THE ROLE OF RBI IN THE INDIAN ECONOMY E D I T I O N : A U G U S T ' 2 0 2 2
For editorial queries contact: Newsletter coordinators: Ayushi : 8210768593 Somya: 7014374496 Harshini: 97425 59398 Nikhil: 94264 79242 Faculty Coordinators: Dr. M.V. Narasimha Chary Amit Mishra : 75036 09484 Shivam Satya: 96085 44731 Ramchandra : 90145 13410 FROM THE EDITORS The Financial Bulletin Money Matters Club IBS Hyderabad Estd: 2005 Can We Help? For further inquiries, subscription and advertisement: E mail us @mmcnewsletter1@gmail.com You can log in to: www.mmcibs.com All rights reserved. Money Matters Club, The official Finance Club of IBS Hyderabad. Dear Readers, It gives us a sense of euphoric pleasure as we successfully unleash the Financial Bulletin "THE ROLE OF RBI IN THE INDIAN ECONOMY". The RBI is said to be the apex body in India and the Banks of all Bank. Through this financial bulletin, we have brought forward the various roles performed by RBI, the various functions carried out by RBI, and the publications of RBI along with how the decisions of RBI has impacted the banking sector and its operations. Through this, we aim to give you an insight about the whole of the Reserve Bank of India and a deep understanding about its operations in our country and how that impacts the economy and its various aspects. We hope that our bulletin turns out to be insightful for all our readers. Happy Reading!
function, dealing with e money and financial markets. Monetary policy in India, in the pre reform period had to contend with a multitude of objectives prescribed as part of planning strategies for growth and societal concerns. The high level of automatic monetization of the fiscal deficits and Government’s market borrowings at rates of interest unrelated to market conditions coupled with a plethora of other administered interest rates and pre emptions of credit in the banking and financial sectors had resulted in stunted growth of financial sector and virtual absence of a market for financial assets. As a result, monetary policy had to rely heavily upon direct instruments as evidenced by high pre emption of the banking system’s resources. An objective of reform has been to develop an efficient and integrated financial market as a prerequisite for switching over to indirect instruments of monetary control. With a series of reform measures in money, government securities and foreign exchange markets, the markets have now grown in size, depth and activity paving the way for a flexible use of policy instruments. The transition has been made possible through several initiatives initiated by the Government and the RBI.
P A G E 1
MENTOR SPEAKS
The Reserve Bank of India (RBI) is India's central bank and regulatory body responsible for regulation of the Indian banking system. With the changing business models, increasing user friendly banking and geopolitical situations the role of RBI is changing in terms of monetary policy
P A G E 2
These include deregulation of interest rates; rationalization of CRR and SLR, structural reforms in the real economy, phasing out of ad hoc treasury bills, eliminating the system of automatic monetization and replacing it with a system of Ways and Means Advances, activation of Bank Rate and reduction in the reliance on refinance. Consequently, the thrust of monetary policy in recent years could include use of instruments in a more flexible and bi-directional manner. To ensure that RBI’s conduct of monetary policy continues to command respect and credibility, it is necessary to focus on existing constraints, emerging factors, and possible impact on the policy in the future. With globalization and impact of technology, several new challenges are likely to emerge for the fraternity of central banks. The emergence of ‘ e-money ’ or electronic devices that store monetary value in electronic form could have perceptible implications for monetary policy. In this regard, there are two inter related issues namely, impact on the balance sheet of the central bank and the conduct of monetary policy. The balance sheet effect implies that extensive use of e money could substantially replace central bank money, i.e., currency notes in the hands of the public. Since currency notes form a major chunk of any central bank’s balance sheet, the expansion of e money would imply that the size of the balance sheet would shrink resulting in the erosion in its capacity of conducting effective Open Market Operations (OMO). In this situation, large additional reserves with the banking system created in the wake of large scale use of e money cannot be sterilized and could pose a challenge to monetary policy.
P A G E 3
The rapid expansion of e-money would also pose challenges in the area of compilation of monetary statistics and, therefore, render the monetary policy prone to operational errors. The issue of e money not backed by central bank money by private issuers would also be subject to the problem of moral hazard and would necessitate careful and extensive supervision by central banks. Another challenge that central banks might face would be in their role in crisis prevention in the context of large volume and high speed transactions through complex instruments. This would require building of enhanced expertise to deal with moral hazard and systemic problems and strategies of intervention with safeguards against undue credit risk exposures.
The role of financial markets in the economy gets significantly enhanced as the process of reform continues. While this process essentially involves domestic liberalization, the decision to open up the economy adds urgency and complexity to the process of developing financial markets in India. The changing role and increasing responsibility of RBI has to be seen in this context and in conjunction with development of financial markets in areas outside of RBI jurisdiction but relevant to its activities, especially equity markets and insurance activities. More specifically, the role of the RBI in the financial markets should be assessed in the light of the following: First, the primary interest of the RBI in financial markets is because of its criticality in the transmission of monetary policy. Second, the conscious effort by the RBI towards the development of efficient, stable and healthy financial markets is important since they were repressed in several ways in the past by law, regulation and policies
The RBI has, therefore, to equip itself to perform its developmental and regulatory roles effectively. The process involves constant interaction with the rest of the world in order to identify best practices, benchmark existing practices in our markets, identify gaps and take measures to move towards these international standards, within the framework of our unique country circumstances. Secondly, coordination with other regulators within the country is important to sort out regulatory gaps and overlaps. Thirdly, it is important to constantly interact with market participants without in any way compromising confidentiality so as to effect changes in the regulatory aspects of the markets through consultative mechanisms. Fourthly, with increased liberalization, there is also need to update information and market intelligence to assess the prevailing situation and take quick actions. Fifthly, a major challenge within the RBI will be to institute arrangements to improve its skills to keep pace with the speed and the skills of market participants.
Hence, the RBI has been and should continue to facilitate the development of markets through legal changes, technological and institutional development and dynamic improvements in market microstructure. Third, regulation of some financial markets is warranted by virtue of RBI’s charter. Fourth, with the gradual development of sophisticated instruments and innovations in market practices, technological infrastructure has become an indispensable part of the reform of the financial markets.
P A G E 4
T A B L E O F C O N T E N T S 2. GOVERNANCE ON BANKS & NBFCS 3.ROLES & FUNCTIONS 4. RBI’S ROLE IN INFLATION 5. RBI AS THE FOREIGN EXCHANGE RESERVE CUSTODIAN 7. RBI'S ROLE IN DIGITALIZING THE BANKING SECTOR 6. RBI'S ROLE IN CONTROLLING THE RUPEE-DOLLAR HIKE 8. PUBLICATIONS OF RBI I. INTRODUCTION 4 5 12 22 26 29 32 35 M O N E Y M A T T E R S C L U B
It has different decisions to oversee different functions. The printing and minting of Indian banknotes and coins is handled by the RBI’s Bhartiya Reserve Bank Note Mudran division. The Reserve Bank of India formed the National Payments Corporation of India to regulate India’s payment and settlement systems and the Deposit Insurance and Credit Guarantee Corporation to provide deposit insurance and credit guarantees to all Indian banks. It also had full control of monetary policy until the Monetary Policy Committee was constituted in 2016.
P A G E 4 -
Shivika Goel
Established in 1935, in accordance with the Reserve Bank of India Act, the Reserve Bank of India is the central bank of India, playing a vital role in the economic development of the country by controlling inflation and supporting economic growth. It works as an independent body (regulated under the Ministry of Finance), performs different monetary roles like issuing currency notes, maintaining monetary stability in the country etc.
INTRODUCTION
Governance of Commercial Banks:
GOVERNANCE ON BANKS & NBFCs
Committees of the Board: 1. The ACB will be exclusively made up of non-executive directors (NEDs). The board's chair is not allowed to belong to the ACB. A quorum of three members is required for meetings of the ACB. Independent directors must make up at least two thirds of the ACB meeting attendees. The ACB must meet at least once every three months. An independent director who does not head any other board committee must preside over meetings of the ACB. The ACB Chair is not permitted to serve on any board committee with the authority to approve credit exposures. All members should be able to comprehend all financial statements and the notes and reports that are attached to them, and at least one member must possess the necessary professional expertise or qualification in financial accounting or financial management [for example, experience applying accounting standards and practices, including internal controls around.
1. The Chair and meetings of the Board: An independent director shall serve as the board's chair. The board meetings will be presided over by an independent director when the chair is not present. One-third of the board's total membership or three directors, whichever is higher, shall constitute a quorum for board meetings. At least half of the directors in attendance at board meetings must be independent.
P A G E 5
Audit Committee of the Board (ACB):
2. Risk Management Committee of the Board (RMCB):
3. Nomination and Remuneration Committee (NRC):
The top age restriction for NEDs, including the Chair of the Board, is 75 years old, and no one may continue in these roles after reaching that age. A NED's overall term on a bank's board, whether continuous or not, should not exceed eight years. After serving on a bank's board for eight years, a person may be considered for reappointment only after a three year break. If the qualifications are met, this will not prevent him/her from being appointed as a director in another bank.
The board shall appoint an NRC composed only of NEDs. A quorum of three members is required for the NRC to meet. At least half of the members attending the NRC meeting must be independent directors, one of whom must be a member of the RMCB. The NRC meetings will be presided over by an impartial director. The board's chair shall not preside over the NRC. The NRC meeting can be called whenever it is needed. Age and Tenure of Non-Executive Directors:
P A G E 6
The board will be an RMCB with a majority of NEDs. A quorum of three members is required for the RMCB to convene. At least half of the members attending the RMCB meeting must be independent directors, with at least one having professional expertise/qualification in risk management. 2. Meetings of the RMCB should be presided over by an independent director who is not a member of the board or any of its committees. The Chair of the Board may serve on the RMCB only if he or she possesses the necessary risk management experience. The RMCB must meet at least once per quarter.
The jobs of MD and CEO or WTD cannot be held by the same incumbent for more than 15 years, subject to the legislative permission needed from time to time. Following that, the individual will be eligible for reappointment as MD, CEO and WTD in the same bank, if the board deems it essential and desirable, after a minimum three year hiatus, subject to additional requirements. During the three year cooling period, the individual may not be appointed or affiliated in any position with the bank or its group businesses, either directly or indirectly. It is clarified that the existing instructions on the upper age restriction for MD&CEO and WTDs in private sector banks will be followed, and no one will be able to remain as MD and CEO or WTD after the age of 70. Individual bank boards are free to prescribe a lower retirement age for WTDs, including the MD and CEO, within the general limit of 70 years as part of their internal policy. A MD&CEO or WTD who is also a promoter/major stakeholder cannot serve in these positions for more than 12 years.
P A G E 7
Remuneration of Non-Executive Directors:
Tenure of Managing Director &CEO and Whole Time Directors:
In addition to sitting fees and expenses related to attending board and committee meetings as per existing statutory norms/practices, the bank may provide for payment of compensation to NEDs in the form of a fixed remuneration commensurate with an individual director's responsibilities and time demands, and which is deemed sufficient to attract qualified and competent individuals. However, such a fixed salary for a NED other than the Chair of the Board must not exceed Rs. 20 lakh per year.
The Constitution of Committees of the Board:
All applicable NBFCs must form an Audit Committee composed of at least three members of their Board of Directors. For the purposes of this paragraph, the Audit Committee shall be the Audit Committee formed by a non-banking financial firm as required by Section 177 of the Companies Act, 2013. The Audit Committee established under this paragraph will have the same rights, responsibilities, and obligations as specified in Section 177 of the Companies Act of 2013. The The Audit Committee must guarantee that an information systems audit of the internal systems and procedures is performed at least once every two years in order to analyze operational risks faced by NBFCs.
P A G E 8
However, in exceptional situations, such MD&CEO or WTDs may be allowed to continue for up to 15 years at the sole discretion of the Reserve Bank. The Reserve Bank would consider the amount of development and adherence to the milestones for dilution of promoters' shares in the bank when reviewing the question of re appointment of such MD&CEOs or WTDs during the 12/15 year timeframe.
2. Governance of Non-Banking Financial Companies:
Nomination Committee: All applicable NBFCs must organize a Nomination Committee to ensure that proposed/existing directors are "fit and suitable." The Nomination Committee established under this paragraph will have the same rights, responsibilities, and obligations as specified in Section 178 of the Companies Act of 2013.
P A G E 9
All applicable NBFCs should present to the Board of Directors, at such intervals as the Board may specify, the following:
Fit and Proper Criteria: All Applicable NBFCs shall Provided, however, that the Bank maintains the authority to assess the fit and appropriate criteria of directors of any non-banking financial organization, regardless of its asset size, if it deems fit and in the public interest.
Disclosure and transparency: 1.
Get the directors' signatures on a Deed of Covenant. Provide the Reserve Bank with a quarterly summary on director changes, as well as a certificate from the Managing Director of the NBFC stating that fit and sufficient standards for director selection were followed. The statement must be received by the Reserve Bank's Regional Office within 15 days after the end of the corresponding quarter. The auditors should certify the NBFCs' statements for the quarter ended March 31st.
Establish, with the consent of the Board of Directors, a policy for determining the fit and appropriate criteria of the directors at the time of appointment and on an ongoing basis. Acquire from the directors a declaration and undertake to provide more information about the directors.
The Risk Management Committee: In addition to the Asset Liability Management Committee, all applicable NBFCs must create a Risk Management Committee to manage the integrated risk.
The NBFCs' progress in implementing a progressive risk management system and risk management policy and strategy Compliance with corporate governance standards, such as the composition of various committees, their roles and functions, the frequency of meetings, and compliance with coverage and review functions, among other things. Registration/license/authorization gained from other financial sector regulators. Ratings awarded by credit grade agencies and movement of ratings during the year. Penalties imposed by any regulator Asset-Liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off balance sheet exposures, structured products issued by them, as well as securitization/assignment transactions, and other disclosures.
2. Beginning March 31st, 2015, all applicable NBFCs must provide the following information in their Annual Financial Statements: Rotation of partners of the Statutory Auditors' Audit Firm: Every three years, all applicable NBFCs must rotate the partner/s of the chartered accounting firm performing the audit such that the same partner does not conduct the company ' s audit for more than three years.
P A G E 1 0
Framing of Internal Guidelines: With the approval of the Board of Directors, all applicable NBFCs shall frame their internal corporate governance guidelines, enhancing the scope of the guidelines without sacrificing the spirit underlying the above guidelines, and they shall be published on the company ' s website, if any, for the information of various stakeholders. Priya
P A G E 1 1 - Ayushi
.However, if the NBFC so chooses, the rotational partner will be entitled to perform the NBFC audit after three years. NBFCs must include relevant provisions in the letter of appointment of the auditor firm and guarantee their compliance.
Monetary Authority: It chooses the quantum of money needed to be delivered to the economy in order to improve the exchange rate, sustain a good equilibrium of expenditure, and achieve fiscal stability. Regulate inflation, strengthen and support the introductory banking system.
The issuer of the currency: It has the only authority in India to produce currency. It also takes action to regulate the passage of fake bank notes.
The issuer of a banking permit: According to Sec 22 of the Banking Regulation Act, a bank isn't authorized to start its functions without attaining a license from the RBI. Bankers to the Government: It acts as a financier both to the state and the central governments. It delivers short term credit. It governs all new matters of government lending, maintaining the government debt unsettled, and taking care of society for the The Preamble of the Reserve Bank of India describes the essential functions of the Reserve Bank of India to regulating the issue of notes and keeping reserves with a view to securing financial stability in India and generally operating the currency and credit system of the country to its advantage; to have an ultramodern financial policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the idea of growth. Functions of the RBI in the Indian Banking System:
ROLES & FUNCTIONS
P A G E 1 2
Financier of last resort: All the other banks can adopt from the Reserve Bank of India by keeping good securities as a deposit at the time of extremity or need.
Banker and debt regulator of government: It retains credits of Governments devoid of charging any interest, accepts and makes the compensation, carries exchange payments, and aids to float new loans and control public debt, it also acts as a companion to Government.
Regulator of the Economy: RBI manages the money force in the system and tracks the different vital pointers such as inflation, GDP, etc.
P A G E 1 3
Bankers Bank: It is the bank of all banks in the country as it delivers the loan to bankers' banks, rediscounts the bill of banks, and receives the payment from banks.
Money supply and Regulator of Credit: To manage demand and force of cash in the economies by open Market conduct, Credit Ceiling, and much further. It has to meet the credit requirements of the remaining banking system. It requires sustaining price stability and an elevated rate of profitable growth.
Clearinghouse: In support of the agreement of banking dealings, RBI governs 14 clearing houses. It enables the exchange of devices and the processing of charge instructions.
Controller of foreign exchange: RBI acts as a guardian of FOREX. It oversees and implements the implementation of the Foreign Exchange Management Act( FEMA), 1999. It buys and sells foreign currency to conserve the exchange rate of the Indian rupee v/ s overseas currencies.
Regulator and Supervisor of Expense and Settlement structures: The Payment and Clearing Structures Act of 2007( PSS Act) provides the Reserve Bank of India with oversight power for the expenditure and clearing systems in the country. It emphasizes the development and working of safe, effective payment and payment mechanisms. Development part: This part includes the development of the standards of the banking system in India and guaranteeing that credit is accessible to productive areas of the economy. It delivers a wide range of hype functions to upkeep public objects. It also includes establishing associations designed to shape the country's fiscal set up. It also supports expanding access to affordable financial services and championing fiscal literacy and knowledge.
Publisher of profitable data and fresh data: Reserve Bank of India preserves and provides all pivotal banking and fresh profitable data, articulating and critically assessing the profitable guidelines in India. It collects, combines, and publishes information regularly. Exchange Director and regulator: Reserve Bank of India represents India as an associate member of the International Monetary Fund (IMF). The majority of the commercial banks are certified members of the RBI.
Managing government securities: It directs investments in associations when they invest minimum quantities of their total liabilities and assets in government securities.
P A G E 1 4
P A G E 1 5
Standards Board of India and Banking Codes: To calculate the presentation of banks in contrast to codes and norms centered on allowed global practices, the Reserve Bank of India frames the Standards Board of India( BCSBI) and Banking Codes.
Impartial Practices Codes For Investors: RBI framed the Fair Practices Code for Investors, which was conveyed to banks to cover the interests of the debtors. All the banks are anticipated to track the codes formulated by the RBI.
Miscellaneous Functions: Reserve Bank of India gathers, collates, and issues all financial and banking information constantly in its weekly statements, in the RBI Notice( monthly) and in the Report on Cash and Finance. The aptitude of industrial finance: Fast industrial growth is vital to the growth of the economy. Furnishing satisfactory and timely acknowledgement to small, medium, and large businesses is certainly significant. The RBI has a crucial role in setting up distinct financial establishments similar to ICICI, IDBI Ltd, Exim Bank, etc.
Provisions of Training: It has always strived to give pivotal training to the workforce of the banking trade. The RBI has framed the bankers' training institutions in several places. BSC( Bankers Staff College), NIBM( National Institute of Bank Management), and CAB( College of Agriculture Banking) are some to mention.
Banking Ombudsman Scheme: Reserve Bank of India first presented the Banking Ombudsman Scheme in 1995. In this scheme, the appellants can file their expostulations in any form, including online and can also file a solicitation to the RBI against the subventions and the other verdicts of the Banking Ombudsman.
RBI Functions in General Terms: Monetary Policy: It denotes the use of monitoring tools under the control of the RBI in order to control the availability, cost, and use of cash and credit. Cash Reserve Ratio: The CRR is decided by the RBI and the percentage changes every year. Banks need to hold a certain quantum of their credit in the P A
furnishing authorization to banks; managing the number of new branches Doing a timely examination of banks monitoring Bank Financial Associations
G E 1 6
The Non Bank Financial Establishments are inclined by the working of financial policy. The RBI has the right to give orders to the NBFIs regarding their functioning. Prosecution of the Deposit Insurance Scheme To guard the credit of small depositors, the RBI is working to devise the Deposit Insurance Scheme in the event of a bank failure. It cannot give any direct financial support to any trade, industry, or business It cannot buy its own share It cannot buy shares of any artificial and marketable undertaking. It cannot buy any immovable property It cannot give loans on the security of shares and property.
Supervisory Functions of RBI: Prohibitory Functions of RBI
RBI follows CRR either to drain fresh liquidity from the economy or to discharge additional reserves needed for the progression of the economy. The statutory liquidity ratio: SLR is the sum that commercial banks are obliged to maintain in the form of gold or government-permitted securities before issuing credit to their customers.
Repo Rate: The rate at which the Reserve Bank of India credits cash to marketable banks is called the Repo Rate. Every time banks face a restraint of resources, they can take from the RBI, against safety. However, borrowing becomes suitably expensive for banks and vice versa if the RBI surges the repo rate. As a device to regulate inflation, the RBI surges the repo rate, making it more expensive for the banks to take from the RBI with the vision of limiting the availability of cash. Likewise, the RBl does the exact reverse in a deflationary situation.
Reverse Repo Rate: It is a rate at which the Reserve Bank of India is prepared to adopt from the commercial banks and is entitled to a reverse repo rate. However, it means that the RBI is keen to give banks a good interest rate to place their money with the RBI, If the RBI surges the reverse repo rate. This results in a reduction in the quantum of cash accessible for bank customers as banks prefer to credit their money with the RBI as it assures advanced security.
P A G E 1 7
The development of financial institutions Development of backward areas Bringing profitable stability Easing economic growth Preparing The proper interest rate structure
Development of the banking system
P A G E 1 8
The Repo Rate and Reverse Repo Rate are significant tools through which the Reserve Bank of India can govern the availability and supply of cash in the economy. Role of RBI: RBI was established in 1935 under a special Act of Parliament. It's responsible for determining the country's financial policy. The main functions of the RBI are to maintain fiscal stability and ensure acceptable liquidity in the economy. The following are the main functions that the RBI performs.
RBI's Role in Economic Development: The Reserve Bank of India has a pivotal role in the Indian economy as it makes or breaks the economy. Following mentioned are the regions where RBI plays a significant part: RBI’s Role in Promoting Schemes and Policies: Publicizing schemes and policies that benefit the community as well as the government is one of the main functions of RBI. Below stated are the parts RBI selects for economic development
Promotion of commercial banking Promotion of collaborative banking Promotion of industrial finance Promotion of export finance Promotion of credit guarantees Promotion of a discriminational rate of interest scheme Promotion of credit to precedence sections including rural & agrarian sectors of credit to weaker sections
Promotion
P A G E 1 9
Role of the RBI in the current scenario: On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent with immediate effect. The marginal standing facility (MSF) rate and the bank rate were both set at 5.15 per cent. The MPC also decided to remain focused on the pull out of accommodation to ensure that inflation remains within the target going forward while supporting growth.
Policy Rates: P A G E 2 0 Policy Repo Rate 4.90% Bank Rate 5.15% Marginal Standing Facility Rate 5.15% Standing deposit facility Rate 4.65% Fixed Reverse Repo Rate 3.35% Reserve rates: Cash Reserve Ratio 4.50% Statutory Liquidity 18.00% Ratio
These opinions are in consonance with the idea of achieving the medium term target for the consumer price index (CPI) affectation of 4 per cent within a band of / 2 per cent while supporting growth. The main considerations underpinning the decision are set out in the statement below.
Global Economy: Since the MPC’s meeting in May 2022, the global economy has continued to grapple with multi decadal high inflation and decelerating growth, persisting geopolitical pressures and warrants, elevated prices of crude oil and other goods; and lingering COVID 19 related supply chain bottlenecks.
P A G E 2 1
Domestic Economy CPI headline inflation rose further from 7.0 per cent in March 2022 to 7.8 per cent in April 2022, reflecting a broad grounded increase in all its major ingredients. Food inflation pressures are accentuated, led by cereals, milk, fruits, vegetables, spices and set meals. Energy inflation was driven up by a rise in LPG and kerosene prices. Core inflation (i.e., CPI excluding food and energy) hardened across nearly all factors, dominated by the transport and communication subgroup. - Gopi Laxman & Mohak Agarwal
RBI’s Role in Inflation
Inflation is largely misunderstood as just a “rise in prices”. There may be temporary phenomena like a sudden bumper or unexpected failure in production of certain sectors like agriculture which cause temporary price change. These price movements must not be conceptualized as inflation or deflation but rather as market occurrences of brief fluctuations in supply. Dealing with inflation is even more difficult because it has several facets. The mismatch between total supply and total demand, as well as the structure and application of policy, is what causes inflation. The corporate, labour, home, and governmental sectors, as well as the industrial and agricultural sectors, all contribute to the economy ' s total demand. Therefore, there are limits to what a single source can affect. Due to their interdependence, it is also exceedingly challenging to determine precisely what source is causing what and how much it is hurting the economy. These restrictions help make inflation one of the most difficult issues to manage, making it the emperor of economic maladies. It might be helpful to keep in mind that inflation is a gradual phenomenon. Insofar as it gives you time to protect yourself, it is benign. The Reserve Bank of India is responsible for monitoring and controlling the inflation situation in India.
P A G E 2 2
P A G E 2 3
Reverse Repo rate: It refers to the interest rate at which the RBI borrows money from private banks. When there is no other lucrative option to invest the short term excess liquidity or when there is severe market uncertainty, banks deposit money in the RBI. Bank Rate: The rate at which the RBI permits lending to domestic banks. Usually, it lasts only a short time. There are no securities to be held against the funds, unlike the repo rate. But bank rates are rarely adjusted under measures meant to manage inflation. Steps RBI take to tackle Inflation: To manage inflation, the RBI has implemented policies that allow it to lower or raise specific rates. It is crucial to comprehend these rates and how they impact inflation. RBI take to tackle Inflation: To manage inflation, the RBI has implemented policies that allow it to lower or raise specific rates. It is crucial to comprehend these rates and how they impact inflation. Interest rate
Repo Rate: The repo rate (repurchase or repossession) is the price at which the RBI purchases government securities from commercial banks with a promise to repurchase them. It is a brief borrowing from the central bank secured by assets used to bridge the shortfall between the demand for money (loans) and bank deposits.
If there is an increase in the reserve ratios, the total amount of deposits left with commercial banks can decrease as commercial loans decrease, and hence there is a reduction in the loan granting capacity of the banks. This tool is used by the RBI to regulate market credit. Open Market Operations: The RBI has the authority to buy or sell public securities. The RBI drains excess liquidity from the market by selling securities in the money market in order to manage inflation. Demand drops as there are fewer available sources of liquid cash.
Cash Reserve Ratio: Banks are required to keep a fraction of deposit liabilities in the form of liquid cash with the RBI to ensure the safety and liquidity of the deposits.
Statutory Liquidity Ratio: Every bank in India has to maintain a minimum proportion of their net demand and time deposits as liquid assets in the form of cash, gold, precious and semiprecious stones. SLR has nearly remained constant for the last 14 years.
Reserve Ratios
An increase in these interest rates means that the RBI is making it expensive for the commercial banks to borrow money (in the case of the reverse repo rate, it is lucrative to keep the deposits in RBI), thus limiting the injection of money into the market. The RBI is taking this action to reduce market liquidity.
P A G E 2 4
Selective Credit Control
P A G E 2 5 -
The Banking Regulation Act gives the RBI the authority to flexibly regulate the quantity and type of advances made by banks. The RBI has been using selective credit restriction to hold inflation in check for commodities including food grains, vegetables, pulses, oilseeds, cotton, sugar, gur, Khansari, and other commodities with high demand. Therefore, the goal of the selective credit control policy is to prevent banks from making advances against these necessities Dollar: The RBI also purchases dollars from banks and exporters, in part to stop the dollar from oversupplying the market and falling in value, which would raise the rupee indirectly. In other words, while maintaining the rupee ' s depreciation will make India's exports more competitive, the central bank's policies also improve liquidity. Nikhil Amrutiya
Foreign currency reserves are a complex topic in today's economy in both theory and in practice. The RBI is the custodian of the country's foreign exchange reserves and is vested with the responsibility of managing their investment. It buys and sells rupees as well as foreign currency in the foreign exchange market to maintain a stable exchange rate. The Reserve Bank of India possesses substantial foreign-exchange reserves; cash, bank deposits, bonds, and other financial assets denominated in currencies other than the Indian rupee. The majority of the reserves for the Indian government are held in foreign currency assets, which are managed by the Reserve Bank of India. Foreign-exchange reserves serves as India's first line of defense in the event of an economic slowdown, but acquiring reserves comes at a cost. Foreign exchange reserves allow external trade and payments while also promoting the orderly development and upkeep of India's foreign exchange market. As of today, India's total foreign exchange reserves stood at around $ 599.58 bn. on June 17, 2022, with the foreign exchange assets component at around $ 526.882 bn., gold reserves at around $ 40.584 bn., SDRs at around $18.155 bn., and reserve position in the IMF at around $18.555 bn. According to the Economic Survey of India 2014 15, India could aim for foreign exchange reserves ranging from $ 750 bn. to $ 1 tn.
P A G E 2 6
RBI as the Foreign Exchange Reserve custodian
India's foreign currency reserves are primarily made up of US dollars in the form of US government bonds and institutional bonds, with gold accounting for about 6.72% of forex reserves.
Gold: As of March 2021, the RBI held 695.31 metric tonnes of gold. 403.01 metric tonnes of which are in the custody of the Bank of England and the Bank for International Settlements. A domestic reserve of 292.30 tonnes of gold is stored.
Foreign Currency Assets: Total FCA till March 2021 was $ 536.69 bn. out of which $ 359.87 bn. is invested in overseas securities, $ 153.39 bn. is deposited with other central banks and $ 23.42 bn. (4.36% of total FCA) is deposited with overseas commercial banks.
Investments in US Treasury bonds, bonds issued by other countries, and deposits with foreign central and commercial banks are all included in the FCAs. Following Switzerland, India has the world's fourth largest foreign exchange reserves as of September 2021. The Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 establish the legal framework for foreign exchange reserves. The Reserve Bank of India acquires foreign currency reserves through open market purchases from authorized dealers. When global interest rates begin to rise, India's foreign exchange reserves operate as a buffer against rupee volatility.
India's foreign exchange reserves are divided into four categories as follows:
P A G E 2 7
Special Drawing Rights(SDR): SDRs are IMF accounting units, not currencies in and of themselves. They reflect a claim on currency held by IMF member countries and can be traded for it. Reserve Tranche Position: Members' quotas are the principal source of funding for the IMF. Each IMF member is granted a quota (membership fee), with a portion payable in SDRs or defined usable currencies ("Reserve Assets") and a portion payable in the member's own currency. A country's reserve tranche position is the gap between its quota and the IMF's holdings of its currency. P A G E 2 8 - Somya Khicha
P A G E 2 9
Inflation Interest Rates Trade Imbalance Macroeconomic Regulations
In this globalized world, trade between the home country and foreign countries in various currency denominations is a common scenario. However, the value of a currency is highly volatile given the instability of the global trade environment due to the influence of various factors. Therefore, it becomes an important role of the central bank, such as the Reserve Bank of India (RBI), to constantly keep a check on the value of the rupee against the dollar. The RBI controls the fluctuations in the value of the rupee through a set of various policies. An explanation of the role of the RBI in the case of a Rupee dollar hike is given below. The forces of supply and demand in the market determine how much the rupee is worth in relation to the dollar or any other currency. The value of the rupee decreases as demand for dollars rises and vice versa. For instance: The domestic currency will weaken if there is an increase in the demand for imports, which demands payment in foreign currency. Other elements that can affect the value of the rupee include: Because a weak domestic currency can raise a nation's import costs, the Reserve Bank of India intervenes in the currency market to support the rupee.
RBI's role in controlling the Rupee-Dollar hike
How does the RBI’s rate hike/cut influence the Rupee?
P A G E 3 0
A weak rupee is viewed favorably for exports, which is why countries that rely heavily on exports like to keep the exchange rate low.
The Reserve Bank of India uses the repo rate as a tool to manage inflation. It refers to the interest rate at which the Reserve Bank of India, the country's central bank, loans money to commercial banks in the event of a funding gap. An economy with higher interest rates tends to attract more foreign investment, raising both the demand for and the value of the domestic currency. The same holds true for lower interest rates and currency rates. If the repo rate is low in other markets, the RBI may raise it, which will increase interest rates, bond yields, and the return on debt securities, luring additional investment capital to seek out higher returns.
The RBI intervenes via a number of techniques. It may make direct market interventions by purchasing and selling dollars. When the RBI wants to raise the value of the rupee, it can sell dollars, and vice versa, when it has to lower it.
The central bank's monetary policy may also have an impact on the value of the rupee. The RBI can adjust the liquidity ratio (the amount of money banks must invest in government bonds) and the repo rate (the rate at which the RBI loans to banks) to regulate the rupee. The Reserve Bank wants to prevent the already high import costs from rising as a result of the weak currency.
Repo rate increase: The RBI uses a repo rate increase to limit the amount of money that banks may borrow from the central bank, which helps to contain inflation. A higher repo rate can assist in stopping price increases by reducing the amount of money available in the economy.
Repo rate reduction: When the RBI lowers the repo rate, banks must pay less interest on the money they borrow from the RBI. As a result, banks also charge lower interest rates on their loans, which increases money circulation and, in turn, raises prices and boosts economic activity. Harshini Ramesh
On the other hand, higher interest rates restrict the flow of money through the economy, leaving the RBI with more cash to control the demand-supply situation for currencies. Additionally, as a currency ' s value declines, imported items cost more, increasing inflation. The central bank can increase interest rates to reduce demand for certain products, which will put upward pressure on pricing.
P A G E 3 1 -
Pilot Scheme: In this, authorized payment system operators (PSOs) banks and non banks were to be able to provide offline payment solutions using cards, wallets, or mobile devices for remote or proximity payments under the trial plan. Conditions apply to the plan. Other entities with novel solutions must collaborate with the authorized PSOs.
There are certain steps that were taken to boost the digitalization of the Indian banking sector, which are as follows: 1.
Technology has exploded in all areas, with banking being one of the first to use information technology. "Digital Banking" refers to the digitization of traditional banking techniques in order to facilitate banking transactions.
P A G E 3 2
The RBI and the National Payment Corporation of India have taken several efforts and initiatives to strengthen the payment and settlement systems in banks, such as the creation of the United Payments Interface (UPI) and the Bharat Interface for Money. To boost customer confidence and safety, the Reserve Bank has prioritized security measures for digital payments, such as the requirement of additional factors of authentication (AFA) and online alerts for every transaction over the years.
RBI's role in digitalizing the Banking Sector
The development of digital banking has revolutionized the banking sector and altered the entire bank transfer procedure. It has helped customers by allowing them to view their account details, pay online bills, and transfer money from one account to another in a faster manner.
Global Scenario: Since 2014–15, there have been digital banks in places including Hong Kong, Singapore, Malaysia, China, the UK, and the US. Services provided by DBUs: Each DBU is required by the RBI to provide a minimum set of digital banking goods and services. Such products ought to appear on the digital banking segment's balance sheet on both the liabilities and assets sides. The same would apply to conventional products with digital value added services.
Need: To encourage financial inclusion throughout the nation,this is being done. It was announced in order to guarantee that digital banking reaches all areas of the nation and quickens payment processing.
P A G E 3 3
2. .Digital Banking Units: A digital banking unit is a specialized fixed point business unit that is equipped with the bare minimum of digital infrastructure needed for the delivery of digital banking goods and services as well as the self-service digital maintenance of current financial products and services.
The services include a digital kit for consumers, mobile banking, internet banking, debit cards, credit cards, current accounts, fixed deposits, and recurring deposit accounts, mass transit system cards, a digital kit for merchants, UPI QR code, BHIM Aadhaar, and point of sale (PoS).
Other services include making applications for and onboarding consumers for specific retail, MSME, or schematic loans. This could also entail identifying government sponsored programmes that are covered by the national portal, as well as end-to-end digital processing of such loans, commencing with online application and ending with disbursal
While card issuance in the country is increasing rapidly, payment acceptance infrastructure must keep up. To that end, the RBI established the 'Acceptance Development Fund.' The RBI directed the State/UT Level Bankers Committees to pick one district in their respective States/UTs as a pilot project to expand the digital payments ecosystem. The specified district may be assigned to a bank with a large footprint, which will attempt to make the district completely digitally enabled. Tarannum Unisa & Somya Khicha
4. UPI123PAY: The 'Call Karo, Pay Karo’ instant payment system was introduced by RBI for feature phone users who can use the Unified Payments Interface (UPI) payment service in a safe and secure manner. With this, feature phone users will be able to conduct a variety of transactions based on four technological options via UPI 123PAY. Calling an IVR (interactive voice response) number, app capability in feature phones, a missed call based approach, and proximity sound based payments are among them.
Given the rapid development of digital payments, the RBI intends to release more specific data on payment systems authorized by the RBI.
3. Ombudsman scheme: The Banking Ombudsman Scheme is a quick and low cost venue for bank customers to resolve complaints about specific services provided by banks. The motive of RBI was to help customers or users to outline the number of issues that may occur for prepaid payment instrument clients under this scheme, all in a paperless manner.
P A G E 3 4 -
Prices and Costs: 1. When the Omicron wave began to fade, the economy was starting to pick up steam. However, the aftermath of the conflict between Ukraine and Russia has cast further uncertainty over the immediate future. The results of growth and inflation are highly precarious, both globally and in India. The benefits anticipated from the release of repressed demand, particularly for contact-intensive services, the government's push for infrastructure and capital spending, favourable financial conditions, and rising capacity utilization appear fleeting in the face of this unusual danger. According to updated projections, the food inflation is already under control thanks to record production and ample supplies, delaying the expected decline in overall inflation that was predicted to occur. The worsening of geopolitical tensions may make these risks even more severe. They include the escalation of war, ongoing supply chain disruptions, volatility in the global financial markets brought on by the normalization of monetary policy in the major advanced economies, and the evolving of COVID 19 trajectory. Upside risks to inflation have been amplified by recent geopolitical events. Global supply shocks are still developing, and they are now affecting a wider range of commodities. Energy expenses are one of many input costs that are projected to rise for various manufactured goods and services.
PUBLICATIONS OF RBI Monetary policy report - April 2022
P A G E 3 5
Macroeconomic Outlook:
P A G E 3 6
The government's focus on capital spending, infrastructure development, and manufacturing operations through the PLI programme should spur private investment activity, which would also profit from better capacity utilization, stronger corporate balance sheets, and opportune financial circumstances. The Russia Ukraine conflict's escalation of geopolitical tensions, along with the ensuing rise in global oil and commodity prices to multi-year highs and the resulting high level of financial market volatility, pose serious downside risks to global economic activity and may affect domestic growth prospects. Domestic industry would also be hampered by the uncertainties surrounding the rate of monetary policy normalization in the main advanced economies and the course of the pandemic. The domestic financial markets have mostly followed the position of an accommodating monetary policy. Money market rates are being firmed up by the rebalancing of liquidity from the fixed rate window to variable rate reverse repo auctions. Despite this, the economy is still in a growth friendly state, and loan demand is increasing. The recovery continues to benefit from the market operations of the RBI.
The expectation for future aggregate demand will also influence how recent events are felt. The risk of domestic inflation increasing is posed by ongoing pressures on commodity prices and the reappearance of global supply chain and logistics disruptions.
Demand and Output: Financial Markets and Liquidity Conditions:
Despite the fact that the pass through has been relatively little thus far due to weak demand conditions, it may need to be closely watched in the future.
P A G E 3 7
The 2021 22 report on currency and finance was recently made public by the RBI. It was clear from the report's focus on post pandemic development and structural problems that affect different industries. While analysing India's response to COVID, it provides a road plan. The research also highlights the risks associated with indicators that exceed regulated thresholds. The structural problems that are impeding the Indian economy ' s possibilities for growth are identified in the paper. The following factors are listed as influencing the structural transformation:
In order to protect domestic financial markets from spill overs, they will now contextually take into account the developments in the global financial and commodity markets, which are experiencing volatility due to deteriorating geopolitical situations and the normalization of monetary policy in the major AEs.
The unprecedented accommodation required by the once-in-acentury COVID-19 problem is now being ended by monetary authorities. The impact of the Russia-Ukraine conflict on global economic growth, inflation, and financial circumstances has completely changed the picture for the world. Authorities in charge of making policy must navigate a precarious course to prevent a crash landing due to rising dangers to economic growth and financial stability.
2.Report on Currency and Finance
External Environment:
Comparative advantages: New chances for sectoral resource reallocation. Additionally, it examines certain industries and the structural problems that prevent their expansion. The problems listed for the agricultural sector are as follows: Some key highlights for the future:
Income shifts: Varying levels of income elasticity can lead to structural changes.
Credit for agriculture is still flat. We shouldn't ever experience being unprepared for a disaster again.
Relative sectoral price changes: This causes change by reallocating resources.
P A G E 3 8
Changes in input-output linkages: Growing importance of supply chains in the domestic and international spheres.
·Input subsidies make up a sizable portion of the barriers to gross capital creation.
Inadequate capital formation Low research and development costs India's growth in total factor productivity is less than that of its competitors.
Structural change is a process rather than an isolated occurrence. In order to ensure resistance to upcoming shocks, it must be ongoing Everyone should participate in the crisis' recovery. The road to rehabilitation needs to be broad, solid, tough, and long lasting.
India's recovery, which started in the second half of 2020–21 with the first wave ’ s abatement, was rekindled in 2021–2022. Real GDP rebounded in Q2 (FY 2021 22) and increased by 1.3 % over Q2 (FY 2019 20), due to ongoing fiscal policies policies and congenial
The Reserve Bank of India released its annual report for the financial year 2021 22 on 27th May, 2022. Below are the key highlights from this year ’ s RBI annual report: In FY 2021-22, India recommenced the recovery that had begun in the second half of FY 2020 21 with the abatement of the first wave.
P A G E 3 9
The Reserve Bank's monetary, regulatory, and liquidity efforts, including some unconventional ones, helped create favourable financial conditions that allowed the real GDP to rebound in Q2 (FY 2021 22) to grow by 1.3 percent over Q2 (FY 2019 20). With GDP rising by 6.2 percent in Q3 (FY 2021-22) over the corresponding prepandemic quarter, the recovery was further solidified. The world economy emerged from the severe contraction brought on by the pandemic the year before, thanks to a divergent and uneven recovery that took place throughout the first half of 2021. The International Monetary Fund (IMF) estimates that global GDP increased by 6.1 percent in 2021 as opposed to a contraction of 3.1 percent the year before in its World Economic Outlook (April 2022).
Economy Review: Global Economy: Indian Economy: 3. Annual Report of RBI
Assessment of the current situation
The international economy has suffered a terrible hit as a result of the geopolitical tensions that began to escalate into conflict in late February 2022.
Despite being bystanders, emerging markets and developing economies (EMDEs) are suffering the most from global spill overs. With nearly three fourths of the consumer price index at risk, inflation is the immediate impact of geopolitical aftershocks.
High-frequency indicators have already shown that the economic recovery, which gained speed in the second quarter of 2021 2022, has begun losing some of its momentum.
1. 2. 3. 4. 5. The road forward will be influenced by the following global policy priorities: 1. 2.
Consistent policy support has provided a foundation for overall demand and economic activity. According to RBI, the events of 2021–2022 have taught us important lessons that will help us understand how the Indian economy will develop in the coming year. Response to evolving global challenges: Adjusting monetary policy to combat inflation while protecting economic recovery. Prioritizing financial support to the most vulnerable. conditions created by RBI’s regulatory, monetary, and liquidity initiatives. With GDP increasing by 6.2 percent from the same pre pandemic quarter in Q3 2021–2022, the recovery was further cemented.
P A G E 4 0
Way forward in FY 2022-23: The geopolitical battle in Europe, which began in February 2022, threatens to devastate the global economy and its constituents.
3. Tightening macroprudential policies to coincide with monetary regulations.
The less fortunate are being negatively affected by rising food and fuel prices in particular, as well as shortages of basic necessities. Nations around the world are starting to adopt hawkish monetary policy stances in response to increased and diffused inflationary pressures, and tightening financial conditions.
4. Focusing on structural and health reforms (through digitalization, reconfiguring supply chains, reskilling workers, climate resilience, trade cooperation, and debt resolution).
5. Stopping economic fragmentation and aiding the world's poorest nations through coordinated action of international institutions.
The global recovery is anticipated to lose substantial steam in 2022, which might have an impact on longer term prospects by aggravating the pandemic's scars, deglobalization, financial fragmentation, and setting back the attempts to combat climate change. Large and negative risks include escalating war, shortages, a pandemic outbreak again, a downturn in China, and climate stress beyond the Paris Agreement goals.
6. Preventing economic fragmentation and supporting the poorest countries through coordinated actions of the international institutions. These priorities require the undertaking of both multinational and national initiatives.
1. 2. 3. 4. P A G E 4 1
The central bank is also taking into account the new risks in the emerging FinTech industry. Systemic risks arise with BigTechs' involvement in the BFSI sector.
Core inflation is still being affected by cost push factors like high transportation costs, high industrial raw material prices, and logistical and supply chain constraints on a worldwide scale. Shubham Jaroli & Saurav Raj
Other Key Highlights: Cost-push pressures from high transportation costs, high industrial raw material prices, and bottlenecks in the world's supply chains and logistics continue to have an impact on core inflation. The Indian economy is in a better position than most to support the currently undergoing recovery and enhance future macroeconomic prospects.
1. 2. 3. 4. P A G E 4 2 -
THE FINANCIAL BULLETIN MONEY MATTERS CLUB Official Finance Club of IBS Hyderabad /money-matters-club /mmc_ibshyderabad /mmcibshyd05 /MMC_Ibshyd05 Promotional Partner If you wish to subscribe to our quarterly Newsletter and Financial Bulletin, Kindly visit our website and subscribe https://www.mmcibs.com For more updates, you can follow us on our social media handles Our Sponsors:
