THE MONETARY MONARCH - RBI 1

"RBI data shows bank credit growth at 9.4%", "RBI unlikely to cut repo rate in 2015-16", "RBI eases overseas borrowing rules for domestic companies", "RBI move on loan to value ration seen reducing home loan rate further" etc are often heard of from the business news. The common from all as we find is - RBI. Is not it intriguing that the entire economy of India is stabilized by a single authority and institution of great bureaucrats and economists - The Reserve Bank of India? Indeed, it is. What are deemed to be the powers of that reputed authority? How it lubricates the Indian economic growth? What is the strategy they adapt? What are the limitations of its functioning and few related questions interests one to know the basis of the working of the economy.

The basic functions of RBI are divided in the formulation of two important policies. They are 1) Monetary policy 2) Fiscal policy.

The monetary policy streamlines the money flow in the market. In order to regulate the money flow, RBI uses few tools in hand. They are 1) Liquidity Adjustment Facility 2) Marginal Standing Facility.

 Prior to getting deeper into monetary, let us look at the primary and basic functions RBI has to monitor.  The foremost function tends to be the printing of currency. RBI is responsible for the origin of all the currency notes except for the one rupee notes/ coins and its denomination. Why does not RBI mint one rupee coins and denomination? Because it is the true currency of India and is directly minted under the ministry of finance. All the notes printed by RBI are barely the promissory notes where the governor promises to pay the bearer the sum of ‘X’ rupees. Now the question arises that how much money is permitted to be printed by RBI? RBI is given freedom and authority to print limitless currency notes. Then why cannot RBI print notes enough to make ever poor family, wealthy?

During the earlier years of Independence, RBI had to issue currency notes based on the gold reserves deposited with the IMF to maintain stability. Later, it was banished but a standard reserve of 200 crore is to be deposited with IMF for security, even today. The basis for the printing of currency in the current India happens to be the GDP and the growth rate. There are many other factors adding to them like increase in the population, decrease in the debts of government, differences in rates of taxes, growth of different sectors of the economy, Per capita Income etc.

Now, how the money supply is related to GDP, is explained with a small example. Ravi and Raja produce 50 and 30 units each per annum, each unit costing 10 rupees each i.e.; GDP being (50*10+30*10) = Rupees 800. So, RBI is permitted to print Rs. 800 worth currency notes. If it issues more than 800, it would lead to inflation and vice versa (deflation).  So this is a narrow example for us to understand the base for the issue of currency.

Monetary policy is discussed in detail in the next blog.

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