6 with RBI. Interestingly, RBI does not pay any interest on this money to banks. When RBI wants to reduce liquidity from the system, like in times of high inflation, it increases the CRR.RBI by varying the CRR regulates the lend able funds of commercial banks. An increase in CRR would also mean that money is being sucked out of the system. This would mean that funds are hard to come by and hence banks will have to pay more to depositors in order to induce them to keep their funds with banks. This will push up cost of funds for banks. The banks therefore will also have to raise lending rates in order to meet the increased cost while maintaining their margins. For example RBI has increased the CRR of scheduled banks by 6% of their Net Demand and Time Liabilities (NDTL). As a result of this increase in the CRR, about 12,500 core of excess liquidity will be absorbed from the system. Statutory Liquidity Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy. Under the provision of Banking Regulation Act governing the banking operations, banks are required to hold liquid assets such as government securities, or other unencumbered approved securities, cash or gold, against their demand and time liabilities as on the last Friday of second preceding fortnight in India. This is known as supplementary reserve requirement or secondary reserve requirement. The main objective of this monetary policy instrument is to ensure solvency of commercial banks by compelling them to hold low risk assets up to a stipulated extent. It also helps to regulate the pace of credit expansion to commercial sector. SLR refers to the ratio of

holdings of the prescribed liquid assets to total time and demand liabilities. At present, SLR is 25%, means 25 out of 100 are invested in prescribed liquid assets. The objectives of SLR are: 1.To restrict the expansion of bank credit. 2.To augment the investment of the banks in Government securities. 3.To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India. Open Market Operations: A monetary policy instrument which is used by the Reserve Bank mainly with a view to affect the reserve base of the banks and thereby the extent of monetary expansion. It also, in the process, helps to create and maintain desired pattern of yield on government securities (G-Sec) and to assist the government in raising resources from the capital market. Under the RBI Act, the RBI is authorized to purchase and sell the securities of the Union Government and State Governments of any maturity and the security specified by the Central Government on the recommendation of Bank's CentralBoard. Presently the RBI deals only in the securities issued by the Union Government. Open market operations are by wayoutright sale and purchase of securities through the Securities Department and repo and reverse repo transactions. When RBI buys the securities in the open market, It increases the liquidity and reserves of commercial banks, making it possible for banks to expand their loans and investments. If RBI sells the securities, the effects are reversed. QUALITATIVE MEASURES: They aim to control the quantity of money supply indirectly through cost of credit. These measures are Bank Rate, Repo & Reverse Repo Rates, and Interest Rates etc. Bank Rate: An instrument of general credit control and represents the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the provisions of the Act. In short, Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect the lending rates through altering the cost of credit. At present Bank rate is 6%. Repo Rate: Repo and Reverse Repo Rates are Liquidity adjustment Facility (LAF) tools used by RBI. Repo is an instrument meant for injecting the funds required and Reverse Repo for absorbing the excess

liquidity out of system. In bond markets, interest rates are the most important factor, and the RBI controls interest rates. RBI uses various rates like repo, reverse repo and CRR to give direction to interest rates in the country. Take an example Repo refers to 'repurchaseobligation'. In case of tight liquidity conditions (as you saw in 2008), when banks need funding for the short term, they approach the RBI and ask for a temporary loan. RBI gives them a loan only after taking some collateral. This collateral is Government Securities (G-Secs). So banks give G-Secs to RBI and take money to meet their temporaryrequirements. The interest rate which RBI charges to banks for such short-term loan is known as the repo rate. After the short-term period is over, banks have the obligation to repay the money back to RBI, along with the interest and '' its G-Secs, hence the word repurchase obligation. In short, Banks borrow from RBI or RBI lends to banks at this rate. It must be understood that when RBI does not want more money to go into the economy, it will raise this rate. When repo rateincreases, the cost of money for banks also increases. Banks in turn increase the interest rates for their borrowers. This preventsborrowers from taking loans from banks and thus RBI's objective of controlling money supply is achieved. Reverse Repo Rate: Reverse repo is that rate which RBI pays to banks. When banks have surplus liquidity and there are not enough borrowings from banks by consumers (as is the condition now), banks park their surplus money with RBI and earn some minimum interest. The rate at which RBI pays interest is known as reverse repo rate. When RBI wants the economy to grow, it will reduce reverse repo rate. By this By doing so, it will give a signal to banks thatinstead of deploying surplus money with RBI for a low return they should deploy the same in projects in the economy, whichwill help to kickstart the economy. In times of ample liquidity, repo rate is practically redundant. Hence you will observe RBI focusing more on cutting reverse repo rates in times of slowdown, as was seen in the recent past. Liquidity Adjustment Facility (LAF): LAF is a monetary policy instrument introduced in 2000 to modulate liquidity in the system in the short term and to send interest rate signals to the market. LAF operates through repo and reverse repotransactions. RBI conducts repo to inject liquidity into the system through purchase of government securities with anagreement to sell them at a predetermined date and repo rate. In the reverse repo transaction RBI sells securities with a view to absorb excess liquidity with a commitment to repurchase them at a predetermined date

and reverse repo rate. Other instruments of liquidity management are Open Market Operations (OMO) in the form of outright purchase/sale of securities and Market Stabilisation Scheme (MSS). Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system. RBI has announced hike of 25 bps in Repo Rate wef 25/10/2011 and accordingly Reverse Repo Rate and Marginal Standing Facility Rates too have been revised. The latest rates are given below 6.00% (w.e.f. Bank Rate 29/04/2003) Increased from 5.00% to 5.50% wef 6.00% 13/02/2010; and then (w.e.f. again to 5.75% wef 24/04/2010) 27/02/2010; and now to 6.00% wef 24/04/2010 Decreased from 25% 24%(w.e.f. which was continuing 18/12/2010) since 07/11/2009 8.50% Increased from 8.25% (w.e.f. which was continuing 25/10/2011) since 16/09/2011

Cash Reserve Ratio (CRR)

Statutory Liquidity Ratio (SLR)

Repo Rate under LAF

Increased from 7.50% Reverse Repo Rate under 7.25% which was (w.e.f. LAF * continuing since 25/10/2011) 16/09/2011 *Reverse Report rate was an independent rate till 03/05/2011. However, in the monetary policy announced on 03/05/2011, RBI has decided that now onwards the Reverse Repo Rate will not be announced separately, but will be linked to Repo rate and it will always be 100 bps below the Repo rate (till RBI decides to delink the same) Marginal Standing Facility 9.50% Increased from 9.25%

(w.e.f. which was continuing 25/10/2011) since 16/09/2011 ** The concept of Marginal Standing Facility has been announced by RBI wef 03/05/2011 (However implemented wef 09/05/2011). It was decided that Marginal Standing Facility i.e. MSF rate will be linked to Repo rate and it will always be 100 bps above the Repo Rate (till RBI decides to delink the same). It remained regulated by RBI till 24th Saving Deposits - For residents October, 2011. RBI has amended the rate of Deregulated (a) It was 4% interest on SF accounts in by RBI wef between 3/5/2011 to exercise of the powers 25/10/2011 24/10/2011; conferred by Section 35A of the (b) It was 3.50% Banking Regulation Act, 1949 between 1/3/2003 to 2/5/2011) Repo epo Rate, Latest SLR Rate, Latest MSF Rate (MSF) ** Saving Deposits under NRO and NRE categories) Increased from 4.00% 3.50%, which was (w.e.f. continuing since 1st 03/05/2011) March, 2003

Monetary Measures On the basis of the current macroeconomic assessment, it has been decided to: increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 8.25 per cent with immediate effect. Consequent to the above increase in the repo rate, the reverse repo rate under the LAF will stand automatically adjusted to 7.25 per cent and the marginal standing facility (MSF) rate to 9.25 per cent with immediate effect. Introduction Since the Reserve Banks First Quarter Review of July 26, the global macroeconomic outlook has worsened. There is growing consensus that sluggishness will persist longer than earlier expected. Concerns over the sovereign debt problem in the euro area have added further uncertainty to the prospects of recovery. Domestically, even as many indicators point to moderating growth, both headline and non-food manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists notwithstanding a normal monsoon. Inflationary pressures are expected to ease towards the later part of 2011-12. Stabilisation of energy prices and moderating domestic demand should facilitate this process. However, in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk. This

makes it imperative to persevere with the current anti-inflationary stance. Global Economy The global economy slowed in Q2 (April-June) of 2011. Lead indicators such as purchasing managers indices (PMIs) suggest a further moderation in economic activity in Q3, with the global manufacturing PMI approaching the neutral level of 50. In recent weeks, global financial markets have been rattled by perceptions of inadequate solutions to the euro area sovereign debt problem, exposure of banks to euro area sovereign debt and renewed fears of recession. Global recovery will also be affected by fiscal consolidation measures in some of the advanced economies. In the US, apart from fiscal concerns, stubbornly high unemployment and weak housing markets continued to weigh on consumer confidence and private consumption. In response to the weakening of economic activity, the US Federal Open Market Committee, in its 9th August meeting, indicated that it would keep the federal funds rate near zero at least through mid-2013. Economic activity in the euro area decelerated significantly during Q2 of 2011 reflecting decline in both private and government consumption expenditures as well as deceleration in capital formation. Economic activity contracted in Japan reflecting the impact of the earthquake/tsunami. In contrast to advanced economies, growth remained relatively resilient in emerging and developing economies, notwithstanding some moderation in response to monetary tightening to contain inflation. Domestic Economy Growth GDP growth decelerated to 7.7 per cent in Q1 of 2011-12 from 7.8 per cent in the previous quarter and 8.8 per cent in the corresponding quarter a year ago. Agricultural growth has accelerated, but industry and services have decelerated. The index of industrial production (IIP) slowed from 8.8 per cent year-on-year in June to 3.3 per cent in July. However, excluding capital goods, the growth of IIP was higher at 6.7 per cent in July as compared with 4.4 per cent in June. Cumulatively, the IIP increased by 5.8 per cent during April-July 2011, compared with an increase of 9.7 per cent in the corresponding period of the previous year. The HSBC Purchasing Managers' Index for the manufacturing sector also suggested moderation. Corporate margins in Q1 of 2011-12 moderated across several sectors compared to their levels in Q4 of 2010-11. However, barring a few sectors, significant pass-through of rising input costs is still visible. Monsoon rains so far have been normal. The first advance estimates for the 201112 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline. Inflation Headline year-on-year wholesale price index (WPI) inflation rose from 9.2 per cent in July to 9.8 per cent in August 2011. Inflation in respect of primary articles and fuel groups edged up in August. Year-on-year non-food manufactured products inflation rose from 7.5 per cent in July to 7.7 per cent in August 2011 suggesting as yet

persistent demand pressures. The oil marketing companies raised the price of petrol by ` 3.14 per litre with effect from September 16, 2011. This will have a direct impact of 7 basis points to WPI inflation, in addition to indirect impact with a lag. The new combined (rural and urban) consumer price index (base: 2010=100) rose to 110.4 in July from 108.8 in June. Other consumer price indices registered inflation rates in the range of 8.4 to 9.0 per cent in July. Monetary, Credit and Liquidity Conditions Year-on-year money supply (M3) growth at 16.7 per cent in August was higher than the projection of 15.5 per cent for the year reflecting higher growth in term deposits and moderation in currency growth. Similarly, year-on-year non-food credit growth at 20.1 per cent in August 2011 was above the indicative projection of 18 per cent set out in the July Review. Liquidity has remained in deficit, consistent with the stance of monetary policy. The daily average borrowings under the liquidity adjustment facility (LAF) were around ` 40,000 crore in September (up to September 15, 2011). Money and the government securities markets have remained orderly. In recent weeks, as a result of global risk aversion, the rupee has depreciated, which may have adverse implications for inflation. Monetary transmission strengthened further with 45 scheduled commercial banks raising their Base Rates by 25-100 basis points after the July Review. Consequently, the modal base rate of banks rose to 10.75 per cent in August from 10.25 per cent in July. Fiscal Conditions The central governments fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline in revenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertiliser subsidies. Fiscal deficit at 55.4 per cent of the budget estimates in the first four months of the current fiscal was significantly higher than that of 42.5 per cent during the corresponding period last year (when adjusted for the more than budgeted spectrum proceeds). Summing Up To sum up, developments in the global economy over the past few weeks are a matter of serious concern. Growth momentum is weakening in the advanced economies amidst heightened concerns that recovery may take longer than expected earlier. Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand. This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for 2011-12 made in the July Review are on the downside. Meanwhile, inflation remains high, generalised and much above the comfort zone of the Reserve Bank. After slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures. Global crude oil prices have remained elevated despite weakening of global recovery. Moreover,

there is still an element of suppressed inflation. Though global oil prices have moderated, the pass-through to domestic prices remains incomplete. Also, current administered electricity prices are yet to reflect increase in input prices, even as many states have initiated increases. Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demandsupply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum, reflected in the de-seasonalised sequential monthly data, persists. Expected Outcome The policy action in this Review is expected to: reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations. Guidance The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Banks comfort zone. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12. As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments.