Reserve Bank of India - Blood for the Economy.

Being an economics learner, I always kept my focus on various topics of Economics. And today I will be explaining one of my favourite topic since class 12th.

Reserve Bank of India, also known as Central Bank of India.

All of us know that the Reserve Bank of India is blood to our economy. Today I'll try to explain the monetary policy of RBI.

The first and one of the most major function of RBI is Issuing of Money. And leading functions of RBI are, such as

* Banker to Government

*Controls credit in the market

*Regulator of money market

*Controller and banker to banks, etc.

Reserve Bank of India has the monopoly to issue notes legally in India. RBI can issue notes up to 10000 rupees and issued up to 2000 rupees note.

But there is an important factor to be known behind this, that RBI follows a minimum reserve system (MRS) in which RBI keeps a minimum amount of gold and rupees in foreign security.

In proper data, it is 115 crores of gold and Rs.85 crores, after this there is no limit of issue of notes.

Except for one rupee, because RBI has no right to issue one rupee note. Ministry of Finance issues the one rupee note, it bears the signature of Finance Secretary.

When I was in 12th standard, I read all the above of it in my Syllabus. But I hadn't heard the reason for MRS. But let me tell you that the sole purpose of MRS is the general public trust and to maintain the money supply in the economy without the major effect of inflation.

Moving to my next favourite question.

*How does RBI issue new currency?

Simply, previously you've read that RBI has the right to issue a new currency. Majorly the declaration of new currency is taken to clear out the black money in the market or just to meet the demands of money value in the economy. You can understand it as that the note of 100 rupees in 90s and 100 rupees note in 20s don't have the same value. So that's why the issue of new currency takes place.

For issuing a new currency in the country. RBI has to maintain some assets in the form of government bonds and foreign assets just to meet some major liquidity trust of the country.

Okay, just let's simplify it, consider yourself the general public and your father as RBI. Because he has the control to supply of money.

When your father gives you and your family money, he makes sure that if you all are going to be insolvent one day at that time he must have some assets or say his investment with him which can be sold by him to meet all of your requirements or liquidity. Simply RBI does the same for the general public.

*The keys to proper management and regulations of money :

1. Repo rate: Simply it's the Interest rate at which RBI lends money to other banks for short term transactions. It is even called "overnight".

The repo rate is increased by RBI to decrease the liquidity with banks. I hope now you have the answer to why the repo rate was decreased in a pandemic?

2. Reverse repo rate: the rate in which RBI borrows money from banks, simply the interest rate paid to banks for depositing their excess money to RBI. The major instrument to control cash in banks. RBI increases the rate to minimise cash in banks.

3. Cash reserve ratio: It's the ratio, all banks have to maintain as a reserve for immediate transactions. Or just to meet regular requirements. This ratio works as an instrument to control the credit potential of banks. The more cash they have to reserve, the less credit they'll provide.

4. Statutory liquidity ratio: All affiliated banks have to maintain some required funds with RBI in the form of gold, the government-approved securities in certain percentages to its total deposits which are called SLR. It's increased to control credit amount in the country and vice versa.

These all are the part of the monetary policy of RBI.

All these majors are taken to stable to price for economic development.

I hope guys it helped you. There are more functions related to RBI but I can't explain all of them in one blog. So if you need any specific blog. Please do let me know about it.

Thank you for reading!