NAME:- RAKESH KUMAR B. STD: -T.Y.B.COM ROLL NO.

: -12 SUB: BUSINESS ECONOMICS III DIV: - A

TOPIC: - RBI AND FINANCIAL SERVICES ACADEMIC YEAR: - 2011-12 TERM: - IST TERM

INDEX
Sr.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. CONTENTS INTRODUCTION RBIs MONEY SUPPLY POLICY FACTORS AFFECTING MONEY SUPPLY TYPES OF FINANCIAL SERVICES TRENDS AND STRATEGIES IN FINANCIAL SECTOR CONSOLIDATION COMPETITION RBIs MONETARY POLICY FOREIGN EXCHANGE SERVICES MANAGEMENT SERVICES RAPO RATE BY RBI INSURANCE AND HOME LOAN SERVICES MONETARING FOREING EXCHANGE CONCLUSION REFERENCE

INTRODUCTION
The Reserve Bank of India (RBI) is the central banking institution of India and controls the monetary policy of the rupeeas well as US$300.21 billion (2010)[1] of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. [2]Reserve bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union.Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks

In last few years, India has emerged as the one of the most rapidly growing economies in the world. India has been categorized with nations like Brazil, Russia and China (BRIC Nations) who are going to be the prime drivers of world economy in next few decades. Since the time, India first opened its gates to foreign investment (FDI & FII), there has been a complete turnaround. Now the traditional Hindu rate of growth is a thing of past and clocking 8%-9% GDP growth rate is the common norm. India along with other Asian powerhouse China makes for the fastest growing nations in the entire world. Even if we take the case of ongoing global recession, India has managed to perform far better than other nations. Right from banking system to financial regularities, the country has thrived on discipline and out-performance. The booming Indian economy resulted in widespread growth and arrival of new industries. The most sparkling phenomenon is in form of financial market of India. Financial services in India has taken a giant leap from the days of standing in banks queue for several hours for opening a saving account or trying to get some fixed deposits (FD) done. The financial services have increased manifold and now people have the choice to choose the one that most suitably fits the bill. There are several services like broking firms, investment

services, financial consulting, evergreen national banks, numerous private banks, mutual funds, car and home loans, equity market and other banking services. Services are many and offered by blue chip names of the industry. Most of the companies in financial segment offer taxation services, project consultancy services and all the services of wide financial gamut. Whether its taking a car loan or booking your favorite house, going for pension plan or getting your child insured, numerous attractive financial services are available at affordable costs. Personal banking services have acquired an altogether new meaning. Now customers have multiple choices to choose from. One can find all the financial services on the internet that are just a call away.

HOW RBI CONTROLS MONEY SUPPLY?

The money supply means the total amount of liquid assets circulating in the economy. At any given time, this whole amount of money in circulation determines the price levels prevailing in an economy. Whenever this supply of money goes up, there is an all round increase in prices. This is because more money is being used for the same goods and services.

RESERVE BANK OF INDIA AND MONEY SUPPLY

The Reserve Bank of India makes use of the interest rate, OMO (open market operations), changes in the CRR (cash reserve ratio) of banks as well as placements of governmental debt as a means to control the money supply in India. As part of the open market operations, the RBI either buys or disposes off government bonds in what is termed the secondary market. As the bonds are absorbed by the secondary market, it increases the yield of bonds, thereby injecting fresh cash into the market. When the RBI sells bonds, it is meant to absorb money out of the economic system. Whenever there is a change in the cash reserve ratio, it can have an effect on the amount of free cash that banks use to lend. A reduction in the CRR can reduce the amount of money reserved for lending. This results in cuts to liquidity as a whole, causing interest rates to increase bringing down inflation and taking cash out of the markets. The Reserve Bank of India follows the method of making primary deals in government bonds to directly intervene in markets. By purchasing such bonds directly from the government, at rates that are lower than market rates, the RBI limits the increase in interest rates.

MONEY SUPPLY AFFECTING FACTORS

If the trend of low liquidity or high inflation remains for long periods of time, jobs, wages as well as production will be affected in the long run. If wages cannot keep pace with other prices, increased inflation can affect productivity. An increase in interest rates absorbs money out of shares, and transfers it into fixed deposits and bonds. In the same way, a fall in interest rates will have the opposite effect. The RBI announces its monetary and credit policy every year, which introduces new money supply policies for coming year. This policy is important to all Indians and more so to the financial institutions like banks. This policy determines the money supply in Indian economy, as also the interest rates charged by financial institutions. It also makes an economic overview and introduces future economic forecasts. The aims of RBIs monetary policy are to maintain stable prices and guarantee sufficient flow of credit to the productive sections of the economy.

TYPES OF FINANCIAL SERVICES

1. Insurance
A contract in which one party agrees to pay for another party's financial loss resulting from a specified event (for example, a collision, theft, or storm damage). Lease agreements generally require that you maintain vehicle collision and comprehensive insurance as well as liability insurance for bodily injury and property damage.

2. Mutual Fund
A mutual fund enables investors to pool their money and place it under professional investment management. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. There are more mutual funds than there are individual stocks.

3. Banking
Financial intermediary Institutions for receiving, lending, and safeguarding money as well as conduction other financial transactions. There are several types of banks: central banks, commercial banks, corporate banks, credit unions, savings banks, trust companies, finance companies, life insurers, investment banks, etc. Banks have drastically evolved throughout time, increasing their services but also becoming institutions that cater to greater numbers of people.

4. Shares and Stocks

Shares are a term referred to the units of ownership interest provided to the stockholder or owner of a company. The term is often used in connection with the number of units issued to an owner of Common Stock or Preferred Stock. A stock is a certificate of ownership in a corporation. It is the same as a share

Industry Overview
The financial sector is in a process of rapid transformation. Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The role of an integrated financial infrastructure is to stimulate and sustain economic growth. The growth rate of the financial sector is 15 percent. The financial sector consists of Institutions, markets, financial instruments, specialized and non-specialized financial institutions of organized and unorganized financial markets, financial instruments and services. The common thing between all is that they facilitate transfer of funds. These parts are not always mutually exclusive; Inter-relationships between these are a part of the system e.g.. Financial Institutions operate in financial markets and are, therefore, a part of such markets. Indian Financial sector, with Ministry of Finance at the helm as policy making body, with two regulators RBI and SEBI consists of three principal segments i.e. 1. Financial Institutions

2. Banking Segment 3. Markets: Debt/Equity/Securities

TRENDS AND STRATEGIES IN THE FINANCIAL SECTOR

Information technology, deregulation and liberalization have dramatically affected the financial services industry, contributing to two trends: consolidation and increased competition at both national and international levels.

CONSOLIDATION
Consolidation means that financial services worldwide are increasingly concentrated in the hands of a few corporations. Consolidation is seen as the single most important factor transforming the financial services industry since almost a decade. Many experts predict that consolidation will continue and within 5 to 10 years there will be only five to ten top financial conglomerates in the world. In the search for more profitable opportunities, most consolidated financial firms grew through mergers and acquisitions or takeovers that were either friendly or hostile. Such process took place at national and international levels with cross-border consolidation, by trading and investing in financial services in many countries around the world. Many financial services categories, such as retail banking and insurance, were increasingly being brought under one corporate roof, which is called "cross-category consolidation".

The strategies behind consolidation are:

a. Increasing the number of customers and beating competitors by selling various b. Financial products through one distribution channel. c. Diversifying products and customers to avoid the risk and to finance a loss-making part of the business with the profits of another one.

d. Maintaining a large capital base as a sponge to absorb losses and the growing cost of technology. e. Increasing the quality of service and products to gain the trust of the customers. f. Increasing profitability in the battle against competitors

COMPETITION
Consolidation is the financial industry's way of dealing with increasing competition. Governments, regulators and supervisors worldwide try to create and maintain a free market with many competitors, for the sake of efficiency and lower prices. Competition remains fierce. The struggle is always for quicker and short-term profit which leads to strategies for more efficiency, lowering costs, expansion of profit-making clients and markets while outpacing competitors. This often means an increasing effort to standardize and automate services, to differentiate them according to the wealth of the client and to shift the focus on financial portfolios. One should also notice the importance of cross selling and cross branding (some financial companies have started to distribute products for their competitors without operating them).

RBI MONETARY POLICY

The Monetary Policy for 2010-11 is set against a rather complex economic backdrop. Although the situation is more reassuring than it was a quarter ago, uncertainty about the shape and pace of global recovery persists. Private spending in advanced economies continues to be constrained and inflation remains generally subdued making it likely that fiscal and monetary stimuli in these economies will continue for an extended period. Emerging market economies (EMEs) are significantly ahead on the recovery curve, but some of them are also facing inflationary pressures. Indias growth-inflation dynamics are in contrast to the overall global scenario. The economy is recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by supply side factors, are now developing into a wider inflationary process. As the domestic balance of risks shifts from growth slowdown to inflation, our policy stance must recognise and

respond to this transition. While global policy co-ordination was critical in dealing with a worldwide crisis, the exit process will necessarily be differentiated on the basis of the macroeconomic condition in each country. Indias rapid turnaround after the crisis induced slowdown evidences the resilience of our economy and our financial sector. However, this should not divert us from the need to bring back into focus the twin challenges of macroeconomic stability and financial sector development. This statement is organised in two parts. Part A covers Monetary Policy and is divided into four Sections: Section I provides an overview of global and domestic macroeconomic developments; Section II sets out the outlook and projections for growth, inflation and monetary aggregates; Section III explains the stance of monetary policy; and Section IV specifies the monetary measures.Part B covers Developmental and Regulatory Policies and is organised into six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets (Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory Measures for Commercial Banks (Section V) and Institutional Developments (Section VI). Part A of this Statement should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank.

FOREIGN EXCHANGE SERVICES

With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect from June 1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to "facilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India". The new Act has brought about structural changes in the exchange control administration. Regulations have been framed for dealing with various types of transactions. These regulations are transparent and have eliminated case-by-case approvals. All current account transactions are free from restrictions except 8 transactions prohibited by the Government of India. 11 transactions which require prior permission of the Government of India and 16 transactions on which indicative limits are fixed by the Government and release of foreign exchange beyond those limits requires permission from the Reserve Bank. All Regional Offices of the Department have in turn been authorised to release exchange for such transactions. For capital account transactions, the Reserve Bank regulations provide for general permissions/automatic routes for investments in India by nonresidents, investments overseas by residents and borrowings abroad, etc. The Department ensures timely realisation of export proceeds and reviews, on a continuous basis, the existing rules in the light of suggestions received from various trade bodies and exporters' fora. The Department collects data relating to forex transactions from authorised dealers on a daily basis for exchange rate management and on a fortnightly basis for monthly quick estimates of balance of payments and quarterly balance of payments compilation. The Department lays down policy guidelines for risk management relating to forex transactions in banks. The Department is also entrusted with the responsibility of licensing banks/money changers to deal in foreign exchange and inspecting them. There is a "Standing Consultative Committee on Exchange Control" consisting of representatives from various trade bodies and authorised dealers which meets twice a year and makes recommendations for policy formulation. With a view of further improving facilities available to NRIs and removing irritants, the Department is also engaged, on an ongoing basis, in reviewing and simplifying the procedures and rules.

MANAGEMENT SERVICES
The principal objectives behind the Reserve Bank's approach to reserves management continue to be safety and liquidity. Within these parameters, return optimisation dictates operational strategies. . The regulatory and supervisory framework for e-banking is continuing to evolve and the regulatory authorities all over the world recognize the need for cooperative approach in this area. The applicability of various existing laws and banking practices to ebanking is not tested and is still in the process of evolving, both in India and abroad. With rapid changes in technology and innovation in the field of e-banking, there is a need for constant review of different laws relating to banking and commerce. The Group, therefore, recommends that the Reserve Bank of India may constitute a multi disciplinary high level standing committee to review the legal and technological requirements of e-banking on continual basis and recommend appropriate measures as and when necessary.The Basle Committee for Banking Supervision (BCBS) has constituted an Electronic Banking Group (EBG) to develop guiding principles for the prudent risk management of e-banking activities. This Working Group, therefore, recommends that the Reserve Bank of India should maintain close contact with regulating / supervisory authorities of different countries as well as with the Electronic Banking Group of BCBS and review its regulatory framework in keeping with developments elsewhere in the world. The legal framework for reserves management is provided in the Reserve Bank of India Act 1934. Specifically, Sections 17 (12), 17(12A), 17(13) and 33(1) of the RBI Act 1934 lay down the scope of investment of foreign exchange reserves by RBI. Broadly, the following investment categories are permitted under the RBI Act:
1. 2. 3.

Deposits with other central banks and Bank for International Settlements Deposits with foreign commercial banks Investments in securities issued by the Government of any other country or by any institution incorporated outside India provided such securities are guaranteed by the Government of the country concerned. The maturity period of such investments should not exceed more than ten years from the date of such investment.

4.

Other instruments/institutions as approved by Central Board of RBI.

Further, in order to ensure safety and liquidity of our reserves, RBI has also framed internal guidelines/procedures to manage the various risks like credit risk, liquidity risk, operational risks and market risk incidental to the reserves management.

REPO RATE BY RBI What is repo ?

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. The rate charged by RBI for its Repo operations is 5.75% and Reverse Repo rate is 3.25%. When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap.It takes approved securities as securityand lends money.These types of operations are generally for overnight operations.

INSURANCE AND HOME LOAN SERVICES

The banking regulator of India- RBI has asked banks to be fair and transparent while signing any agreements on home Insurance or home loans with the consumers. While reading an article of Indian Express on Y.V. Reddy, RBI Governor updating on current finance issues in India many new policies made for convenience of the finance and insurance seekers came in front. Mr Reddy said that, while giving a home loan, the banks should not tie their loans with their own prime lending rates (PLR) which is often against the consumers interest. He said Banks cant say, my PLR is the benchmark. It is better to get an independent and outside PLR while giving a home loan, The governor is on the way of making planning to make it essential for the banks to give credit counseling to customer before disbursing any loans Consumers often complain that they did not receive benefits of falling interest rates as banks tied their floating rate loans with its PLR and even when rates fell, the banks kept the PLR unchanged. But when interest rates went up, the banks increased the benchmark rate, thus making customers pay a higher rate and increase the number of equated monthly installments.

The RBI governor said they are in the process of coming out with proper directions to the banks in this regard. We have asked banks to become more fair and transparent in the loan agreements with the common man, said Reddy. The governor also advised individual borrowers to ask for the exact tenure and EMI while taking a fixed rate loan. The RBI, he promised, would look into all consumer complaints if it is bought to the regulators notice. The governor also commented on miss-selling of products like mutual funds and insurance by banks, and said that IRDA (Insurance Regulatory and Development Authority) has powers to take action against banks if a customer feels cheated while buying an insurance product; and encouraged the customer for an approach in such cases.

MONITORING FOREIGN INVESTMENTS

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients.

The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release.

CONCLUSION
In conclusion, as has been rightly noted by the Working Group that "the applicability of various existing laws and banking practices to e-banking is not tested and is still evolving, both in India and abroad. With rapid changes in technology and innovation in the field of e-banking, there is a need for constant review of different laws relating to banking and commerce." The establishment of the multidisciplinary high level standing committee to review the legal and technological requirements of e-banking on a continual basis and recommendations of appropriate measures as and when necessary, would really be a panacea for legal clarifications as and when they arise. The key in such future and further deliberations would be to encourage banks towards innovation and where necessary or required evolve new practices and customs to complement the banking laws in force from time to time.

REFERENCE
1. http://www.thehindubusinessline.com/bline/2007/02/16/stories/2007021600700800.htm 2. http://www.livemint.com/2007/02/15011413/Reserve-Banks-move-may-not-ch.html 3. http://economictimes.indiatimes.com/articleshow/msid-2481902,prtpage-1.cms 4. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/21595.pdf 5. http://www.sendmoneyindia.org/how-rbi-controls-money-supply.php