Banking & RBI

Sort every RBI instrument by one question: does it change the PRICE of money or the QUANTITY of it? Price tools are the rates — repo (RBI lends to banks against securities), reverse repo and the standing deposit facility (RBI absorbs money), MSF (emergency borrowing above repo), bank rate. Quantity tools are the ratios — CRR is cash the bank must park WITH the RBI, earning nothing; SLR is liquid assets the bank keeps WITH ITSELF in the form of government securities, gold and cash. Remember C for Cash-with-Central-bank. Both squeeze how much a bank can lend, but only CRR takes the money out of the bank's own hands. Then the direction rule: to fight inflation, raise rates and ratios (tighten); to fight slowdown, lower them (ease).

• Repo up, money tight.

  Repo is the rate at which the RBI lends to banks against securities; raising it makes borrowing costlier and drains liquidity. Reverse repo absorbs liquidity by paying banks to park funds. CRR is the share of deposits kept as cash with the RBI, SLR the share held in specified liquid assets. All four move liquidity, in different ways.

• Six on the committee, four per cent in the target.

  The Monetary Policy Committee has six members — three from the RBI including the Governor, and three appointed by the central government. Its mandate is to keep consumer price inflation at four per cent within a band of two percentage points either side.

• 1The Reserve Bank of India was established on 1 April 1935 under the RBI Act 1934 and nationalised in 1949; its head office is in Mumbai.
• 2Fourteen major commercial banks were nationalised in 1969 and six more in 1980.
• 3The State Bank of India was created in 1955 by reconstituting the Imperial Bank of India.
• 4The RBI's flexible inflation targeting framework, with a four per cent target and a two-point band, was formalised by amendments to the RBI Act in 2016.
• 5Priority sector lending obliges banks to direct a share of credit to agriculture, small enterprises, education, housing and weaker sections.
• 6Bank deposits are insured by the DICGC up to a statutory limit per depositor per bank.

• The Reserve Bank of India was established on 1 April 1935 under the RBI Act of 1934 and was nationalised in 1949; it is the sole authority for issuing currency notes in India except the one rupee note and coins, which are issued by the Government of India.
• The repo rate is decided by the Monetary Policy Committee, a six-member body with three RBI members including the Governor as chairperson and three external members appointed by the central government; decisions are by majority and the Governor has a casting vote in a tie.
• CRR is the share of net demand and time liabilities a bank must keep as cash with the RBI and earns no interest on it; SLR is the share it must keep with itself in liquid form as government securities, gold or cash.
• Under the flexible inflation targeting framework adopted in 2016, the government sets the inflation target for the RBI in consultation with it, measured by the Consumer Price Index; the target is 4 per cent with a tolerance band of plus or minus 2 percentage points.
• Fourteen major commercial banks were nationalised in 1969 and six more in 1980; priority sector lending norms, which require banks to lend a fixed share of credit to agriculture, small enterprises and weaker sections, come from this same policy tradition.
• Deposit insurance in India is provided by the Deposit Insurance and Credit Guarantee Corporation, a wholly owned subsidiary of the RBI, and bad loans are resolved under the Insolvency and Bankruptcy Code of 2016.

• CRR is kept as cash with the RBI and earns nothing; SLR is held by the bank itself in approved securities and does earn. Options treating them as the same are wrong.

• NCERT Class XII — Introductory Macroeconomics
• Indian Economy by Ramesh Singh
• Report on Trend and Progress of Banking in India, published annually by the Reserve Bank of India

• NCERT textbooks (free PDFs)
• Union Budget
• Reserve Bank of India
• NITI Aayog