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The Reserve Bank’s Central Office was first located in Calcutta but was permanently relocated to Mumbai in 1937. The Reserve Bank of India (R.B.I.) is the country’s leading monetary authority that controls quantitative measures; it prints currency notes (save one rupee note) and distributes them through commercial banks. As a result, the R.B.I. determines the money supply in the whole economy. The Reserve Bank of India (R.B.I.) is the country’s leading monetary authority; it prints currency notes (save one rupee note) and distributes them through commercial banks. As a result, the R.B.I. determines the overall supply of money in the economy.
The goal of Monetary policy:
The:- structure of the banking sector in India depends on R.B.I. The basic goal of monetary policy is to preserve price stability and quantitative measures while keeping growth in mind. Price stability is a need for long-term growth. The Reserve Bank of India (R.B.I.) Act 1934 was changed in May 2016 to provide a legal foundation for implementing the flexible inflation targeting framework. The new R.B.I. The Act also requires the Government of India, in conjunction with the Reserve Bank, to determine the inflation goal once every five years.
The Central Government identified the following causes as contributing to the inability to meet the inflation target: (a) Average inflation exceeds the inflation target’s higher tolerance threshold for three consecutive quarters, or (b) Average inflation falls below the lower tolerance level for three consecutive quarters.
Before the May 2016 change to the R.B.I, the flexible inflation targeting framework was controlled by the February 20, 2015, Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India.
The monetary policy framework:
The new R.B.I. The act specifically gives the Reserve Bank the legislative mandate to run the country’s monetary policy framework.
The framework intends to determine the policy (repo) rate based on evaluating the current and changing macroeconomic circumstances and modulating liquidity conditions to anchor money market rates at or near the repo rate. Changes in repo rates are transmitted through the money market to the whole financial system, influencing aggregate demand – a fundamental predictor of inflation and growth.
Once the repo rate is published, the Reserve Bank’s operational structure envisions liquidity management daily by appropriate measures to anchor the operating objective – the weighted average call rate (WACR) – around the repo rate. The operating framework is fine-tuned and amended in response to changing financial market and monetary conditions while adhering to the monetary policy. The liquidity management framework was extensively altered in April 2016.
There are two types of instruments used by the R.B.I. to control the monetary market of the country:
Quantitative Measures:
(i) Open market operations: The R.B.I. uses this strategy to sell and buy government securities and treasury bills on the open market. When the R.B.I. seeks to lower inflation or the market’s money supply, it sells government securities and treasury bills to financial institutions and vice versa.
(ii) Discount rate or Bank rate: The interest rate at which the R.B.I. loans money to commercial banks. When the R.B.I. seeks to restrict the market’s money supply to control inflation, it raises the bank rate, making borrowing more expensive for all borrowers (Institutions.)
(iii) Cash Reserve Ratio: The money that commercial banks deposit with the R.B.I. When the R.B.I. notices that inflation has grown in the economy due to excess money supply, it raises the C.R.R. so that commercial banks have less money to lend to borrowers.
- Credit Control Measures of a Qualitative or Selective Nature: The Credit Control Measures of a Qualitative or Selective Nature are as follows:
Credit Rationing: In the event of increased inflation, credit is rationed to only those sectors that are critical to the economy (productive lending). Another approach is charging interest on loans once a limit is raised to control the money supply.
Change in Lending Margin: Under this strategy, banks only provide loans up to a specified proportion of the mortgaged property’s worth. The lending margin is the difference between the value of a mortgaged property and the lent amount.
Moral Suasion: Moral suasion is a way of influencing and convincing commercial banks to provide loans in compliance with the R.B.I.’s mandate. Essentially, under this technique, the R.B.I. encourages commercial banks to collaborate in controlling the economy’s money supply.
Conclusion
The Reserve Bank of India (R.B.I.) was founded on April 1, 1935, under the Reserve Bank of India Act, 1934. The Reserve Bank’s Central Office was first located in Calcutta but was permanently relocated to Mumbai in 1937. The Reserve Bank of India (R.B.I.) prints currency notes (save one rupee note) and distributes them through commercial banks. The R.B.I. determines the money supply in the whole economy.
* Ensure that currency is printed and distributed in the economy.
* To serve as a banker’s bank
* Serve as the custodian of foreign money and provide financial advice to the federal and state governments.
