Rbi and Its Roles

1. RBI and its Roles Reserve Bank of India (RBI) Reserve Bank of India (RBI) is the central bank of India. It monitors, formulates and implements India’s monetary policy. Established in the year 1935, RBI was nationalized in the year 1949. Owned fully by the Government of India, Reserve Bank has 22 regional offices in various state capitals of India with its headquarters located in Mumbai. It has a majority stake in the State Bank of India. Role of RBI RBI formulates the monetary policy, thus regulating and supervising the economy of India. RBI is the supreme banking authority in India.It sets the guidelines according to which the banking operations and financial systems within the country functions. i. Issuer of currency RBI is the sole authority for the issue of currency in India. Major currency is in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand. RBI has two departments – the Is sue department and Banking department. The issue department is dedicated to issuing currency. All the currency issued is the monetary liability of RBI that is backed by assets of equal value held by this department.Assets consist of gold, coin, bullion, foreign securities, rupee coins, and the government’s rupee securities. The department acquires these assets whenever required by issuing currency. The conditions governing the composition of these assets determine the nature of the currency standard that prevails in India. The Banking department of RBI looks after the banking operations. It takes care of the currency in circulation and its withdrawal from circulation. Issuing new currency is known as expansion of currency and withdrawal of currency is known as contraction of currency. ii. Banker to the governmentRBI acts as banker, both to the central government and state governments. It manages all the banking transactions of the government involving the receipt and payment of money. In addition, RBI remits exchange and performs other banking operations. RBI provides short-term credit to the central government. Such credit helps the government to meet any shortfalls in its receipts over its disbursements. RBI also provides short term credit to state governments as advances. RBI also manages all new issues of government loans, servicing the government debt outstanding, and nurturing the market for government's securities.RBI advises the government on banking and financial subjects, international finance, financing of five-year plans, mobilizing resources, and banking legislation. iii. Managing government securities Various financial institutions such as commercial banks are required by law to invest specified minimum proportions of their total assets/liabilities in government securities. RBI administers these investments of institutions. The other responsibilities of RBI regarding these securities are to ensure – * Smooth functioning of the marke t * Readily available to potential buyers * Easily available in large numbers Undisturbed maturity-structure of interest rates because of excess or deficit supply * Not subject to quick and huge fluctuations * Reasonable liquidity of investments * Good reception of the new issues of government loans iv. Banker to other Banks The role of RBI as a banker to other banks is as follows: * Holds some of the cash reserves of banks * Lends funds for short period * Provides centralized clearing and quick remittance facilities RBI has the authority to statutorily ensure that the scheduled commercial banks deposit a stipulated ratio of their total net liabilities. This ratio is known as cash reserve ratio [CRR].However, banks can use these deposits to meet their temporary requirements for interbank clearing as the maintenance of CRR is calculated based on the average balance over a period. v. Controller of money supply and credit RBI has to regulate the claims of competing banks on money suppl y and credit. RBI also needs to meet the credit requirements of the rest of the banking system. RBI needs to ensure promotion of maximum output, and maintain price stability and a high rate of economic growth. To perform these functions effectively, RBI uses several control instruments such as – * Open Market Operations Changes in statutory reserve requirements for banks * Lending policies towards banks * Control over interest rate structure * Statutory liquidity ration of banks vi. Exchange manager and controller RBI manages exchange control, and represents India as a member of the international Monetary Fund [IMF]. According to foreign exchange regulations, all foreign exchange receipts, whether on account of export earnings, investment earnings, or capital receipts, whether of private or government accounts, must be sold to RBI either directly or through authorized dealers. Most commercial banks are authorized dealers of RBI. ii. Publisher of monetary data and other data R BI maintains and provides all essential banking and other economic data, formulating and critically evaluating the economic policies in India. In order to perform this function, RBI collects, collates and publishes data regularly. Users can avail this data in the weekly statements, the RBI monthly bulletin, annual report on currency and finance, and other periodic publications. 2. Asset and Wealth Management: mutual fund, different types of mutual fund and various products and services offered by mutual fund companies Mutual FundA mutual fund is a professionally managed Medium or vehicle that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual fund is managed by professional managers who have deep knowledge and understanding of Stock Market, Bonds, money market. The combined holdings the mutual fund owns are known as its portfolio. Types of mutual fund Mutual Funds are of various types depending upon the f ollowing: 1) On the basis of structure This includes open-ended funds and close ended funds I.Open-ended funds Liquidity is the key feature involved which means these funds are like Open Box where investors can enter into or exit from an open-ended scheme anytime at NAV (Net Asset Value) related prices. Open ended funds are popular with investors because they operate in similar way to stock market where no maturity or lock-in period is involved. II. Close-ended funds A close-ended fund or scheme has a stipulated maturity period for eg. 5 – 7 years. The fund is open for subscription only during a specified period at the time of the launch of the scheme.Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchange where the units are listed. In order to provide an exit route to the investors, some close-ended funds give the option of selling back the units to the mutual fund through p eriodic repurchase at NAV related prices. 2) On the basis of asset class On the basis of Asset classes there can be Equity scheme wherein you invest in shares, Debt or Income scheme wherein you can invest in govt. ecurities, balanced scheme wherein you can invest in both equities and fixed income securities. 3) On the basis of investment objectives Investment objectives can be Growth scheme or Income scheme or Balanced scheme. | Growth Scheme| Income Scheme| Balanced Scheme| Aim| To provide capital appreciation over medium to long term| To provide regular and steady income to investors| To provide both growth and income by periodically distributing a part of the income ; capital gains they earn| Invests| Invests a major part of their fund in equities| Invest in fixed income securities like bonds and corporate debentures. Invest in both bonds and shares| 4) Other types A. Sector specific scheme Invest only in sector for eg. Infrastructure fund would invest in infrastructure companies . Sectoral funds carry a higher risk along with a higher potential to generate returns. This is because their fate moves with the sector in which they invest. Therefore if that sector performs well, they generate excellent returns. B. Index scheme Index attempts to replicate a stock market index or as closely as possible by investing in the stocks that form that index in the very same proportion.So a NIFTY index fund would have the same 50 companies that make up Nifty in the same weightage. The aim of an index fund is to replicate the performance of that market index. So if the markets are rising, then your investment will rise with almost the same percentage and if it is falling, you will get similar negative returns. The main advantage of investing in an index fund is the low Expense Ratio that is incurred in these funds as compared to other investments because it is passively managed funds. C. ELSS (Equity linked saving schemes)An Equity-linked saving scheme (ELSS) is a great inv estment option that offers the double benefits of Tax saving and capital Gains. Money collected under ELSS is mainly invested in equity and equity related instruments. ELSS Schemes have 3 years Lock-in period. Because of this, fund manager can have portfolio of stocks that can outperform over a period of time. The best way to invest in ELSS is through Systematic Investment Plan (SIP). With SIP you can invest a small amount every month for a specific time period.