class-3
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- BANKER’S BANK, SUPERVISOR AND CONTROLLOR:
- Regulate and supervise all commercial bank for their proper functioning.
RBI AS BANKER’S BANK:
- Custodian of cash reserves: CRR has to maintain by C.B. and deposit with RBI.
- Lender of the last reserve: C.B. have last option for their financial requirements as RBI. RBI does it through discounting of approved securities and bills of exchange.
- Clearing House: RBI settle claims of various commercial banks against each other because RBI has accounts of them.
RBI AS BANKER’S SUPERVISOR:
- RBI regulates the commercial banks related to:
- Branch expansion.
- Liquidity of assets.
- Their management.
- Winding up.
RBI AS BANKER’S CONTRLLOR
- By periodic inspection and their ITR filling.
- CONTROLLOR OF MONEY SUPPLY AND CREDIT
RBI as CONTROLLOR OF MONEY SUPPLY:
Due to Economic Fluctuations, RBI control money supply in the best interests of the economy. RBI has sole monopoly in currency issue. Methods use by RBI for credit control are:
(I) Repo (Repurchase) rate: Rate at which loan provide by RBI for C.B. for short time against securities & bills of exchange.
Impact: Repo rate + , Cost of borrowing from RBI +, lending rate by CB+, Borrower discourage, Credit Creation ability-
=> Inflation Control.
Repo rate – , Cost of borrowing from RBI -, lending rate by CB-, Borrower encourage , Credit Creation ability+ => Deflation Control.
(II) Bank (Discount Rate) Rate: Same as Repo rate but FOR LONG TIME.
Actively use by RBI for credit control.
Effect: Same as repo.
Repo rate Vs Bank Rate: ?
(III) Reverse repo Rate: Opposite of Repo rate.
(IV) Open Market Operations: Buying and selling of government securities (treasury bills) Impact:
- Sale of securities -> CB’s Reserve -, Credit creation ability-, Money Supply -, => Inflation control.
- Purchase of securities:
Conditions Necessary for success of open market operations:
- Security market should be well organised.
- CB’s reserves should be affected after sale/purchase securities.
- RBI should hold adequate securities to influence money supply in economy.
- Less fluctuations in gov. securities.
(V) LRR: With this quick and direct method of controlling credit creation, CB’s are obliged to maintain reserve in 2 ways:
- Cash Reserve Ratio (CRR): Meaning, Effect
- Statutory Liquidity Ratio (SLR): Meaning, Effect
RBI as CREDIT CONTROLLOR:
- Moral Suasion:
- Selective Credit Control:
- Quantitative instruments for credit control: general in purpose and affect all sectors. Like- Repo, RRR, BR, Open market operations, CRR, SRR
- Qualitative instruments for credit control: Specific in nature & affect credit for particular use. Ex.- Margin
requirements, Moral suasion, selective credit control.
- Custodian of foreign reserve:
- RBI maintain country’s stock of gold and reserves of foreign exchange.
- Foreign exchange regulations- transections must be routed through RBI. Through this two objectives fullfill-
- Banks get help in Stabilizing the external value of currency.
- Helps in making policy for BOP situation.
- MARGIN REQUIREMENTS:
- Margin – difference between the amount of loan and market value of the security.
- Example:
- Effect: Margin+, Borrowing capacity of customer -, Money supply-,
- RBI may prescribe different margins for different borrowers.
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