Rbi || Reserve bank of India || current monetary policies ||functions of Reserve bank of India

The central bank | Reserve bank of India |RBI 

The central bank is an apex bank.it controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy.it serves as a banker to the government and manages forex(foreign exchange) Reserve of the country.

In India,The central bank  is known as RBI,Bank of England in uk and Federel Reserve system in USA. The first central bank in the world was set up in 1668 in sweden,effective central banking came into being in1694 with the establishment of Bank of england.

There is no standard definition of a central bank.the definition depends on the functions it discharges.

"According to Samuelson says Every central bank has one function.it operates to control economy, supply of money and credit"

Functions of the Reserve bank of India|central bank |RBI 

1. Bank of issuing notes: Central bank of a country has the exclusive right (monoply right)of issuing notes.this is called currency Authority function of the central bank.
2. Banker to the government: central bank is a banker,agent and financial advisor to the government. As an agent to the government, it buys and sells securities on behalf of the government. As an agent to the government, it buys and sells securities on behalf of the government.
3. Bankers' bank and supervisory role: As a banker's bank,it has almost the same relation with other bank in the country as a commercial bank has with its customers. It accepts deposits from the commercial banks and offers them loans. The rate at which the central bank offers loans to the commercial banks is called 'Repo rate'.In supervisory role,the central bank ensures that the commercial banks show compliance to its directives,particularly relating to CRR and SLR.
4. Lender of the last resort:commercial bank create liabilities many times more than their  cash reserves.this is possible only so long as people have confidence in thr banking system of the country.
5. Custodian of foreign exchange: central bank is the custodian of nation's foreign exchange Reserve. It also exercise 'managed floating' to ensure stability of exchange ratr in the international money market.
6. Clearing house function: central bank perform the function of clearing house. For example:- Bank A receive a cheque of rs.10000 drawn on bank B,and Bank B receives a cheque of 15000rs drawn on bank A.Both,banks A and B have thier accounts with the central bank. The cheque of both the banks are cleared through their accounts with the central bank. 
7. Control of credit:The central function of the central bank is to control the supply of credit in the economy .it implies increase or decrease in the supply of money in the economy by regulating the 'creation of credit'by the commercial banks.

Monetary policy of the Reserve bank of India |RBI |the central bank 

(Cash Reserve Ratio): This refers to the proportion of total deposts of the

commercial banks which they must keep as cash reserves with the RB This is foxed

the central bank and is varied from time to time to control the supply of money

in the economy.

We know, credit multiplier =

                            1

                         --------

                          CRR

Higher CRR lowers the value of credit multiplier

CRR

and lower CRR raises it. Increase in CRR causes a multiple times decrease in credit

creation capacity of the commercial banks. Likewise, decrease in CRR causes a

multiple times increase in credit creation capacity of the commercial banks

Following this principle, the RBI raises CRR to correct inflation and lowers it to

correct deflation.

This is a very effective and often-used policy instrument of the central bank to

manage the supply of money in the economy.

However, the effectiveness of this instrument is reduced when the commercial

banks have in their possession enough of excess reserves. Excess reserves

(beyond the legally required reserves) enable the commercial banks to defy the

impact of higher CRR.

SLR (Statutory Liquidity Ratio): This refers to liquid assets of the commercial

banks which they must maintain (on daily basis) as a minimum percentage of their

total deposits. The liquid assets include:(1 ) cash, (2) gold, and (3)unencumbered

approved securities. SLR is fixed by the RBI and varied from time to time. This is

yet another policy ratio used as an instrument of monetary policy. Like CRR, a

rise in SLR signals that the banks need to maintain healthy reserves of liquidity.

They are to restrict the creation of credit by way of demand deposits. So that

when SLR is raised (as during inflation), credit creation capacity of the banks is

reduced. On the other hand, when SLR is lowered (as during deflation) banks are

encouraged to expand credit by way of loans.

Open market operations refer to the sale and purchase of securities in the open

market by the central bank. By selling the securities (like, National Saving

Certificates-NSCS), the central bank soaks liquidity (cash) from the economy. And.

by buying the securities, the central bank releases liquidity.

When liquidity is soaked (as during inflation) cash reserves of the commercial banks

are squeezed. Implying a cut in their credit creation capacity. On the other hand,

whien liquidity is released (as during recession/deflation) cash reserves of the banks

tend to rise. Implying a rise in credit creation capacity of the commercial banks

Thus, inflation is corrected by selling the securities and soaking liquidity, while

deflation is corrected by buying the securities and releasing liquidity.

Margin Requirement: The margin requirement refers to the difference between

the current value of the security offered for loan (called collateral) and the value

of loan granted. Suppose, a person mortgages his house worth rs 1 crore withthe bank for a loan of rs 80 lakh. The margin requirement in this case would be

20 lakh. The mnargin requirement is raised when the supply of credit needs to

be curbed. The margin requirementis lowered when the supply of creditis to be

increased. Often the margin reguirement is kept high for speculative (trading)

Rationing of Credit: Rationing of credit refers to fixation of credit quotas for

different business activities. Rationing of credit is introduced when the flowet

credit is to be checked particularly for speculative activities in the economy. The

central bank fixes credit quota for different business activities. The commercial

banks cannot exceed the quota limits while granting loans.

 Moral Suasion: Sometimes, the central bank makes the member banks agres

through persuasion (or pressure) to follow its directives, The member banks

generally do not ignore the advice of the central bank. The banks are advised to

restrict loans during inflation, and be liberal in lending during deflation,

However, it is to be noted that moral suasion is a combination of both

persuasion' and 'pressure'. The central bank tries to persuade the commercial

banks to follow its directives, but if persuation does not work, it uses the

required pressure as an apex bank of the country. If pressure also does not work,

the central bank can use direct action which indudes derecognition of the

concerned bank. As an instrument of monetary policy, 'moral suasion' 

Reasons that slowdown Indian economy