60-second revision
- RBI: set up under the RBI Act, 1934; began on 1 April 1935; nationalised 1 January 1949; HQ moved from Kolkata to Mumbai in 1937.
- Monetary Policy Committee: 6 members (3 RBI incl. Governor, 3 external); Governor has the casting vote.
- Inflation target: CPI (Combined) 4% with a band of 2% to 6%, retained for April 2026 to March 2031.
- LAF corridor: floor = Standing Deposit Facility (since April 2022), ceiling = Marginal Standing Facility (= bank rate).
- CRR is kept as cash with the RBI; SLR is kept by the bank itself in cash, gold or approved securities.
- M1 = narrow money; M3 = M1 + time deposits = broad money.
- 14 banks nationalised on 19 July 1969 and 6 more in 1980.
- A loan becomes an NPA when payment is overdue for more than 90 days.
Money and its functions
Money is anything generally accepted in exchange. Its functions are medium of exchange, measure of value (unit of account), store of value and standard of deferred payment. Modern currency is fiat money: it has value because the law makes it legal tender, not because it is backed one-for-one by gold.
Measures of money supply
| Measure | Components | Name |
|---|---|---|
| M0 | Currency in circulation + bankers' deposits with RBI + other deposits with RBI | Reserve money / high-powered money |
| M1 | Currency with the public + demand deposits with banks + other deposits with RBI | Narrow money |
| M2 | M1 + savings deposits with post office savings banks | Narrow money (less used) |
| M3 | M1 + time deposits with banks | Broad money (most used) |
| M4 | M3 + all deposits with post office savings organisations (excluding National Savings Certificates) | Broad money |
Liquidity falls from M1 to M4. The money multiplier (M3 / M0) shows how banks create deposits on a base of reserve money; a higher CRR lowers the multiplier.
The Reserve Bank of India
- Founded on the Hilton Young Commission's recommendation; operational from 1 April 1935 with its first office in Calcutta, moved to Bombay in 1937. Nationalised on 1 January 1949.
- Functions: monetary authority, issuer of currency, banker and debt manager to the government, banker to banks, lender of last resort, regulator of banks and NBFCs, manager of foreign exchange (under FEMA) and overseer of payment systems.
- Currency notes of Rs 2 and above are issued by the RBI. The one-rupee note and all coins are issued by the Government of India; the RBI only distributes them.
- Note issue follows the Minimum Reserve System (since 1957): at least Rs 200 crore of gold and foreign exchange, of which at least Rs 115 crore in gold.
The Monetary Policy Committee
Flexible inflation targeting was given a legal basis by amending the RBI Act in 2016. The Centre, in consultation with the RBI, sets the inflation target every five years: 4% CPI (Combined) inflation with a tolerance band of 2% to 6%, retained for April 2026 to March 2031. Failing to keep inflation within the band for three consecutive quarters requires the RBI to report to the government with reasons and remedies.
The six-member MPC fixes the policy repo rate. Three members are from the RBI (the Governor as chairperson, a Deputy Governor and one officer) and three are external experts appointed by the Centre for four years. Each member has one vote and the Governor has a casting vote in case of a tie. The MPC meets at least four times a year; in practice it meets six times.
Quantitative tools
| Tool | What it is | Effect of a raise |
|---|---|---|
| Policy repo rate | Rate at which RBI lends overnight to banks against government securities | Borrowing costlier, credit and demand slow |
| Standing Deposit Facility (SDF) | Rate RBI pays banks for parking surplus funds, without collateral; floor of the corridor | Encourages banks to park money, absorbs liquidity |
| Marginal Standing Facility (MSF) | Emergency overnight borrowing by banks, even dipping into SLR securities; ceiling of the corridor | Emergency funds costlier |
| Bank rate | Rate for longer-term rediscounting; now aligned with the MSF rate | Used mainly as a penal benchmark |
| CRR | Share of net demand and time liabilities kept as cash with RBI, earns no interest | Less money for banks to lend |
| SLR | Share of NDTL kept by banks in cash, gold or approved securities | Less lending; more demand for government bonds |
| Open market operations | RBI buys or sells government securities in the market | Selling securities absorbs liquidity |
Qualitative (selective) tools
- Margin requirements: the share of a loan's collateral value that the bank cannot lend, raised to curb speculative lending against certain goods.
- Credit rationing: caps on credit to particular sectors.
- Moral suasion: persuasion and informal advice to banks.
- Direct action: penalties on banks that do not follow RBI directions.
Banking milestones
| Year | Event |
|---|---|
| 1955 | Imperial Bank of India becomes State Bank of India |
| 1969 | 14 major banks (deposits over Rs 50 crore) nationalised on 19 July |
| 1975 | Regional Rural Banks set up |
| 1980 | 6 more banks nationalised |
| 1982 | NABARD and EXIM Bank set up |
| 1990 | SIDBI set up |
| 1991 and 1998 | Narasimham Committees on banking sector reform |
| 2002 | SARFAESI Act lets banks enforce security without courts |
| 2016 | Insolvency and Bankruptcy Code; MCLR replaces base rate |
| 2019 | External benchmark (such as the repo rate) for new floating-rate retail loans |
Types of banks and asset quality
Scheduled banks are listed in the Second Schedule of the RBI Act. Differentiated banks emerged from the Nachiket Mor Committee (2014): payments banks accept deposits and offer payments services but cannot lend, while small finance banks serve small businesses and unbanked households and must lend a large share to the priority sector.
A loan becomes a Non-Performing Asset when interest or principal is overdue for more than 90 days. NPAs are then graded as sub-standard (NPA for up to 12 months), doubtful (beyond 12 months) and loss assets, each needing higher provisions. Capital adequacy follows the Basel norms, which link the capital a bank must hold to the riskiness of its assets.
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