RBI HISTORY: • INAGURATED IN 1935 WITH A SHARE CAPITAL OF RS. 5 CR.• THE GOVERNMENT OF INDIA HELD SHARES OF NOMINAL VALUE OF RS. 2,22,000.• RBI WAS NATIONALISED IN 1949.

CONSTITUTION OF RBI:

CENTRAL BOARD OF DIRECTORS OF 20 MEMBERS• GOVERNOR & 4 DY. GOVERNORS.• 1 GOVERNMENT OFFICIAL FROM MINISTRY OF FINANCE.• 10 DIRECTORS BY GOVT. OF INDIA• 4 DIRECTORS BY CENTRAL GOVT. (represent Local Board)

FUNCTIONS OF THE RESERVE BANK OF INDIA

GENERAL FUNCTIONS: BANK OF ISSUE. BANKER TO GOVERNMENT. BANKER’S BANK. CONTROLLER OF CREDIT. CUSTODIAN OF FOREIGN EXCHANGE RESERVES.

SUPERVISORY FUNCTIONS PROMOTIONAL FUNCTIONS

BANK OF ISSUE:

• SOLE RIGHT TO ISSUE BANK NOTES OF ALL DENOMINATIONS.• SEPARATE ISSUE DEPARTMENT FOR ISSUE OF CURRENCY NOTES.• ORIGINAL ASSETS: 2/5TH OF GOLD COINS, GOLD BULLION OR STERLING SECURITIES FOR AMOUNT OF GOLD NOT LESS THAN RS. 40 CR. 3/5TH HELD IN RUPEE COINS, GOI RUPEE SECURITIES, PROMISSIONARY NOTES PAYABLE IN INDIA.• MODIFIED PROVISIONS SINCE 1957 (POST-WAR PERIOD)

MAINTAIN GOLD & FOREIGN EXCHANGE RESERVES OF RS. 200 CR, OF WHICH RS. 115 CR. SHOULD BE IN GOLD.

• THIS SYSTEM IS CALLED AS “MINIMUM RESERVE SYSTEM”.

BANKER TO GOVERNMENT:

• ACT AS GOVERNMENT BANKER, AGENT AND ADVISER.• OBLIGATION TO TRANSACT GOVT. BUSINESS i.e.

RECEIVE & MAKE PAYMENTS ON BEHALF OF GOVT.• HELPS GOVT. TO FLOAT NEW LOANS & TO MANAGE PUBLIC DEBT.• ACTS AS ADVISER TO THE GOVT. ON ALL MONETARY &BANKING MATTERS.

BANKER’S BANK:

• EVERY SCHEDULED BANK WAS REQUIRED TO MAINTAIN A CASH BALANCE EQUIVALENT TO 5% OF ITS DEMAND LIABILITES & 2% OF ITS TIME LIABILITES WITH RBI.• AT PRESENT BANKS KEEP CASH RESERVES EQUAL TO 3%OF THEIR AGGREGATE DEPOSIT LIABILITIES.• SCHEDULED BANKS CAN BORROW OR GET FINANCIAL ACCOMODATION IN TIMES OF NEED.• SINCE COMMERCIAL BANKS ALWAYS EXPECT RBI TO COME TO THEIR HELP IN TIME OF CRISIS, RBI ALSO BECOMES “LENDER OF THE LAST RESORT”

CONTROLLER OF CREDIT:

• RBI HOLDS THE CASH RESERVES OF ALL THE SCHEDULED BANKS.• IT CONTROLS THE CREDIT OPERATIONS OF BANKS THRO’ QUANTITATIVE & QUALITATIVE CONTROLS.• IT CONTROLS THE BANKING SYSTEM THRO’ THE SYSTEM OF LICENSING, INSPECTION AND CALLING FOR INFORMATION.• IT ACTS AS THE LENDER OF THE LAST RESORT BY PROVIDING REDISCOUNT FACILITIES TO SCHEDULED BANKS.

CUSTODIAN OF FOREIGN EXCHANGE RESERVES:

MAINTAINS THE OFFICIAL RATE OF EXCHANGE. ACC. TO RBI ACT OF 1934, BANK WAS REQUIRED TO BUY AND SELL AT FIXED RATES(AMOUNT NOT > 10,000) AFTER BECOMING A MEMBER OF THE I.M.F i.e. “INTERNATIONAL MONETARY FUND” IN 1946, RBI MAINTAINS FIX EXCHANGE RATE WITH ALL OTHER MEMBER COUNTRIES OF THE I.M.F. RBI ACTS AS THE CUSTODIAN OF INDIA’S RESERVE OF INTERNATIONAL CURRENCIES.

SUPERVISORY FUNCTIONS:

• RBI HAS CERAIN NON-MONETARY FUNCTIONS SUPERVISION OF BANKS PROMOTION OF SOUND BANKING IN INDIA• RBI IS AUTHORISED TO CARRY OUT PERIODICALINSPECTION OF BANKS.

• NATIONALISATION OF 14 MAJOR INDIAN SCHEDULEDBANKS IN JULY 1969 IMPOSED NEW RESPONSIBILITIESON RBI FOR DIRECTING THE GROWTH OF BANKING

AND CREDIT POLICIES TOWARDS RAPID ECONOMICGROWTH.

PROMOTIONAL FUNCTIONS:

• PROMOTE BANKING HABIT.• EXTEND BANKING FACILITIES TO RURAL & SEMI-URBAN AREAS.• ESTABLISH & PROMOTE NEW SPECIALISEDFINANCING AGENCIES.• ACCORDINGLY RBI HAS SET UP : DEPOSIT INSURANCE CORPORATION (1962) UNIT TRUST OF INDIA (1964) INDUSTRIAL DEV. BANK OF INDIA (1964) AGRICULTURAL REFINANCE CORPORATION OFINDIA (1963) INDUSTRIAL RECONSTRUCTION CORPORATION OFINDIA (1972)• THE BANK HAS DEVELOPED CO-OPERATIVE CREDITMOVEMENT TO: ENCOURAGE SAVING ELIMINATE MONEY-LENDERS FROM VILLAGE• RBI WITH HELP OF ARDC PROVIDES LONG-TERM FINANCE TO FARMERS.

Revenue Budget: It consists of the revenue receipts of the government (which is tax revenues plus other revenues) and the expenditure met from these revenues. It has two components: Revenue Receipt and Revenue Expenditure.

Capital Budget: It consists of capital receipts and payments. It also incorporates transactions in the Public Account. It has two components: Capital Receipt and Capital Expenditure.

Capital Expenditure: It consists of payments for acquisition of assets like land, buildings, machinery, equipment, as also investments in shares etc, and Loans and advances granted by the Central government to state and union territory governments, government companies, corporations and other parties.

Capital Receipt: The main items of capital receipts are loans raised by the government from public which are called market loans, borrowings by the government from the Reserve Bank of India and other parties through sale of Treasury Bills, loans received from foreign governments and bodies and recoveries of loans granted by the Central government to state and union territory governments and other parties. It also includes proceeds from disinvestment of government equity in public enterprises.

Expenditure Budget: It contains expenditure estimates made for a scheme or programme under both revenue and capital heads. These estimates are brought together and shown on a net basis at one place by major heads.

Finance Bill: This contains the government’s proposals for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structurebeyond the period approved by Parliament. It is submitted to Parliament along with the Budget for its approval.

Fiscal Deficit: It is the difference between the revenue receipts plus certain non-debt capital receipts and the total expenditure including loans (net of repayments). This indicates the total borrowing requirements of the government from all sources.

Monetised Deficit: It indicates the level of support extended by the Reserve Bank of India to the government’s borrowing programme.

Non-Plan Expenditure: It includes both revenue and capital expenditure on interest payments, the entire defence expenditure (both revenue and capital expenditure), subsidies, postal deficit, police, pensions, economic services, loans to public enterprises and loans as well as grants to state governments, union territory governments and foreign governments.

Plan Expenditure: It includes both revenue and capital expenditure of the government on the Central Plan, Central assistance to state and union territory plans. It forms a sizeable proportion of the total expenditure of the Central government.

Primary Deficit: It is the difference between fiscal deficit and interest payments.

Public Account: It is an account in which money received through transactions not relating to the Consolidated Fund is kept. Besides the normal receipts and expenditure of the government relating to the Consolidated Fund, certain other transactions enter government accounts in respect of which the government acts more as a banker, for example, transactions relating to provident funds, small savings collections, other deposits etc. Such money is kept in the Public Account and the connected disbursements are also made from it. Public Account funds do not belong to the government and have to be paid back some time or the other to the persons and authorities who deposited them. Parliamentary authorisation for payments from the Public Account is not required.

Revenue Deficit: It refers to the excess of revenue expenditure over revenue receipts. Revenue Expenditure: It is meant for the normal running of government departments and various services, interest charges on debt incurred by the government and subsidies. Broadly speaking, expenditure which does

not result in creation of assets is treated as revenue expenditure. All grants given to state governments and other parties are also treated as revenue expenditure even though some of the grants may be for creation of assets.

Revenue Receipt: It includes proceeds of taxes and other duties levied by the Centre, interest and dividend on investments made by the government, fees and other receipts for services rendered by the government.

Appropriation Bill: It is presented to Parliament for its approval, so that the government can withdraw from the Consolidated Fund the amounts required for meeting the expenditure charged on the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till the Appropriation Bill is voted is enacted.

Balance of PaymentThe statement that shows the transaction of the country’s trade and finance in terms of net outstanding receivable or payable from any other country with a certain period of time.

BillA legislative proposal draft is discussed and passed by both the houses of Parliament and then has to get an approval from the President and then finally it is a declared Act.

Contingency FundIf and when in emergencies the Government at such times helps with funds which is not authorized by the Parliament because of urgent needs that may arise.

Consumer price indexIt is a price index that features the rates of consumer goods

Capital budgetWhen a list of capital expenditure is planned and prepared annually it is termed Capital budget.

Custom DutyIt is the tax that is put on imports and tariffs.

Nationalization in context of banks means, when a bank becomes a public sector bank. These are the banks which were not public sect bank right from the start. Notes below will help you further in understanding the Nationalisation of banks in India

Phase IWith the nationalization of RBI in 1949,RBI was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.

Phase IIBefore the steps of nationalization of Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955 (In 1955, this act nationalised Imperial Bank of India to SBI). Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. SBI was to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

On 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. In 1980 with seven more banks were nationalized (hence Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks). Below is the list of those 14 banks:• Central Bank of India• Bank of Maharashtra• Dena Bank• Punjab National Bank• Syndicate Bank• Canara Bank• Indian Bank• Indian Overseas Bank• Bank of Baroda• Union Bank• Allahabad Bank• United Bank of India• UCO Bank• Bank of India

Important point: Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19.

Phase IIIThis phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Time is given more importance than money.

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange ratesbased on relative price levels of two countries. The idea originated with the School of Salamanca in the 16th century and was developed in its modern form by Gustav Cassel in 1918. The concept is founded on the law of one price;

the idea that inabsence of transaction costs, identical goods will have the same price in different markets.In its “absolute” version, the purchasing power of different currencies is equalized for a given basket of goods. In the “relative” version, the difference in the rate of change in prices at home and abroad—the difference in the inflation rates—is equal to the percentage depreciation or appreciation of the exchange rate.Deviations from the theory imply differences in purchasing power of a “basket of goods” across countries, which means that for the purposes of many international comparisons, countries’ GDPs or other national income statistics need to be “PPP adjusted” and converted into common units. The best-known and most-used purchasing power adjustment is the Geary-Khamis dollar (the “international dollar”).Real exchange rate fluctuations are mostly due to different rates of inflation between the two economies. Aside from this volatility, consistent deviations of the market and purchasing power adjusted exchange rates can be observed, for example (market exchange rate) prices of non-traded goods and services are usually lower in countries with lower incomes (a U.S. dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States).There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates. For example, the World Bank’s World Development Indicators 2005 estimated that in 2003, one Geary-Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity—considerably different from the nominal exchange rate. (from wikipedia)

In simple wordsAn economic theory that estimates the amount of adjustment needed on theexchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power.

The relative version of PPP is calculated as:

Where:“S” represents exchange rate of currency 1 to currency 2“P1” represents the cost of good “x” in currency 1“P2” represents the cost of good “x” in currency 2

In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency.

For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)

Mutual Fund

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund’s current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

Hedge Funds

An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In many countries, laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge fundsas mutual funds for the super rich. They are similar to mutual funds in thatinvestments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can’t enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn’t accurate to say that hedge funds just “hedge risk”. In fact, because hedge fund managers make speculativeinvestments, these funds can carry more risk than the overall market.

Q) What is GDP?

Ans ) Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP is the basic measure of the country’s economic performance over a given period.GDP is measured by three basic approaches viz. 1)Expenditure approach2)Income approach3)Value based approach

Types of GDP1. Real GDP

2. Nominal GDP

Real GDP is the production of goods and services valued at constant prices whereas nominal GDP is the production of goods and services valued at current prices.But why we need to measure both real and nominal GDP?. The answer is here.

Now when the total spending increases in a given period it points towards two happenings, either the goods or services are sold at higher prices (i.e inflation has increased) or the total output of goods and services have increased. While studying economy, economist tries to separate these two effects. Hence they measure the real GDP which allows them to find whether production of goods and services has increased or decreased over the periods.Components of GDPGDP is a variable which depends upon four other variables. These variables form components of GDP

GDP = C+I+G+NX

C= total consumptionI = gross investmentG= Government spendingNX= exports less imports

Consumption is spending by households on goods and services. Here we do not include purchase of new housing. Investment is spending on inventories. Equipments and purchase of new housingGovernment spending includes spending on goods and services by state and central governmentNet exports spending on the domestic products by foreigners less spending on foreign products by locals.

What is FII?

A: FII (Foreign Institutional Investor) used to denote an investor, mostly in the form of an institution. An institution established outside India, which proposes to invest in Indian market, in other words buying

Indian stocks. FII’s generally buy in large volumes which has an impact on the stock markets. Institutional Investors includes pension funds, mutual funds, Insurance Companies, Banks, etc.

What is FDI?

A: FDI (Foreign Direct Investment) occurs with the purchase of the “physical assets or a significant amount of ownership (stock) of a company in another country in order to gain a measure of management control” (Or) A foreign company having a stake in a Indian Company.

What is CRR Rate?

Answer: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

CURRENT CRR : 6.0%

Repo Rate (RR)Repo rate is the rate at which our banks borrow rupees from RBI. Whenever the banks have any shortage of funds they can borrow it from RBI. A reduction in therepo rate will help banks to get money at a cheaper rate. When the repo rateincreases, borrowing from RBI becomes more expensive.

## CURRENT REPO RATE IS : 6.50% (updated)##

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Reverse Repo Rate (RRR)This is exact opposite of Repo rate. Reverse Repo rate is the rate at whichReserve Bank of India (RBI) borrows money from banks. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates.

## CURRENT REVERSE REPO RATE IS : 5.50% (updated)##

credit to its customers.

#SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.

#SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities

are the liabilities a commercial bank liable to pay to the customers on their anytime demand.

#With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency acommercial bank.

#It is also helpful to control the expansion of Bank Credits.

#By changing the SLR rates, RBI can increase or decrease bank credit expansion.

#Through SLR, RBI compels the commercial banks to invest in government securities like government bonds.

#SLR is used to control inflation n growth.

## CURRENT SLR RATE IN INDIA IS 25% ##