Page 50 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 4: Reserve Bank of India

Notes
the fact that the apex bank hiked CRR by 0.75 per cent instead of by the widely expected
0.50 per cent."
While interest rate pressures are seen, there may not be an immediate increase in rates, the
economists said.
Source: www.thehindubusinessline.com

Task Find out what are the developmental activities RBI is involved in and
evaluate them one by one.
4.2 Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the
Reserve Bank of India.

Monetary Authority

The Reserve Bank of India formulates, implements and monitors the monetary policy with an
objective of maintaining price stability and ensuring adequate flow of credit to productive
sectors. Monetary Policy can be broadly defined as "the deliberate effort by the Central Bank to
influence economic activity by variations in the money supply, in availability of credit or in the
interest rates consistent with specific national objectives." The Reserve Bank adopts expansionary
or contractionary methods of investment and consumption expenditure to regulate the money
supply in Indian economy. For this RBI resorts to quantitative as well as qualitative methods.

Quantitative Measures

1. Open market operations: Open market operations make quite an important instrument of
credit control. The Reserve Bank of India purchases and sells securities in open market
operations. In times of inflation, RBI sells securities to mop up the excess money in the
market. Similarly, to increase the supply of money, RBI purchases securities.
2. Bank rate policy: Bank rate, also referred to as the discount rate, is the rate of interest
which a central bank charges on the loans and advances that it extends to commercial
banks and other financial intermediaries. Changes in the bank rate are often used by
central banks to control the money supply. During inflation, the bank rate is increased and
during deflation, bank rate is decreased.
3. Repo/ reverse Repo: Repo comes from the repurchasing agreement. Whenever the banks
have any shortage of funds they can borrow it either from Reserve Bank of India |RBI] or
from other banks. The repo rate is the rate at which the banks borrow these excess funds.
The borrowing bank mortgages its government securities to carry out this loan transaction.
A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo
rate increases borrowing from RBI becomes more expensive.
Reverse repo rate is the rate that RBI offers the banks for parking their funds with it.
Reverse repo operations suck out liquidity from the system.

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