Money and Banking (part – II)

The Reserve Bank of India (RBI) is India's Central Bank, also known as the bankers' bank. RBI regulates the money supply and monitors the works of NABARD. RBI does not provide loan to any business families. Hence, option (d) is the correct answer.

The Reserve Bank of India (RBI) is the Central Bank of India, which was established on April 1, 1935, under the RBI Act. The main functions of the RBI are Banker to banks; conducting and administration of monetary policy; Debt and cash management for Central and State Governments; Foreign exchange management (current and capital account management); Regulation and supervision of the banking and non-banking financial institutions including credit information companies; Management of foreign exchange reserves; Banker to the Central and State Governments; Oversight of the payment and settlement system; Currency management; Developmental role; and Research and statistics. RBI acts as an agent of the Government in respect of India's membership in IMF.

The Reserve Bank of India (RBI) is the fiscal agent and advisor to Government in monetary and financial matters. Since its inception, the RBI has undertaken the traditional central banking function of managing the Government's banking transactions. The RBI Act, 1934 requires the Central Government to entrust the RBI with all its money, remittance, exchange and banking transactions in India and the management of its public debt. The Government also deposits its cash balances with the RBI. The RBI also acts as an advisor to Government, whenever called upon to do so, on monetary and banking related matters.

A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government's debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issue both, treasury bills and bonds or dated securities while the State Government issue only bonds or dated securities, which are called the State Development Loans (SDLs).

Treasury bills or T-bills are zero coupon security and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, a 91 day T-bill of Rs. 100 (face value) may be issued at Rs. 98.50, that is, at a discount of Rs. 1.50 and would be redeemed at the face value of Rs. 100.

In terms of Section 21A(1)(b) of the Reserve Bank of India Act, 1934, the RBI may, by agreement with any State Government undertake the management of the public debt of that State. Accordingly, the RBI has entered into agreements with all the State Governments (including UTs of Puducherry and Jammu & Kashmir) for management of their public debt. Thus, RBI manages and services the Central Government's G-Secs as well as SDLs of these States. From the above explanation it is clear that statements 2 and 3 are correct while statement 1 is incorrect.

Treasury bills or T-bills, which are money market instruments, are short-term debt instruments issued by the Government of India. Treasury bills were first issued in 1917 in India. Treasury bills are sold by the RBI on auction basis. These are presently issued in three tenors, namely 91 day T-bills, 182 day T-bills and 364 day T-bills.

Reserve Bank of India (RBI) launched 'Retail Direct Scheme' on November 12, 2021 for providing one-stop access to facilitate investment in Government Securities (G-Secs) by retail (individual) investors. It aims to promote retail participation in Government Securities by providing prices/quotes to Retail Direct Gilt (RDG) account holders enabling them to buy/sell securities under the RBI Retail Direct Scheme. Hence, statement 1 is correct.

'Negotiated Dealing System - Order Matching' (NDS-OM) is a screen-based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI. Presently, the membership of the system is open to entities like Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc. These are Primary Members (PM) of NDS, permitted by RBI to become members of NDS-OM. Gilt account holders which have gilt account with the PMs are permitted to have indirect access to the NDS-OM system i.e. they can request their Primary Members to place orders on their behalf on the NDS-OM system. Hence, statement 2 is correct.

Central Depository Services Limited (CDSL) was founded in 1999 to fulfil the goal of 'Convenient, Dependable and Se- cured depository services at affordable cost to all market participants'. CDSL was initially promoted by the Bombay Stock Exchange (BSE) Ltd. which thereafter divested its stake to leading commercial banks. It is not promoted by the RBI. Hence, statement 3 is incorrect.

State Governments' transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of Section 21A of the RBI Act, 1934. As of now, such agreements exist between RBI and all the State Governments (including UTs of Puducherry and Jammu & Kashmir), except Government of Sikkim. Thus, the legal provisions vest Reserve Bank of India with both the right and obligation to function a banker to all State Governments (except Government of Sikkim). For Sikkim, RBI has limited agreement for management of its public debt.

RBI is the regulator of banks and possesses wide ranging powers in this respect. It controls the liquidity through its instruments like Repo Rate, SLR, CRR etc. It control branch expansion by providing for among other things the ratio of brank branches in rural and urban areas. It controls the mergers of banks along with the Competition Commission of India. It also controls the winding-up of banks.

The Reserve Bank of India was established on April 1, 1935, under the Reserve Bank of India Act of 1934. The central office (headquarter) of the RBI was initially established in Kolkata but was permanently shifted to Mumbai in 1937. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Some of the basic functions of the RBI are:

1. Issuer of notes : The RBI is the only institution which has the control over issuing of currency notes (except the one rupee note, which is issued by the finance ministry).

2. Banker to the Government: The RBI performs banking functions for the Central and State Governments. It advises the government on monetary policy issues and also manages the government's public debt. Currently, the RBI acts as banker to all the State Governments (including UTs of Puducherry and Jammu & Kashmir), except Sikkim. For Sikkim, RBI has limited agreement for management of its public debt.

3. Banker's bank: The Central Bank is also known as the banker's bank because it performs functions similar to what commercial banks do for their customers.

4. Credit regulation: The RBI regulates the flow of money in the country's financial system. RBI is responsible for maintaining price stability by controlling inflation. It controls inflation in the economy by controlling the credit creation and takes necessary policy decisions from time to time to address systemic concerns.

5. Foreign exchange reserves: The RBI maintains the foreign exchange reserves in India. The Central Bank buys and sells foreign currencies to keep the foreign exchange rates stable. It takes necessary steps as and when required.

6. Role in development of the country: The RBI performs various functions and takes necessary decisions to support developmental agenda of the government.

The Reserve Bank of India was established on April 1, 1935, under the Reserve Bank of India Act of 1934. The central office (headquarter) of the RBI was initially established in Kolkata but was permanently shifted to Mumbai in 1937. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Some of the basic functions of the RBI are:

1. Issuer of notes : The RBI is the only institution which has the control over issuing of currency notes (except the one rupee note, which is issued by the finance ministry).

2. Banker to the Government: The RBI performs banking functions for the Central and State Governments. It advises the government on monetary policy issues and also manages the government's public debt. Currently, the RBI acts as banker to all the State Governments (including UTs of Puducherry and Jammu & Kashmir), except Sikkim. For Sikkim, RBI has limited agreement for management of its public debt.

3. Banker's bank: The Central Bank is also known as the banker's bank because it performs functions similar to what commercial banks do for their customers.

4. Credit regulation: The RBI regulates the flow of money in the country's financial system. RBI is responsible for maintaining price stability by controlling inflation. It controls inflation in the economy by controlling the credit creation and takes necessary policy decisions from time to time to address systemic concerns.

5. Foreign exchange reserves: The RBI maintains the foreign exchange reserves in India. The Central Bank buys and sells foreign currencies to keep the foreign exchange rates stable. It takes necessary steps as and when required.

6. Role in development of the country: The RBI performs various functions and takes necessary decisions to support developmental agenda of the government.