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Unit 2: Reserve Bank of India

real money. These promises to pay are circulatory multiples of real money. For general purposes, Notes
people perceive money as the amount shown in financial transactions or amount shown in their
bank accounts. But bank accounts record both credit and debits that cancel each other. Only the
remaining central-bank money after aggregate settlement – final money – can take one of two
forms:
1. physical cash, which is rarely used in wholesale financial markets
2. central-bank money.
The currency component of the money supply is far smaller than the deposit component. Currency
and bank reserves together make up the monetary base, called M and M .
1 2

Task Write (in 2000 words) about central bank of any three countries of this world.

Exchange Requirements

To influence the money supply, some central banks may require that some or all foreign exchange
receipts (generally from exports) be exchanged for the local currency. The rate that is used to
purchase local currency may be market-based or randomly set by the bank. This tool is generally
used in countries with non-convertible currencies or partially-convertible currencies.
The recipient of the local currency may be allowed to freely dispose of the funds, required to
hold the funds with the central bank for some period of time, or allowed to use the funds subject
to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be
otherwise limited.
In this method, money supply is increased by the central bank when it purchases the foreign
currency by issuing (selling) the local currency. The central bank may subsequently reduce the
money supply by various means, including selling bonds or foreign exchange interventions.

Selective Credit Control

The Banking Regulation Act confers wide powers on the Reserve Bank of India to control the
level and pattern of banks’ advances in general or on a selective basis. Under Section 21 of the
banking Regulation Act, 1949, the Reserve Bank is empowered to issue directions to the banking
companies to determine the policy in relation to advances to be followed by them either generally
or by any of them in particular. The Reserve Bank’s directives may relate to any/or of the
following:
1. The purposes for which advances may or may not be made.
2. The margins to be maintained in respect of secured advances.
3. The maximum amount of advances to any company, firm, individual etc.

4. The rate of interest and other terms and conditions on which advances and other financial
accommodation may be given.
The Reserve Bank of India has been operating selective controls since 1956 in respect of certain
commodities, which have been sensitive or in short supply. These controls are being enforced
with the objective to discourage the use of bank finance for the hoarding of such commodities so
as to check an unjustified rise in their prices.
Advances against (1) Food grains, (2) Pulses, (3) Oilseeds, (4) Vegetable oils, (5) Cotton and
Kapas and (6) Sugar, Gur and Khandsari have been covered by selective credit controls.

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