CENTRAL BANK BY: - RAMESH KUMAR, K V NO.1, BATHINDA CANTT. THOMAS MALTHUS GROUP 17-Jan-16Ramesh kumar, P.G.T. (Eco.)1

HILTON YOUNG COMMISSION Hilton Young commission recommended to established RBI, under RBI Act Central bank start its operation on 1 st April

3 Central Bank:-Central bank is the principal banking and monetary institution of a country which has the monopoly to issue note. Functions of the Central Banks (i)Issuing of Notes (ii)Bankers of the Government (iii)Banker’s Bank (iv)Supervision of Banks (v)Custodian of Foreign Exchange (vi)Lender to the Last Resort (vii)Clearing House Function (viii)Control of Credit (ix)Collection of Statistics

4 (i) Issuing of Notes:- Central bank of a country has the exclusive right of issuing notes. The notes issued by the central bank are an unlimited legal tender. (ii) Banker to the Government :- Central Bank is a banker, agent and financial advisor to the government. As a banker to the government,it manages accounts of the government banks across all in the country. As an agent to the government,it buys and sells securities, treasury bills onbehalf of the government. As an advisor to the government,it helps the government in framing policies to regulate the money market. (iii) Banker’s Bank:- It is an apex bank of all banks in the country. The central has almost the same relation with other banks in the country as a commercial bank has with its customers. (iv) Supervision of the Banks:- As a banker’s bank, the central bank also supervises the commercial banks. The supervision of commercial banks relates to: 1.Licensing of the commercial banks, 2.expansion of the commercial banks in terms of their branches across different parts of the Country and abroad, 3.merger of different banks, 4.Liquidation of the banks (V) Control of Credit:- The most important function of the central bank is to control the supply of credit in the economy.The government needs to control the supply of money of cope with the situations of inflation and deflation. During inflation, the supply of money is liberalised.

5 How does the Central Bank Control Flow of Credit in the Economy ? (A) Quantitative Instrument (B) Qualitative Instrument (A) Quantitative Instruments of Monetary Policy (i) Bank Rate (ii) Open Market Operations (iii) Cash Reserve Ratio (CRR) (iv) Statutory Liquidity Ratio (SLR) (i)Bank Rate :- The bank rate is the rate at which the central bank gives credit to the commercial banks. During inflation, the cost of capital is increased by increasing the bank rate. This reduces the flow of credit, as desired. On the other hand, during deflation the cost of capital is reduced By reducing the bank rate. (ii) Open Market Operations:- Open market operations refer to sale and purchase of securities in the open market by the central bank. By selling the securities (like, NSCs), the central bank withdraws cash balances from the economy. And, by buying the securities, the central bank adds to cash balances in the economy.

6 (iii) Cash Reserve Ratio (CRR):- It refers to the minimum percentage of a bank’s total deposits required to be kept with the central bank. Commercial banks have To keep with the central bank a percentage of their deposits in form of cash reserves as a matter of law (iv) Statutory Liquidity Ratio (SLR):- Every bank is required to maintain a fixed percentage of its assets in the form of cash or other liquid assets, called SLR. For reducing the flow of credit, the central bank increases this liquidity ratio. For increasing the flow of credit, the liquidity ratio is reduced. (B) Qualitative Instruments of Monetary Policy i.Margin Requirement ii.Rationing of Credit iii.Direct Action iv.Moral Suasion (i)Rationing of Credit :- Rationing of credit is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. The central bank fixes credit quota for different business activities. (ii)Direct Action :- The central bank may initiate direct action against the member banks in case these do not comply with its directives. (iii) Moral Suasion :- Some times, the central bank makes the member banks agree through persuasion or pressure to follow its directives on the flow of credit.The member banks generally do not ignore the advice of central bank.

Refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. SLR is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. STATUTORY LIQUIDITY RATIO (SLR) 8

SLR is maintained in order to control the expansion of Bank Credit. By changing the level of SLR, Reserve bank of India can increase or decrease bank credit expansion. SLR in a way ensures the solvency of commercial banks. By determining SLR,RBI, in a way, compels the commercial banks to invest in government securities like government bonds. 9

Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank. CASH RESERVE RATIO (CRR)

The Reserve Bank of India raised Cash Reserve Ratio (CRR) by 75 basic points, while the market expectation had been 50 bps. The central bank has left the interest rates untouched. With this raise, banks need to keep 5.75% of their deposits with the RBI, as against the previous 5%.

12 Recaptulation: - 1. In which year RBI recommended? 2. Define Repo rate. 3. Name the commission recommended RBI? 4. What is bank rate? 5. What is meant by CRR?

HOME WORK 1. Define repo rate? 2. How RBI is banker’s bank? 3. Explain, how RBI control credit? 4. What are the differenced between CRR and SLR. 5. What is meant by reverse repo rate? 17-Jan-1613