Business and Commercial Knowledge Notes on RBI

Business and Commercial knowledge meanings are vast in their sense. The core means the core of any business concept or model. Commercial knowledge is, in reality, an essential component of every corporate organization. Everything revolves around understanding commercial expertise, whether it’s a company organization or another type of economic activity. 

The Reserve Bank of India (RBI) is India’s central bank, with the primary responsibility of managing and governing the country’s financial system. The Reserve Bank of India Act, 1934, established it as a legislative entity in 1935. The central bank regulates the issue of currency and supply. It also manages the funds of the federal government. 

Major Role of RBI

1. Issuance of Bank Notes:

 Except for one rupee note, which the Ministry of Finance issues, the Reserve Bank of India has sole authority to issue currency notes. The Reserve Bank’s currency notes have been designated public legal tender throughout the country.

This consolidation of the RBI note-issuing function has several benefits: 

(i) it ensures uniformity in note-issuing; 

(ii) it allows for effective state supervision; 

(iii) it makes it easier to control and regulate credit by economic needs; and 

(iv) it maintains public confidence in paper currency.

2. Custodian of Commercial Bank Cash Reserves:

 Commercial banks keep deposits with the Reserve Bank, which has custody of the commercial banks’ cash reserves. As a result, the central bank functions as the custodian of commercial banks’ cash reserves and assists in the facilitation of their transactions. There are several advantages to maintaining commercial banks’ cash reserves with the central bank.

3. Custodian of the Country’s Foreign Currency Reserves:

 The Reserve Bank is in charge of the country’s international currency reserves, which allows it to cope with crises resulting from a negative balance of payments situation. It keeps these rates within strict limits in order to meet its commitments as a member of the International Monetary Fund and to maintain foreign exchange rate stability. It also oversees exchange control activities, delivering foreign currencies to importers and those travelling to foreign nations for business, study, or other reasons, in accordance with government regulations.

4. Lender of Last Resort: 

Commercial banks contact the Reserve Bank in times of financial distress, and the Reserve Bank steps in to help them, even if it means charging a higher interest rate.

5. Credit Controller:

Credit money is the essential component of money supply, and because the money supply has significant consequences for economic stability, credit regulation is critical. The Reserve Bank regulates credit in conformity with the government’s economic goals.

Policies of the RBI

• Repo rate

The repo rate, also known as the repurchase rate, is the interest rate. RBI loans money to all other banks for a brief period. Borrowing from the RBI becomes higher as the repo rate rises, and consumers or the general public bear the brunt of high-interest rates.

• Reverse Repo Rate (RRR)

The short-term borrowing rate at which RBI lends money from other banks is the reverse repo rate. When there is extra money in the financial system, the Reserve Bank of India utilizes this strategy to control inflation.

•  Cash Reserves Ratio (CRR)

The Cash Reserve Ratio is the percentage of a bank’s total deposit that must be kept with the Reserve Bank of India in the form of liquid cash.

• Statutory Liquidity Ratio (SLR)

Banks must have liquid assets such as gold and authorized securities on hand, apart from the cash reserve ratio. A rising SLR makes it impossible for banks to provide more loans.

Role of RBI in Business facilitation

• Monetary Policy 

The Reserve Bank of India (RBI) is in charge of the economy’s monetization (and, more recently, demonetization or remonetization). A sufficient money supply is necessary for the economy to function properly. In a modern economy, all factor earnings are money incomes. The revenue of a company is also monetized. Furthermore, the RBI offers forging cash to ease international commercial operations. It has a significant impact on determining exchange rates, or the rates at which local money is exchanged for foreign currency and vice versa.

• Credit Policy

The RBI does not fund businesses or other activities, for that matter. However, its regulations significantly influence the channelization of banking resources for business, both in general and in specific industries. A slight drop in the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), or Bank Rate can free up significant cash for lending to businesses and other sectors. Let us begin by learning about the magnitude of financial variables such as interest rates.

Conclusion

In banking, insurance, capital markets, commodities markets, and pension funds, India’s financial system is governed by independent authorities. By influencing these regulators, the Government of India plays a significant role in managing India’s financial sector. The important institutions that enable business in India include Indian regulatory authorities such as SEBI, RBI, IRDA, CCI, and Indian development banks such as NABARD. The RBI  is an important topic of business and commercial knowledge notes. Practice Business and commercial knowledge MCQ for understanding the concept.