ROLE AND FUNCTIONS OF RESERVE BANK OF INDIA (RBI)

Role and Function of the Reserve Bank of India (RBI):

   In every country there is one organization which works as the central bank. The function of the central bank of a country is to control and monitor the banking and financial system of the country. In India, the Reserve Bank of India (RBI) is the Central Bank.

   The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of regulator of the banking system in India. The Banking Regulation Act 1949 and the RBI Act 1953 has given the RBI the power to regulate the banking system.
     The RBI has different functions in different roles. Below, we share and discuss some of the functions of the RBI.

RBI is the Regulator of Financial System:

           The RBI regulates the Indian banking and financial system by issuing broad guidelines and instructions. The objectives of these regulations include:

• Controlling money supply in the system,
• Monitoring different key indicators like GDP and inflation,
• Maintaining people’s confidence in the banking and financial system, and
• Providing different tools for customers’ help, such as acting as the “Banking Ombudsman.”

RBI is the Issuer of Monetary Policy:

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well. The main objectives of monitoring monetary policy are:

• Inflation control
• Control on bank credit
• Interest rate control

The tools used for implementation of the objectives of monetary policy are:

• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),
• Open market operations,
• Different Rates such as repo rate, reverse repo rate, and bank rate.

RBI is the Issuer of Currency:

Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also takes action to control circulation of fake currency.

RBI is the Controller and Supervisor of Banking Systems:

The RBI has been assigned the role of controlling and supervising the bank system in India. The RBI is responsible for controlling the overall operations of all banks in India. These banks may be:

• Public sector banks
• Private sector banks
• Foreign banks
• Co-operative banks, or
• Regional rural banks

The control and supervisory roles of the Reserve Bank of India is done through the following:

• Issue Of Licence: Under the Banking Regulation Act 1949, the RBI has been given powers to grant licenses to commence new banking operations. The RBI also grants licenses to open new branches for existing banks. Under the licensing policy, the RBI provides banking services in areas that do not have this facility.
• Prudential Norms: The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such, they are responsible for implementation of international standards of capital adequacy norms and asset classification.
• Corporate Governance: The RBI has power to control the appointment of the chairman and directors of banks in India. The RBI has powers to appoint additional directors in banks as well.
• KYC Norms: To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Customer“ guidelines. Every bank has to ensure KYC norms are applied before allowing someone to open an account.
• Transparency Norms: This means that every bank has to disclose their charges for providing services and customers have the right to know these charges.
• Risk Management: The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in basel norms.
• Audit and Inspection: The procedure of audit and inspection is controlled by the RBI through off-site and on-site monitoring system. On-site inspection is done by the RBI on the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control.
• Foreign Exchange Control: The RBI plays a crucial role in foreign exchange transactions. It does due diligence on every foreign transaction, including the inflow and outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee. The RBI also takes necessary steps to control the current account deficit. They also give support to promote export and the RBI provides a variety of options for NRIs.
• Development: Being the banker of the Government of India, the RBI is responsible for implementation of the government’s policies related to agriculture and rural development. The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI gives stress on giving specialized support for rural development. Priority sector lending is also in key focus area of the RBI.

Apart from the above, the RBI publishes periodical review and data related to banking. The role and functions of the RBI cannot be described in a brief write up. The RBI plays a very important role in every aspect related to banking and finance. Finally the control of NBFCs and others in the financial world is also assigned with RBI.

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WHAT IS FOREIGN TRADE ? TYPES OF FOREIGN TRADE AND DISCUSS THE SALIENT FEATURES OF FOREIGN TRADE.

DEFINITION:

             Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot. The inflow of goods in a country is called import trade whereas outflow of goods from a country is called export trade. Many times goods are imported for the purpose of re-export after some processing operations. This is called entrepot trade. Foreign trade basically takes place for mutual satisfaction of wants and utilities of resources.

          According to Wasserman and Haltman, “International trade consists of transaction between residents of different countries”.

According to Anatol Marad, “International trade is a trade between nations”.

According to Eugeworth, “International trade means trade between nations”.

Types of Foreign Trade:

    Foreign Trade can be divided into following three groups :-

Import Trade : Import trade refers to purchase of goods by one country from another country or inflow of goods and services from foreign country to home country.

Export Trade : Export trade refers to the sale of goods by one country to another country or outflow of goods from home country to foreign country.

Entrepot Trade : Entrepot trade is also known as Re-export. It refers to purchase of goods from one country and then selling them to another country after some processing operations.

main Features of India’s Foreign Trade:

1) Increasing Share of Gross National Income:

                  India’s foreign trade plays an important role in the Gross National Income.

In 1990-91, share of India’s foreign trade (import export) in net national income was 17 per cent which in 2006-07 rose to 25 per cent. In 2006-07 exports and imports as percentage of GDP were 14.0 per cent and 21 per cent respectively.

2)Less Percentage of World Trade:

        Share of India’s foreign trade in world trade has been declining. In 1950-51, India’s share in total import trade of the world was 1.8 per cent and in export trade it was 2 per cent. According to World Trade Statistics, India’s share in world trade has gone-up from 1.4 per cent in 2004 to 1.5 per cent in 2006 and estimated to be 2 per cent in 2009.

3)Oceanic Trade:

             Most of India’s trade is by sea, India has very little trade relations with its neighing countries like Nepal, Afghanistan, Myanmar, Sri Lanka, etc. Thus, 68 per cent of India’s trade is oceanic trade: Share of these neighing countries in our export trade was 21.8 per cent and in import trade 19.1 per cent.

4) Dependence on a Few Ports:

                    For its foreign trade, India depends mostly on Mumbai, Kolkata, and Chennai ports. These ports are therefore, over-crowded. Recently, India has developed Kandla, Cochin, and Visakhapatnam ports to lessen the burden on former ports.

5)Increase in Volume and Value of Trade:

                   Since 1990-91, volume and value of India’s foreign trade has gone up. India now exports and imports goods which are several times more in value and volume. In 1990-91, total value of India’s foreign trade was Rs 75,751 and in 2008-09, it rose to Rs 22, 15,191 crore. Of it, value of exports was Rs 8, 40,755 crore and that of imports was Rs 13, 74,436 crore.

6) Change in the Composition of Exports:

                         Since independence, composition of export trade of India has undergone a change. Prior to independence, India used to export agricultural products and raw materials, like jute, cotton, tea, oil seeds, leather, food grains, cashew nuts, and mineral products. It also exported manufactured goods. But now in its export kitty are included mostly manufactured items like, machines, ready-made garments, gems and jewellery, tea, jute manufactures, Cashew Kernels, electronic goods, especially hardware’s and software’s which occupy prime place in exports.

7) Change in the Composition of Imports:

                       Since Independence, composition of India’s import trade has also witnessed a sea change. Prior to Independence, India used to import mostly consumption goods like medicines, cloth, motor vehicles, electrical goods, iron, steel, etc. Now it has been importing mostly petrol and petroleum products, machines, chemicals-, fertilizers, oil seeds, raw materials, steel, edible oils, etc.

8) Direction of Foreign Trade:

             It refers to the countries with whom a country trades. Main changes in the direction of foreign trade are as under:

       In the year 1990, in exports the maximum share, i.e., 17.9 per cent was that of Eastern Europe, i.e., Romania, East Germany, and U.S.S.R., etc. In import trade, maximum share, i.e., 16.5 per cent was that of OPEC, i.e., Iran, Iraq, Saudi Arabia, Kuwait, etc. In 2008-09, the largest share in India’s foreign trade (both imports and exports) was that of European Union (EU), i.e., Germany, Belgium, France, U.K., etc., and developing countries. Now, U.A.E., China and U.S.A. have occupied important place in India’s foreign trade. The importance of England, Russia, etc., has declined.

9) Mounting Deficit in Balance of Trade:

             Since 1950-51, India’s balance of trade has been continuously adverse except for two years, viz., 1972-73 and 1976-77, besides it has been mounting year after year. In 1950-51 balance of trade was adverse to the tune of Rs 2 crore and by 1990-1991 it rose to Rs 16,933 crore. After the policy of liberalization, the country has witnessed a rapid increase in it. In 1999- 2000 it rose to Rs 77,359crorc and in 2008-09 it amounted to 5, 33,680 crore. Fast rise in the value of imports and slow rise in the value of exports accounted for this tremendous rise in balance of trade deficit.

10) Trend towards Globalization:

              Globalization and diversification mark the latest trend of India’s foreign trade. India’s foreign trade is no longer confined or a few goods or a few countries. Presently, India exports 7,500 items to about 190 countries and in its import- kitty there are 6,000 items from 140 countries. It unveiled the changing pattern of India’s foreign trade.

11) Changing Role of Public Sector:

                     Since 1991 the role of public sector in India’s foreign trade has undergone a change. Prior to it, State Trading Corporation (STC), Minerals and Metals Trading Corporation (MMTC), Handicraft and Handloom Corporation, Steel Authority of India Ltd. (SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electrical Limited (BHEL), etc., used to play significant role in India’s foreign trade. As a result of implementation of the policy of liberalization, the importance of all these public sector enterprises has diminished.