rbi document

7/29/2019 RBI DOCUMENT

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RESERVE BANK OF INDIA

www.rbi.org.in


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3Contents

Overview:Who We Are Celebrating Our Platinum Jubilee The Reserve Bank: Tradition and Change Celebrating 75 years: Highlights

Organisation and Structure:How We Operate Management and Structure

Main Activities:What We Do Monetary Authority Issuer o Currency Banker and Debt Manager to Government Banker to Banks Regulator o the Banking System Manager o Foreign Exchange Regulator and Supervisor o the Payment

and Settlement Systems Maintaining Financial Stability Developmental Role

Research, Data and Knowledge Sharing:How We Communicate Communicating with the Public RBI Publications

Addressing Current and Future Challenges

Customer Service: How Can We Help You?

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55Overview:

Who We Are

Since 1935, when we beganoperations, we have stood at thecentre o Indias nancial system,with a undamental commitment tomaintaining the nations monetaryand nancial stability.

From ensuring stability o interestand exchange rates to providingliquidity and an adequate supplyo currency and credit or thereal sector; rom ensuring bank

penetration and saety o depositorsunds to promoting and developingnancial institutions and markets,and maintaining the stability o thenancial system through continuedmacro-nancial surveillance, theReserve Bank plays a crucial role inthe economy. Our decisions touch thedaily lie o all Indians and help chartthe countrys current and utureeconomic and nancial course.

Over the years, our specic rolesand unctions have evolved.However, there have been certainconstants, such as the integrity andproessionalism with which the

Reserve Bank discharges its mandate.

RBI at a GlanceManaged by Central Board o

Directors Indias monetary authority Supervisor o nancial system Issuer o currency Manager o oreign exchange

reserves Banker and debt manager to

government Supervisor o payment system Banker to banks Maintaining nancial stability

Developmental unctions Research, data and knowledge

sharing

First RBI Building 1935, Kolkata

The Reserve Bank o India (RBI) isthe nations central bank

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As Reserve Bank commencesoperations today I take [the]opportunity toexpress my condencethat this great undertaking willcontribute largely to the economicwell being o India andits people.

CelebratingOur Platinum Jubilee

1935-2010

- excerpt rom telegram sent bythe Viceroy to Osborne Smith, frst governor o

the Reserve Bank, 1935


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7The Reserve Bank:Tradition and Change

The origin o the Reserve Bank can betraced to 1926, when the Royal Commissionon Indian Currency and Financealso

known as the Hilton-Young Commissionrecommended the creation o a central bankto separate the control o currency andcredit rom the government and to augmentbanking acilities throughout the country.The Reserve Bank o India Act o 1934established the Reserve Bank as the bankerto the central government and set in motion

a series o actions culminating in the start ooperations in 1935. Since then, the ReserveBanks role and unctions have undergonenumerous changesas the nature o theIndian economy has changed.

Todays RBI bears some resemblance to theoriginal institution, although our missionhas expanded along with our deepened,broadened and increasingly globalisedeconomy.


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875 years:

Operations beginon April 1

India embarkson plannedeconomicdevelopment.The ReserveBank becomes

active agent andparticipant

1935

Nationalisationo the ReserveBank; BankingRegulation Actenacted

1949

1950

1966Cooperativebanks comeunder RBIregulation

RBIstrengthens

exchangecontrols byamendingForeignExchangeRegulation Act(FERA)

1973

RegionalRural Banksset up

1975

India acesbalance o

paymentcrisis; pledgesgold to shoreup reserves.Rupeedevalued

1991Board orFinancialSupervisionset up

1994

Nationalisationo 14 majorcommercialbanks (sixmore werenationalised in1980)

1969

Introductiono prioritysectorlendingtargets

1974

Financialmarketreorms

begin withSukhamoyChakravartyand VaghulCommitteeReports

1985

Exchange ratebecomes marketdetermined

1993

Ad hoctreasurybills phased

out endingautomaticmonetisation

1997


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9Highlights

Regulation oNon-BankingFinanceCompaniesstrengthened

1997

2000ForeignExchangeManagementAct replacesFERA

Fiscal

Responsibilityand BudgetManagementAct enacted

2003

Real TimeGrossSettlementSystemcommences

2004

RBI

empoweredto regulatemoney, orex,G-sec andgold relatedsecuritiesmarket

2006

Pro-activeeorts tominimiseimpacto globalnancialcrisis

2008/9

Multiple

indicatorapproach ormonetarypolicyadopted

1998

ClearingCorporationo IndiaLimited (CCIL)

commencesclearing andsettlement ingovernmentsecurities

2002Transition toa ull-fedgeddaily liquidityadjustment

acility (LAF)completed. MarketStabilisationScheme (MSS)introduced tosterilise capitalfows

2004Focus onnancialinclusion andincreasing theoutreach othe banking

sector

2005

RBI empowered toregulate PaymentSystem

2007

PositioningRBI as aknowledgeinstitution

2011

Year-longPlatinumJubileecelebrations

2010


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10Structure, Organisation and Governance:

How We Function

About the Central BoardThe Central Board has primary authority or the oversight o the Reserve Bank. It delegatesspecic unctions through its committees and sub-committees.

The Reserve Bank is wholly owned by the Government o India. The Central Board oDirectors oversees the Reserve Banks business.

Central Board o Directors by the Numbers

Ofcial Directors 1 Governor 4 Deputy Governors, at a maximum

Non-Ofcial Directors 4 directorsnominated by the Central Government to represent

each local board 10 directors nominated by the Central Government with expertise

in various segments o the economy

1 representative o the Central Government 6 meetingsat a minimumeach year 1 meetingat a minimumeach quarter

Central Board: Includes the Governor,Deputy Governors and a ew Directors (orelevant local boards)

Committee o Central Board: Oversees

the current business o the centralbank and typically meets every week, onWednesdays. The agenda ocusses oncurrent operations, including approval othe weekly statement o accounts related

to the Issue and Banking Departments.Board or Financial Supervision:

Regulates and supervises commercialbanks, Non-Banking Finance Companies

(NBFCs), development nanceinstitutions, urban co-operative banksand primary dealers.

Board or Payment and SettlementSystems: Regulates and supervises thepayment and settlement systems.

Sub-committees o the Central Board:Includes those on Inspection and Audit;

Sta; and Building. Focus o each sub-committee is on specic areas ooperations.

Local Boards: In Chennai, Kolkata,Mumbai and New Delhi, representing thecountrys our regions. Local boardmembers, appointed by the CentralGovernment or our-year terms,represent regional and economic interestsand the interests o co-operative andindigenous banks.


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11Management andStructure

The Governor is the Reserve Banks chie executive. The Governor supervisesand directs the aairs and business o the Reserve Bank. The managementteam also includes Deputy Governors and Executive Directors.

Executive Directors

Shri V. S. Das Shri G. GopalakrishnaShri V. K. Sharma Shri D. K. Mohanty

Shri B. MahapatraShri R. Gandhi Shri P. Vijaya Bhaskar

Departments

GovernorDr. D. Subbarao

Deputy GovernorDr. Subir Gokarn

Deputy GovernorShri Anand Sinha

Deputy GovernorDr. K. C. Chakrabarty

Deputy GovernorShri H. R. Khan

Markets

Internal Debt Management DepartmentDepartment o External Investments and Operations

Monetary Policy DepartmentFinancial Markets Department

Regulation,Supervision

and FinancialStability

Department o Banking Operations and DevelopmentDepartment o Non-Banking Supervision

Urban Banks Department

Department o Banking Supervision

Foreign Exchange DepartmentRural Planning and Credit Department

ResearchDepartment o Economic and Policy Research

Department o Statistics and Inormation ManagementServices

Department o Government and Bank AccountsDepartment o Currency Management

Department o Payment and Settlement SystemCustomer Service Department

Support

Premises DepartmentSecretarys Department

Rajbhasha Department

Inspection DepartmentLegal Department

Human Resource Management DepartmentDepartment o Communication

Department o Inormation TechnologyDepartment o Expenditure and Budgetary Control

Shri S. Karuppasamy

Shri G. Padmanabhan

Financial Stability Unit


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12

Training session at the College o Agricultural Banking in Pune

26 Departments: These ocus on policyissues in the Reserve Banks unctionalareas and internal operations.

28 Regional Ofces and Branches:These are the Reserve Banks operationalarms and customer interaces, headed byRegional Directors. Smallerbranches / sub-oces are headed bya General Manager / DeputyGeneral Manager.

Training centres: The Reserve Bank

Sta College at Chennai addresses thetraining needs o RBI ocers; the Collegeo Agricultural Banking at Pune trainssta o co-operative and commercialbanks, including regional rural banks. TheZonal Training Centres, located atregional oces, train non-executive sta.

Research institutes: RBI-undedinstitutions to advance training andresearch on banking issues, economic

growth and banking technology, suchas, National Institute o BankManagement (NIBM) at Pune, IndiraGandhi Institute o DevelopmentResearch (IGIDR) at Mumbai, andInstitute or Development and Researchin Banking Technology (IDRBT) atHyderabad.

Subsidiaries: Fully-owned subsidiariesinclude National Housing Bank (NHB),Deposit Insurance and Credit GuaranteeCorporation (DICGC), BharatiyaReserve Bank Note Mudran PrivateLimited (BRBNMPL). The Reserve Bankalso has a majority stake in the NationalBank or Agriculture and Rural

Development (NABARD).

The RBI is made up o:


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Monetary Authority Issuer o Currency Banker and Debt Manager to Government

Banker to Banks Regulator o the Banking System Manager o Foreign Exchange Maintaining Financial Stability Regulator and Supervisor o the Payment

and Settlement Systems

Developmental Role

The Reserve Bank is the umbrella network or numerous activities,all related to the nations nancial sector, encompassing and

extending beyond the unctions o a typical central bank. Thissection provides an overview o our primary activities:

Main Activities o the RBI:

What We Do


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14 Monetary Authority

Monetary policy reers to the use o instruments under the control o thecentral bank to regulate the availability, cost and use o money and credit.The goal: achieving specic economic objectives, such as low and stableinfation and promoting growth.

The main objectives o monetary policy in India are: Maintaining price stability Ensuring adequate fow o credit to the productive

sectors o the economy to support economic growth Financial stability

The relative emphasis among the objectives varies rom time to time,

depending on evolving macroeconomic developments.

Our ToolsThe Reserve Banks Monetary Policy Department(MPD) ormulates monetary policy. The FinancialMarkets Department (FMD) handles day-to-day liquidity

management operations. There are several direct andindirect instruments that are used in the ormulationand implementation o monetary policy.

Our ApproachOur operating ramework is based on a multipleindicator approach. This means that we monitor andanalyse the movement o a number o indicatorsincluding interest rates, infation rate, moneysupply, credit, exchange rate, trade, capital fows andscal position, along with trends in output as wedevelop our policy perspectives.

The basic unctions o the Reserve

Bank o India are to regulate theissue o Bank notes and the keepingo reserves with a view to securingmonetary stability in India andgenerally to operate the currency andcredit system o the country to itsadvantage.

- From the Preamble o

the Reserve Bank o India Act, 1934


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15Direct Instruments Cash Reserve Ratio (CRR): The share o net demand

and time liabilities that banks must maintain as cashbalance with the Reserve Bank.

Statutory Liquidity Ratio (SLR): The share o net

demand and time liabilities that banks must maintainin sae and liquid assets, such as governmentsecurities, cash and gold.

Refnance acilities: Sector-specic renanceacilities (e.g., against lending to export sector)provided to banks.

Indirect Instruments Liquidity Adjustment Facility (LAF): Consists o

daily inusion or absorption o liquidity on arepurchase basis, through repo (liquidity injection)and reverse repo (liquidity absorption) auctionoperations, using government securities as collateral.

Repo/Reverse Repo Rate: These rates under theLiquidity Adjustment Facility (LAF) determine thecorridor or short-term money market interest rates.In turn, this is expected to trigger movement inother segments o the nancial market andthe real economy.

Open Market Operations (OMO): Outrightsales/purchases o government securities, in additionto LAF, as a tool to determine the level o liquidity

over the medium term.Marginal Standing Facility (MSF): was instituted

under which scheduled commercial bankscan borrow over night at their discretionup to one per cent o their respective NDTLat 100 basis points above therepo rate to provide a saety valve againstunanticipated liquidity shocks

Bank Rate: It is the rate at which

the Reserve Bank is ready to buy or rediscount bills o

What is the Cash Reserve Ratio?The Reserve Bank requires banksto maintain a certain amount o cash inreserve as a percentage o their depositsto ensure that banks have sucient cashto cover customer withdrawals. We adjustthis ratio on occasion, as an instrument

o monetary policy, depending onprevailing conditions. Our centralised andcomputerised system allows or ecientand accurate monitoring o the balancesmaintained by banks with the Reserve Bank.

exchange or other commercial papers. It also signalsthe medium-term stance o monetary policy.

Market Stabilisation Scheme (MSS): Thisinstrument or monetary management wasintroduced in 2004. Liquidity o a more enduring

nature arising rom large capital fows is absorbedthrough sale o short-dated government securitiesand treasury bills. The mobilised cash is held in aseparate government account with the Reserve Bank.


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Looking AheadThe Reserve Bank looks at both short term and longerterm issues related to liquidity management. In thelonger term, we monitor the developments in globalnancial markets, capital fows, the governments scalposition and infationary pressures, with an eye towardencouraging strong and sustainable economic growth.

Open and Transparent Monetary Policy-MakingThe Reserve Bank explains the relative importanceo its objectives in a given context in a transparentmanner, emphasises a consultative approach inpolicy ormulation as well as autonomy in policyoperations and harmony with other elementso macroeconomic policies. The monetary policyormulation is aided by advice and input rom: Technical Advisory Committee on

Monetary Policy Pre-policy consultations with bankers,

economists, market participants, chamberso commerce and industry and otherstakeholders

Regular discussions with credit heads o banks Feedback rom banks and

nancial institutions Internal analysis

The Reserve Banks Annual Policy Statements,announced in April, are ollowed by three quarterlyreviews, in July, October and January. A detailed

background report Review of Macroeconomicand Monetary Developments is released the daybeore each o these policy reviews. In betweenthe quarterlys, we also release three mid-quarterstatements in September, December and Marchreviewing the policy. Faced with multiple tasks anda complex mandate, the Reserve Bank emphasizesclear and structured communication or eective

unctioning. Improving transparency in ourdecisions and actions is a constant endeavour atthe Reserve Bank.

RBI Governor responds to questions ollowing therelease o the annual policy statement.

Improving transparency in our

decisions and actions is a constantendeavour at RBI.


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17Issuer o Currency

The Reserve Bank is the nations sole note issuing authority.Along with the Government o India, we are responsible or thedesign and production and overall management o the nationscurrency, with the goal o ensuring an adequate supply o cleanand genuine notes. The Reserve Bank also makes sure there

is an adequate supply o coins, produced by the government.In consultation with the government, we routinely addresssecurity issues and target ways to enhance security eatures toreduce the risk o countereiting or orgery.

Our Approach

The Department o Currency Management inMumbai, in cooperation with the Issue Departmentsin the Reserve Banks regional oces, oversees theproduction and manages the distribution o currency.

Currency chests at more than 4,000 bank branchestypically commercial bankscontain adequatequantity o notes and coins so that currency isaccessible to the public in all parts o the country.

The Reserve Bank has the authority to issue notes upto value o Rupees Ten Thousand.


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Our ToolsFour printing presses actively print notes: Dewas inMadhya Pradesh, Nasik in Maharashtra, Mysore inKarnataka, and Salboni in West Bengal.

The presses in Madhya Pradesh and Maharashtra areowned by the Security Printing and Minting Corporation

o India (SPMCIL), a wholly owned company o theGovernment o India. The presses in Karnataka andWest Bengal are set up by Bharatiya Reserve Bank NoteMudran Private Limited (BRBNMPL), a wholly ownedsubsidiary o the Reserve Bank.

Coins are minted by the Government o India. RBI isthe agent o the Government or distribution, issue andhandling o coins. Four mints are in operation: Mumbai,

Noida in Uttar Pradesh, Kolkata, and Hyderabad.

RBIs Anti-countereiting Measures Continual upgrades o bank note security eatures Public awareness campaigns to educate citizens

to help prevent circulation o orged orcountereit notes

Installation o note sorting machines

The Reserve Banks printing press at Mysore.

RBIs Clean Note Policy Education campaign on preerred way to handle

notes: no stapling, writing, excessive olding andthe like

Timely removal o soiled notes: use o currency

verication and processing systems and sortingmachines

Exchange acility or torn, mutilated or deectivenotes: at currency chests o commercial banksand in Reserve Bank issue oces

Looking AheadFocus continues on ensuring availability o clean notesand on strengthening the security eatures o banknotes. Given the volumes involved and costs incurredin the printing, transport, storage and removal o unt/

soiled notes, the Reserve Bank is evaluating ways toextend the lie o bank notesparticularly in the lowerdenominations. For example, we are considering issue oRs.10 banknotes in polymer.


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20Banker and Debt Managerto Government

Managing the governments banking transactions is a key RBI role. Like individuals,

businesses and banks, governments need a banker to carry out their fnancial

transactions in an efcient and eective manner, including the raising o resources

rom the public. As a banker to the central government, the Reserve Bank

maintains its accounts, receives money into and makes payments out o these

accounts and acilitates the transer o government unds. We also act as thebanker to those state governments that have entered into an agreement with us.

Our ApproachThe role as banker and debt manager to governmentincludes several distinct unctions: Undertaking banking transactions or the central and

state governments to acilitate receipts and

payments and maintaining their accounts. Managing the governments domestic debt with the

objective o raising the required amount o publicdebt in a cost-eective and timely manner.

Developing the market or government securitiesto enable the government to raise debt at areasonable cost, provide benchmarks or raisingresources by other entities and acilitate transmission

o monetary policy actions.

Our ToolsAt the end o each day, our electronic systemautomatically consolidates all o the governmentstransactions to determine the net nal position. I thebalance in the governments account shows a negativeposition, we extend a short-term, interest-bearing

advance, called a Ways and Means AdvanceWMAthelimit or amount or which is set at the beginning o eachnancial year in April.


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21The RBIs Government Finance Operating StructureThe Reserve Banks Department o Government and Bank Accounts overseesgovernments banking related activities. This department encompasses: Public accounts departments: manage the day-to-day aspects o

Governments banking operations. The Reserve Bank also appoints

commercial banks as its agents and uses their branches or greater access tothe governments customers.

Public debt ofces: provide depository services or government securitiesor banks, institutions and service government loans.

Central Accounts Section at Nagpur: consolidates the governmentsbanking transactions.

The Internal Debt Management Department based in Mumbai raises the

governments domestic debt and regulates and develops the governmentsecurities market.

Looking Ahead

Going orward, we will continue to enhance ecient anduser-riendly conduct o banking transactions or centraland state governments while ensuring cost-eectivecash and debt management by deepening and wideningo the market or government securities.

The RBI plays a critical role managing the issuance o public debt.Part o this role includes inorming potential investors aboutupcoming debt auctions through notices such as these.

RBI as the GovernmentsDebt ManagerIn this role, we set policies,in consultation with thegovernment and determinethe operational aspects oraising money to help thegovernment nance itsrequirements: Determine the size,

tenure and nature(xed or foating rate)o the loan

Dene the issuingprocess including holdingo auctions

Inorm the public andpotential investors aboutupcoming governmentloan auctions

The Reserve Bank alsoundertakes marketdevelopment eorts,

including enhancedsecondary market tradingand settlement mechanisms,authorisation o primarydealers and improvedtransparency o issuingprocess to increase investorcondence, with theobjective o broadening anddeepening the governmentsecurities market.


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22 Banker to Banks

Like individual consumers, businesses and organisations o all kinds,banks need their own mechanism to transer unds and settle inter-banktransactionssuch as borrowing rom and lending to other banksandcustomer transactions. As the banker to banks, the Reserve Bank ulllsthis role. In eect, all banks operating in the country have accounts with

the Reserve Bank, just as individuals and businesses have accounts withtheir banks.

Our ApproachAs the banker to banks, we ocus on: Enabling smooth, swit and seamless clearing and

settlement o inter-bank obligations. Providing an ecient means o unds transer

or banks.Enabling banks to maintain their accounts with

us or purpose o statutory reserve requirementsand maintain transaction balances.

Acting as lender o the last resort.


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23Our ToolsThe Reserve Bank provides products and services or thenations banks similar to what banks oer their owncustomers. Heres a look at how we help:

Non-interest earning current accounts: Bankshold accounts with the Reserve Bank based oncertain terms and conditions, such as, maintenanceo minimum balances. They can hold accounts ateach o our regional oces. Banks draw on theseaccounts to settle their obligations arising rominter-bank settlement systems. Banks canelectronically transer payments to other banks rom

this account, using the Real Time Gross SettlementSystem (RTGS).

Deposit Accounts Department: This departmentscomputerised central monitoring system helpsbanks manage their unds position in real timeto maintain the optimum balance betweensurplus and decit centres.

Remittance acilities: Banks and government

departments can use these acilities totranser unds. Lender o the last resort: The Reserve Bank

provides liquidity to banks unable to raise short-term liquid resources rom the inter-bank market.Like other central banks, the Reserve Bank considersthis a critical unction because it protects theinterests o depositors, which in turn, hasa stabilising impact on the nancial system

and on the economy as a whole. Loans and advances: The Reserve Bank provides

short-term loans and advances to banks / nancialinstitutions, when necessary, to acilitate lendingor specied purposes.

RBI provides liquidity support to banks. Cash being transportedrom Mysore Press.

Looking AheadChallenges going orward include implementing corebanking solutions or our customers and enhancing thesaety and eciency o the payments and settlementsystem in the country.


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24Regulator othe Banking System

Banks are undamental to the nations nancial system. Thecentral bank has a critical role to play in ensuring the saetyand soundness o the banking systemand in maintainingnancial stability and public condence in this system. As theregulator and supervisor o the banking system, the Reserve

Bank protects the interests o depositors, ensures a rameworkor orderly development and conduct o banking operationsconducive to customer interests and maintains overall nancialstability through preventive and corrective measures.

Our Approach

The Reserve Bank regulates and supervises the nationsnancial system. Dierent departments o the ReserveBank oversee the various entities that comprise Indiasnancial inrastructure. We oversee: Commercial banks and all-India development

fnancial institutions: Regulated by theDepartment o Banking Operations and Development,supervised by the Department o Banking Supervision

Urban co-operative banks: Regulated andsupervised by the Urban Banks Department Regional Rural Banks (RRB), District Central

Cooperative Banks and State Co-operative Banks:Regulated by the Rural Planning and CreditDepartment and supervised by NABARD

Non-Banking Financial Companies (NBFC):Regulated and supervised by the Department oNon-Banking Supervision


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25Our ToolsThe Reserve Bank makes use o several supervisory tools: On-site inspections O-site surveillance, making use o required

reporting by the regulated entities

Thematic inspections, scrutiny and periodic meetings

The Board or Financial Supervision oversees the ReserveBanks regulatory and supervisory responsibilities.

Looking AheadIn the regulatory and supervisory arena, there are severalchallenges going orward. For commercial banks: Focus is on implementing

Basel III norms, which will require improved capitalplanning and risk management skills.

For urban cooperative banks: Focus is onprotability, proessional management andtechnology enhancement.

For NBFCs: Focus is on identiying theinterconnections and the roles these institutions

should play as the nancial system deepens. For regional rural banks: Focus is on enhancing

capability through IT and HR or serving the ruralareas.

For rural cooperative banks: Focus is on ensuringthat they meet minimum prudential standards.

The RBIs Regulatory RoleAs the nations nancial regulator, the Reserve Bankhandles a range o activities, including: Licensing Prescribing capital requirements Monitoring governance Setting prudential regulations to ensure solvency

and liquidity o the banks Prescribing lending to certain priority sectors o

the economy Regulating interest rates in specic areas Setting appropriate regulatory norms related to

income recognition, asset classication,

provisioning, investment valuation, exposurelimits and the like

Initiating new regulation

Consumer confdence and trust are undamental to the proper unctioning o thebanking system. RBIs supervision and regulation helps ensure that banks are stableand that the system unctions smoothly.


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26 Manager o Foreign Exchange

With the transition to a market-based system or determining the externalvalue o the Indian rupee, the oreign exchange market in India gainedimportance in the early reorm period. In recent years, with increasingintegration o the Indian economy with the global economy arising romgreater trade and capital fows, the oreign exchange market has evolved as

a key segment o the Indian nancial market.

Our ApproachThe Reserve Bank plays a key role in the regulationand development o the oreign exchange market andassumes three broad roles relating to oreign exchange:

Regulating transactions related to the external sectorand acilitating the development o the oreignexchange market

Ensuring smooth conduct and orderly conditions inthe domestic oreign exchange market

Managing the oreign currency assets and goldreserves o the country


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27Our ToolsThe Reserve Bank is responsible or administration o theForeign Exchange Management Act,1999 and regulatesthe market by issuing licences to banks and other selectinstitutions to act as Authorised Dealers in oreign

exchange. The Foreign Exchange Department (FED) isresponsible or the regulation and development o themarket.

On a given day, the oreign exchange rate refects thedemand or and supply o oreign exchange arisingrom trade and capital transactions. The RBIs FinancialMarkets Department (FMD) participates in the oreign

exchange market by undertaking sales / purchases ooreign currency to ease volatility in periods o excessdemand or/supply o oreign currency.

The Department o External Investments andOperations (DEIO) invests the countrys oreignexchange reserves built up by purchase o oreigncurrency rom the market. In investing its oreignassets, the Reserve Bank is guided by three principles:saety, liquidity and return.

Looking AheadThe challenge now is to liberalise and develop the oreignexchange market, with an eye toward ushering in greatermarket eciency while ensuring nancial stability in an

increasingly global nancial market environment. Withcurrent account convertibility achieved in 1994, the keyocus is now on capital account management.

The Department o External Investments& Operations managesa multi-currency multi-instrument portolio o oreign currencyassets. A well-equipped dealing room executes transactions.

In investing its oreign assets, the Reserve Bankis guided by three principles: saety, liquidity and return.


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28Regulator and Supervisoro Payment and Settlement Systems

Payment and settlement systems play an important role in improvingoverall economic eciency. They consist o all the diverse arrangementsthat we use to systematically transer moneycurrency, paper instrumentssuch as cheques, and various electronic channels.

Our ApproachThe Payment and Settlement Systems Act o 2007(PSS Act) gives the Reserve Bank oversight authority,including regulation and supervision, or the paymentand settlement systems in the country. In this role,we ocus on the development and unctioning o

sae, secure and ecient payment and settlementmechanisms.


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29Our ToolsThe Reserve Bank has a two-tiered structure. The rsttier provides the basic ramework or our paymentsystems. The second tier ocusses on supervision o thisramework. As part o the basic ramework, the Reserve

Banks network o secure systems handles various typeso payment and settlement activities. Most operate onthe security platorm o the INdianFInancialNETwork(INFINET), using digital signatures or urther security otransactions. Here is an overview o the various systemsused:

Retail payment systems: Facilitating cheque

clearing, electronic unds transer, through NationalElectronic Funds Transer (NEFT), settlement ocard payments and bulk payments, such as electronicclearing services. Operated through local clearinghouses throughout the country.

Large value systems: Facilitating settlement ointer-bank transactions rom nancial markets. Theseinclude:

- Real Time Gross Settlement System (RTGS):or unds transers

- Securities Settlement System: or thegovernment securities market

- Foreign Exchange Clearing: or transactionsinvolving oreign currency

Department o Payment and Settlement Systems:The Reserve Banks payment and settlement systemsregulatory arm.

Department o Inormation Technology:Tech support or the payment systems and or theReserve Banks internal IT systems.

Looking AheadGoing orward, we are proactively identiying andaddressing issues that help mitigate the risks or largevalue systems. Eorts on the retail payment system sidewill ocus on operational eciencies, cost eectiveness,innovation and risk management.

Efcient unds clearing was frst initiated in the80s through Magnetic Ink Character Recognition(MICR) technology.


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30 Maintaining Financial Stability

Pursuit o nancial stability has emerged as a key critical policy objectiveor the central banks in the wake o the recent global nancial crisis.Central banks have a critical role to play in achieving this objective. Thoughnancial stability is not an explicit objective o the Reserve Bank in terms othe Reserve Bank o India Act, 1935, it has been an explicit objective o theReserve Bank since the early 2000s.

Our ApproachIn 2009, the Reserve Bank set up a dedicated FinancialStability Unit mainly to, put in place a system ocontinuous monitoring o the macro nancial system.

The departments remit includes: Conduct o macro-prudential surveillance o the

nancial system on an ongoing basis Developing models or assessing nancial stability in

going orward Preparation o hal yearly nancial stability reports. Development o a database o key variables which

could impact nancial stability, in co-ordination with

the supervisory wings o the Reserve Bank Development o a time series o a core set o

nancial indicators Conduct o systemic stress tests to assess resilience

Following the establishment o the Financial StabilityUnit, the Reserve Bank started publishing periodicnancial stability reports, with the rst Financial Stability

Report (FSR) being published in March 2010. FSRs arenow being published on a hal yearly basis in June and


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Our ToolsThe Reserve Bank makes use o a variety o tools and

techniques to assess the build up o systemic risks in theeconomy and to provide critical inputs in this respect toits policy making departments. The tools include: A Financial Stress Indicator - a contemporaneous

indicator o conditions in nancial markets and inthe banking sector;

Systemic Liquidity Indicator or assessing stressesin availability o systemic liquidity;

A Fiscal Stress Indicator or assessing build up orisks rom the scal; A Network Model o the bilateral exposures in the

nancial system or assessing the inter-connectedness in the system;

A Banking Stability Indicator or assessing riskactors having a bearing on the stability o thebanking sector; and

A series oBanking Stability Measures or assessing

the systemic importance o individual banks.

Looking AheadLaunching a Systemic Risk Survey to more ormally elicitmarket views on the possible sources o risk to systemicstability o the country - both, domestic and global.

Financial Stability Report

December every year. Internally, quarterly Systemic RiskMonitors and monthly Market Monitors are preparedto place beore the Banks Top Management a morerequent assessment o the risks to systemic stability othe economy.

In the Union Budget or 2010-11, the Finance Ministerannounced the establishment o Financial Stabilityand Development Council (FSDC) to provide, amongother things, a high level ocus to nancial stability. TheReserve Bank plays a critical role in the Council. TheGovernor, Reserve Bank, is the ex-ocio chairpersono the Sub Committee o the FSDC the Councils

main operating arm. The Financial Stability Unit o theReserve Bank o India acts as the Secretariat or the SubCommittee.


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This role is, perhaps, the most unheralded aspect o our activities,yet it remains among the most critical. This includes ensuring creditavailability to the productive sectors o the economy, establishinginstitutions designed to build the countrys nancial inrastructure,expanding access to aordable nancial services andpromoting nancial education and literacy.

Our ApproachOver the years, the Reserve Bank has added newinstitutions as the economy has evolved. Some o theinstitutions established by the RBI include:Deposit Insurance and Credit Guarantee Corporation

(1962), to provide protection to bank depositorsand guarantee cover to credit acilities extendedto certain categories o small borrowers

Unit Trust o India (1964), the rst mutual undo the country

Industrial Development Bank o India (1964),a development nance institution or industry

National Bank or Agriculture and Rural Development

(1982), or promoting rural and agricultural credit Discount and Finance House o India (1988), a money

market intermediary and a primary dealer ingovernment securities

National Housing Bank (1989), an apexnancial institution or promoting and regulatinghousing nance

Securities and Trading Corporation o India (1994),

a primary dealer

Developmental Role

O T l


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33Our ToolsThe Reserve Bank continues its developmental role, whilespecically ocussing on nancial inclusion. Key tools inthis on-going eort include:Directed credit or lending to priority sector and

weaker sections: The goal here is to acilitate/enhance credit fow to employment intensive sectorssuch as agriculture, micro and small enterprises(MSE), as well as or aordable housing andeducation loans.

Lead Bank Scheme: A commercial bank isdesignated as a lead bank in each district in thecountry and this bank is responsible or ensuring

banking development in the district throughcoordinated eorts between banks and governmentocials. The Reserve Bank has assigned a LeadDistrict Manager or each district who acts as acatalytic orce or promoting nancial inclusion andsmooth working between government and banks.

Sector specifc refnance: The Reserve Bankmakes available renance to banks against theircredit to the export sector. In exceptionalcircumstances, it can provide renance againstlending to other sectors.

Strengthening and supporting smalllocal banks: This includes regional rural banksand cooperative banks

Financial inclusion: Expanding access to nanceand promoting nancial literacy are a part o ouroutreach eorts.

Looking AheadThe development role o the Reserve Bank will continueto evolve, along with the Indian economy. Through theoutreach eorts and emphasis on customer service, theReserve Bank will continue to make eorts to ll thegaps to promote inclusive economic growth and stability.

RBI aims to ensure that credit is available to theproductive sectors o the economy.


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34Financial Inclusion and Literacy:Expanding Access; Encouraging EducationExpanding access to and knowledge about nanceis a undamental aspect o the Reserve Banksoperations. These eorts are critical to ensuringthat the benets o a growing and healthy economyreach all segments o the population. Our work hereincludes: Encouraging provision o aordable nancial

services like zero-balance, no-rills bank accounts,access to payments and remittance acilities,

savings, loans and insurance servicesExpanding banking outreach through use o

technology, such as banking by cell phone, smartcards and the like

Encouraging bank branch expansion in parts othe country with ew banking acilities

Facilitating use o specied persons to act asagents to perorm banking unctions in hard-to-

reach parts o the country

Our work to promote nancial literacy ocusseson educating people about responsible nancialmanagement. Eorts here include: Inormation and knowledge-sharing:

User-riendly website includes easy-to-understand tips and guidance in multiplelanguages; brochures, advertisements andother marketing materials educatethe public about banking services.

Credit counselling: The Reserve Bank encouragescommercial banks to set up nancial literacy andcredit counselling centres, to help people developbetter nancial planning skills.


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The Reserve Bank has a rich tradition o generating sound,policy-oriented economic research, data compilation and

knowledge-sharing.

35Research, Data and Knowledge-Sharing:

How We Communicate

Economic research work is designed to: Educate the public Provide reliable, data-driven

inormation or policy anddecision-making

Supply accurate and timely data oracademic research as well as to thegeneral public

Provide support or collaborativeresearch to research institutions/universities

To develop and maintain statisticaldata reporting systems

To conduct orward-looking surveysor monetary policy

Our economic research ocuses on study and analysis odomestic and international macroeconomic issues. This ismainly done by the Department o Economic and PolicyResearch and the Department o Statistics and InormationManagement.

Communicating with


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36Communicating withthe Public

Our emphasis on communication involves a range o activities, all aimed atsharing knowledge about the nancial arena.

The Reserve Banks web site posts relevant inormationor citizens in 13 local languages.

The Reserve Banks web site (www.rbi.org.in) provides a ull range o inormation about ouractivities, our publications, our history and our organisation. The web site is updated regularly,with the most recent publications, speeches, press releases and circulars. O note, relevantpress releases and circulars are posted in 13 local languages.


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37RBI Publications

Publications produced on a regularbasis include:

AnnualAnnual ReportReport on Trend and Progress o Banking in IndiaReport on Currency and Finance

Handbook o Statistics on the Indian EconomyState Finances: A Study o BudgetsA Prole o BanksStatistical Tables Relating to Banks in India Basic Statistical Returns o

Scheduled Commercial Banks in India

Hal Yearly

Financial Stability Report

QuarterlyMacroeconomic and Monetary Development Occasional PapersQuarterly Statistics on Deposits and Credit o

Scheduled Commercial Banks

MonthlyRBI BulletinMonetary and Credit Inormation Review

WeeklyWeekly Statistical Supplement

OccasionalRBI Working Paper Series (Web version)

A Central Resource:the RBIs Data Warehouse Enterprise-wide data warehouse User-riendly, public access

via RBI web site,www.dbie.rbi.org.in

Pre-ormatted reports

Simple and advanced queries Denitions o basic concepts


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38Addressing Current and

Future Challenges

Building on the rm oundation o our rich tradition,the Reserve Bank is also changing with the times.

The Reserve Banks mandateyesterday, today and tomorrowis to set a monetary andnancial course that will sustain the nations economic growth and health during globaldownturns, periods o volatility and global upturns alike.

Our actions prior to and during the recent period o global nancial upheaval exempliythese commitments. We have demonstrated willingness to take pro-active measures topreserve gains and to ensure that progress is sustainable. The Reserve Bank responses duringextraordinary times are aimed at maintaining nancial stability including maintainingsucient rupee and oreign exchange liquidity to ensure that credit continues to fow tobusinesses and consumers and nancial markets remain stable.

We also continue to address the challenge o ensuring that the national nancial andmonetary policy-making contribute to positive, sustainable and inclusive growth across theincome spectrum.

RBI: Some Notable Actions


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39The Reserve Banks willingness to use conventionaland unconventional measures has helped buerthe nation rom severe crises. Here are some

examples o our responses post-reorms: 2004 : Market Stabilisation Scheme - A

sterilisation instrument, like CRR and OMOs,used to absorb excessive orex fow and theresultant rupee liquidity

2004: Using prudential norms like riskweights and provisioning norms or

commercial real estate and capital marketloans portolio o banks to guard againsttheir excessive bulging

2008-09 : Careully considered and calibratedreduction o interest rates until situationstabilised; and took various steps to makedomestic and orex liquidity available; both,

condence building moves 2011: Marginal Standing Facility - Under

which scheduled commercial banks canborrow overnight (even by dipping into SLRportolio) at their discretion up to one percent o their respective NDTL at 100 basispoints above the repo rate to provide a saety

valve against unanticipated liquidity shocks 2012: Using Open Market Operations and

CRR as pure LAF, liquidity instruments


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40Customer Service: How Can We Help You?

Our customer outreach policy is aimed at inorming the public, so that they knowwhat to expect, what choices they have and what rights and obligations they havein relation to banking services. Our customer service initiatives are designed to protectcustomers rights, enhance the quality o customer service and strengthen thegrievance redressal mechanism in the banking sector as a wholeand at theReserve Bank itsel. Our eorts include:

Customer Service Department (CSD): Questions? Problems? Concerns? Communicate

with this department ([email protected]) which was set up in 2006, based at thecentral oce in Mumbai, to respond to system-level customer issues.

Banking Codes and Standards Board o India: The Reserve Bank established thisboard to encourage transparency in lending and air pricing. This will give customersmore condence in the system and encourage more usage o ormal banking.

(www.bcsbi.org.in)

Banking Ombudsman: The Reserve Banks quasi-judicial authority or resolvingdisputes between commercial banks, primary cooperative banks and regional rural banksand their customers. There is one Banking Ombudsman in virtually every state.(www.bankingombudsman.rbi.org.in)

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