Indian Economy Quiz: Central Bank in India and its powers & Functions | 13 July, 2021

The RBI has started publishing a set of new monetary aggregates following the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y.V. Reddy) which submitted its report in June 1998.

• The Working Group recommended compilation of four monetary aggregates on the basis of the balance sheet of the banking sector in conformity with the norms of progressive liquidity: M0 (monetary base), M1 (narrow money), M2 and M3 (broad money).
• In addition to the monetary aggregates, the Working Group had recommended compilation of three liquidity aggregates namely, L1, L2 and L3, which include select items of financial liabilities of non-depository financial corporations such as development financial institutions and non-banking financial companies accepting deposits from the public, apart from post office savings banks.

Source: TMH Ramesh Singh

Bank Rate: Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as “the standard rate at which the Reserve Bank is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act.

• On introduction of LAF, discounting/rediscounting of bills of exchange by the Reserve Bank has been discontinued.
• As a result, the Bank Rate became dormant as an instrument of monetary management.
• It is now aligned to MSF rate and used for calculating penalty on default in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

Statutory Liquidity Ratio: In terms of Section 24 of the Banking Regulations Act, 1949, scheduled commercial banks have to invest in unencumbered government and approved securities certain minimum amount as statutory liquidity ratio (SLR) on a daily basis.

Cash Reserve Ratio: According to Section 42 of the Reserve Bank of India Act, 1934, each scheduled commercial bank has to maintain a minimum cash balance with the Reserve Bank as cash reserve ratio (CRR) which is prescribed by the Reserve Bank from time to time as certain percentage of its net demand and time liabilities (NDTL) relating to the second preceding fortnight.

Source: RBI

Liberalized Exchange Rate Management System (LERMS) was a new system of exchange rate management.

• According to this system, forty percent of the proceeds of exports and inward remittances were purchased at the official exchange rate by the (RBI) Reserve Bank of India for official use.
• Receipts and Payments on capital account continued to be subject to controls.

Source: TMH Ramesh Singh

The Reserve Bank of India compiles on a daily basis and publishes reference rates for four major currencies i.e., USD, GBP, YEN and EUR.

• The rates are arrived at by averaging the mean of the bid/offer rates polled from a few select banks around 12 noon every week day (excluding Saturdays).
• The contributing banks are selected on the basis of their standing, market-share in the domestic foreign exchange market and representative character.

• The Reserve Bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate is a true reflection of the market activity.

Source: TMH Ramesh Singh

National Payments Corporation of India (NPCI), an umbrella organization for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.

• NPCI launched RuPay is an indigenously developed Payment System – designed to meet the expectation and needs of the Indian consumer, banks and merchant eco-system.
• RuPay supports the issuance of debit, credit and prepaid cards by banks in India and thereby supporting the growth of retail electronic payments in India.

Source: NPCI

In his first speech as RBI Governor, Raghuram Rajan (Reserve Bank of India, 2013) emphasized on the importance of inflation targeting and set up an Expert Committee under Deputy Governor Urjit Patel to assess the current monetary policy and give recommendations to strengthen it.

The RBI Act was amended on May 14, 2016 to give the key provisions in the Monetary Policy Framework Agreement (MPFA) a statutory basis.

Source: RBI

The RBI has made it compulsory for banks to link their new floating rate home, auto and MSME loans to an external benchmark so that the borrowers can enjoy lower rate of interest.

All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following:

• Reserve Bank of India policy repo rate

• Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
• Government of India 6-Months Treasury Bill yield published by the FBIL
• Any other benchmark market interest rate published by the FBIL.

Source: RBI

There are several direct and indirect instruments that are used for implementing monetary policy.

• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
• Reverse Repo Rate: 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.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
• Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
• Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.

Source: RBI

Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.

This provides a safety valve against unanticipated liquidity shocks to the banking system.

Source: TMH Ramesh Singh

The Economic Census is being conducted by Ministry of Statistics and Programme Implementation (MoSPI) to provide disaggregated information on various operational and structural aspects of all establishments in the country.

All entrepreneurial units in the country which are involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.

Source: TMH Ramesh Singh