The Reserve

Bank of India
Functions of the RBI
1. Monetary Authority
• A monetary authority is an institution responsible for managing a
country's currency and monetary policy
• Monetary policy involves management of money supply and interest rate
of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.
• Objective of RBI’s monetary policy: maintaining price stability while
keeping in mind the objective of growth.
The Preamble of the RBI
The basic functions of RBI are
"to regulate the issue of Bank notes and keeping of
reserves with a view to securing monetary stability in
India and generally to operate the currency and credit
system of the country to its advantage; to have a
modern monetary policy framework to meet the
challenge of an increasingly complex economy, to
maintain price stability while keeping in mind the
objective of growth."
 • Till 2016, Reserve Bank of India (RBI) maintained
price stability through a more centralized
How is approach, with the RBI Governor and the
Technical Advisory Committee (TAC) playing key
Monetary roles in deciding monetary policy.
policy • But in 2016, MPC was constituted by the Central
Government under the RBI Act in 2016 to set the
managed? country’s monetary policy, particularly the policy
interest rates.
 • Primary Objective:
• The main goal of the MPC is to maintain price stability, within
the target decided by the central government in consultation
with RBI.
• It also takes into account the need for growth.
• Decision-Making:
Monetary • The committee meets at least 4 times a year to review
Policy economic conditions and set the repo rate—the rate at which
the RBI lends to commercial banks.
committee
• Decisions are made by majority vote, with each member having
one vote, and the RBI Governor has a casting vote in case of a
tie.
 • The MPC consists of 6 members:
• 3 members from the RBI: including the
RBI Governor (who acts as the
chairperson), the Deputy Governor in
Composition charge of monetary policy, and one
officer of the RBI nominated by the
central board.
• 3 external members: appointed by the
Government of India, selected based on
expertise in economics, finance, banking,
or monetary policy. They will hold office
upto 4 years without re-appointment
Inflation targeting

• Set by the Government of India, in

consultation with the Reserve Bank of
India (RBI)
• It is measured by the Consumer Price
Index (CPI).
• Since 2016, the inflation target in
India has been set at 4% with a
tolerance band of ±2%.
• The target is reviewed and decided for a
period of 5 years. The current inflation
target was set for the period 2021-2026
 • Each member has to record reasons for
their vote.
• RBI has to publish a monthly monetary
policy report.
• RBI is accountable for the failure to
Accountability establish and achieve the inflation target.
mechanism • The failure is defined as the inability to
achieve the target of maximum 6% and
minimum 2% for 3 successive quarters.
• Such failure requires RBI to explain its
reasons with remedial actions to the
central government.
 2. Regulator and supervisor of the financial
system:
• Prescribes broad parameters of banking
operations.
• Objective: maintain public confidence in the
Regulator of system, protect depositors' interest and
Banks provide cost-effective banking services to
the public.
• The Reserve Bank of India performs the
supervisory function under the guidance of
the Board for Financial Supervision (BFS).
Regulator of commercial banks
• Bank licensing • Know your customer norms
• Branch expansion • Corporate governance
• Maintenance of statutory reserves • Disclosure norms
• Prudential norms (maintaining • Mergers and amalgamation
enough capital) • Deposit insurance
• Risk Management • Para-banking activities like mutual
• Regulation of interest rates funds and insurance business
Regulator of NBFCs, All India Financial
Institutions, Cooperative Banks etc.
• The four AIFIs, viz. Export-Import (EXIM)
Bank of India, National Bank for Agriculture
and Rural Development (NABARD),
National Housing Bank (NHB) and Small
Industries Development Bank of India
(SIDBI) are under regulation and
supervision of the Reserve Bank.
3. Manager of Foreign Exchange
• Manages the Foreign Exchange Management
Act, 1999.
• Objective: to facilitate external trade and
payment and promote orderly development
and maintenance of foreign exchange market
in India.
4. Custodian of Country’s Foreign Currency
Reserves:
• The Reserve Bank has the custody of the
country’s reserves of international currency,
and this enables the Reserve Bank to deal with
crisis connected with adverse balance of
payments position.
Foreign Reserves India
Managed Float

With the objective of curbing volatility in exchange rate, RBI makes sales or
purchases of foreign currency in the forex market, to even out lumpy (which
comes in spurts) demand or supply.

Such sales and purchases are not governed by a predetermined target or

band around the exchange rate.
5. Issuer of currency:
• The Reserve Bank of India has the
sole right to issue currency notes
except one rupee notes which are
issued by the Ministry of Finance.
• Currency notes issued by the
Reserve Bank are declared unlimited
legal tender throughout the country.
• Objective: to give the public
adequate quantity of supplies of
currency notes and coins and in good
quality.
6. Banker to the banks and Custodian of Cash Reserves of Commercial
Banks
• Banks are required to maintain a portion of their demand and time
liabilities as cash reserves with the Reserve Bank.
• For this purpose, they need to maintain accounts with the Reserve Bank.
• They also need to keep accounts with the Reserve Bank for settling inter-
bank obligations, such as, clearing transactions of individual bank
customers who have their accounts with different banks or clearing money
market transactions between two banks, buying and selling securities and
foreign currencies.
7. Developmental role
• Performs a wide range of promotional functions to support national
objectives. Efforts towards improving financial literacy and financial
inclusion are examples.
8. Central Clearance and Accounts Settlement:
• Since commercial banks have their surplus cash reserves deposited in
the Reserve Bank, it is easier to deal with each other and settle the
claim of each on the other through book keeping entries in the books
of the Reserve Bank.
• The clearing of accounts has now become an essential function of the
Reserve Bank.
9. Lender of Last Resort:
• As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last
resort’. It can come to the rescue of a bank that is solvent but faces
temporary liquidity problems by supplying it with much needed liquidity
when no one else is willing to extend credit to that bank.
• The Reserve Bank extends this facility to protect the interest of the
depositors of the bank and to prevent possible failure of the bank, which
in turn may also affect other banks and institutions and can have an
adverse impact on financial stability and thus on the economy..
10. Controller of Credit:
• Since credit money forms the most important part of supply of
money, and since the supply of money has important
implications for economic stability, the importance of control of
credit becomes obvious.
• Credit is controlled by the Reserve Bank in accordance with the
economic priorities of the government.
• When growth is low, the economy needs more credit and when
inflation is high, credit has to be controlled.
11. Training Establishments
• RBI Academy, College of Agricultural Banking and Reserve Bank of
India Staff College are part of the Reserve Bank.
• Others are autonomous, such as, National Institute for Bank
Management, Indira Gandhi Institute for Development Research
(IGIDR), Institute for Development and Research in Banking
Technology (IDRBT)
12. Banker and debt manager to the government
• The Reserve Bank of India (RBI) acts as the banker to both the
Central and State Governments, requiring them to maintain a
minimum balance.
• Governments keep their cash balances in current accounts with
the RBI, which receives and pays money on behalf of various
government departments.
• Since 1976, each Central Government ministry has been assigned a
specific public sector bank for transactions, reducing the RBI's role
in day-to-day transactions unless specifically nominated.
Government Government securities are debt
instruments issued by the

securities government to borrow money

from the public.
What is a Bond?
• A bond is a debt instrument in which
an investor loans money to an
entity which borrows the funds for a
defined period of time at a variable
or fixed interest rate.
• Bonds are used by companies,
municipalities, states and sovereign
governments to raise money to
finance a variety of projects and
activities.
What is a Government Security (G-Sec)?
• Government securities (G-Secs) refer to a range of financial instruments
issued by the government to finance its fiscal deficit and manage its public
debt by borrowing money.
• Such securities are short term (usually called treasury bills) or long term
(usually called Government bonds or dated securities).
• In India, the Central Government issues both, treasury bills and bonds or
dated securities while the State Governments issue only bonds or dated
securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free
gilt-edged instruments.
Treasury Bills (T-bills)
• Treasury bills or T-bills, which are money market instruments, are short
term debt instruments issued by the Government of India and are
presently issued in three tenors, namely, 91 day, 182 day and 364 day.
• Treasury bills are zero coupon securities and pay no interest. Instead,
they are issued at a discount and redeemed at the face value at maturity.
• For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at
say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at
the face value of ₹100/-.
Cash Management Bills (CMBs)
• In 2010, Government of India, in consultation with RBI introduced a
new short-term instrument, known as Cash Management Bills
(CMBs), to meet the temporary mismatches in the cash flow of the
Government of India.
• Issued on an as-needed basis without a fixed issuance schedule,
(usually less than 91 days)depending on the government’s immediate
cash requirements.
• They have T-bill like structure and generally begins at 1Cr face value.
Dated G-Secs
• Dated G-Secs are securities which carry a fixed or floating coupon
(interest rate) which is paid on the face value, on half-yearly basis.
• Generally, the tenor of dated securities ranges from 5 years to 40
years.
• The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry / depository of G-Secs and deals with the issue, interest
payment and repayment of principal at maturity. Most of the dated
securities are fixed coupon securities.
Types of Bonds

Fixed Rate Bonds – These are bonds on which the interest rate
(coupon rate) is fixed for the entire life (i.e. till maturity) of the
bond. Most Government bonds in India are issued as fixed rate
bonds.

Floating Rate Bonds (FRB) – are bonds where the interest rate
fluctuates over time. The interest rate on these bonds is typically
tied to a benchmark rate (like the RBI’s repo rate, or the U.S.
Treasury rate) plus a set margin or spread
• Capital Indexed Bonds – These bonds have their principal amount adjusted
for inflation (CPI or WPI), ensuring that the investor's capital grows in real
terms.
• For instance, if you invest ₹1,000 in such a bond and the CPI increases by
3% in the first year, the principal would be adjusted to ₹1,030 for
calculating interest in the following year.

• Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both coupon
payments and Principal amounts are adjusted against inflation. Both the
principal and interest payments increase with inflation.
Special Securities
• Under the market borrowing program, the Government of India also issues,
from time to time, special securities to entities like Oil Marketing
Companies, Fertilizer Companies, the Food Corporation of India, etc.
(popularly called oil bonds, fertiliser bonds and food bonds respectively)
as compensation to these companies in lieu of cash subsidies.
• These securities are usually long dated securities and carry a marginally
higher coupon over the yield of the dated securities of comparable
maturity.
Sovereign Gold Bond (SGB)
• Sovereign Gold Bonds (SGBs) are tradeable government securities issued
by the Reserve Bank of India (RBI) on behalf of the Government of India.
• SGBs is directly linked to the price of gold in the market. At redemption
the investor is expected to profit from the higher price of gold.
• The Bonds shall be denominated in units of one gram of gold and
multiples thereof.
• They have a tenure of 8 years with interest paid semi-annually.
Advantages of G-Secs?
• Safety: G-Secs offer maximum safety due to the Sovereign's commitment,
• Holding: Can be held in dematerialized or physical form.
• Maturity: Available in a wide range of maturities, from 91 days to 40 years.
• Liquidity: Easily sold in secondary markets to meet cash requirements.
• Collateral: Can be used as collateral in the repo market.
• Yield: Securities like State Development Loans (SDLs) and Special Securities
(e.g., Oil bonds, UDAY bonds) offer attractive yields.
• Investor Base: Held by banks, insurance companies, large investors, and
statutorily by smaller entities like Co-operative Banks, RRBs, and Provident
Funds.
 • G-Secs are issued through auctions
conducted by RBI. Auctions are conducted on
the electronic platform called the E-Kuber,
the Core Banking Solution (CBS) platform of
RBI.
• What is the RBI Retail Direct Scheme?
How are the • Retail Direct Scheme is a one-stop solution to
facilitate investment in Government
G-Secs issued? Securities by individual investors.
• Under this scheme individual retail investors
can open a Gilt Securities Account – “Retail
Direct Gilt (RDG)” account with RBI. Using
this account, retail investors can buy and sell
government securities through the online
portal
 • Repurchase (buyback) of G-Secs is a process
whereby the Government of India and State
Governments buy back their existing
What is meant securities, by redeeming them prematurely,
from the holders.
by repurchase
• The objectives of buyback can be reduction
(buyback) of of cost (by buying back high coupon
G-Secs? securities), reduction in the number of
outstanding securities and infusion of
liquidity in the system.
• The repurchase by the Government of India is
also undertaken for effective cash
management by utilising the surplus cash
balances.
Ways and Means advances
• The scheme was started in 1997 to end the four-decade-old system of ad-
hoc treasury bills to finance the central government deficit.
• The RBI provides short-term (upto 90 days) credit to the government
under RBI Act through ways and means advances.
• WMA are interest-bearing at repo rate.
• The amount is pre-decided and is valid for 6 months (half-yearly)
• RBI decides the WMA limit for central government and for states uses a
performance metric and a committee approach
• Outstanding WMA amount – Government will incur additional 1%
rate of interest.
• Overdraft - Central government is given 10 days and state
governments 21 days to honour the advance which will incur 2%
additional rate.
• States are provided a special WMA called Special Drawing Facility of
lower interest in lieu of government securities.
• Additionally, the RBI advises the government on monetary and
banking matters and manages public debt, including issuing new
rupee loans, paying interest, and managing repayments through
government securities.
RBI dividend payout
• RBI transfers its surplus to the government as per Section 47 of the
Reserve Bank of India Act, 1934.
• The surplus calculation is based on the Economic Capital Framework (ECF)
recommended by the Bimal Jalan committee (2018).
• The committee, advised the RBI to maintain a Contingent Risk Buffer (CRB)
between 5.5% and 6.5% of its balance sheet.
• CRB is a fund set aside by the Reserve Bank of India (RBI) to cover
unexpected risks
• The ECF will be reviewed every 5 years