First, the RBI could use a reserve ratio to stop commercial banks from lending money that increases the money supply. If this percentage was higher than what commercial banks wanted, they would have to cut back on deposits and loans more than they could afford to. If the central bank used this rule to limit the money supply, it’s likely that commercial banks wouldn’t be able to borrow money from the central bank to add to their cash reserves so they could give out more loans. In order to get more deposits, they might raise interest rates, and the central bank might respond by raising the reserve ratio. In this article, we will discuss about role of rbi in money market in brief with examples for your better understanding.
Section 20 of the Reserve Bank of India Act of 1934 says that the RBI is in charge of keeping an eye on all Central Government money transactions and public debt. Section 21 says that the Reserve Bank of India (RBI) can stand in for the Indian central government. RBI is in charge of all business between State Governments. Section 21 A makes it easier for two state governments to come to a deal before a transaction.
Top 12 – Role of RBI in Money Market
The RBI differs from commercial banks because it serves a purpose other than solely generating profits. The Reserve Bank of India was set up in 1935, but the government didn’t take control of it until 1949. In order to help the economy grow, the RBI regulates financial institutions and payment systems. The role of rbi in money market will be covered in-depth in this article, along with some examples for your convenience.
Over-Sees Market Operations
The Central Bank puts its monetary policy into action on the money, foreign exchange, and government securities markets. The group is in charge of making and regulating money market instruments like term money, repo, etc.
Lender of the Last Resort
As a “lender of last resort,” the Central Bank helps commercial banks with emergency loans when they have no other way to get money. It can help any bank get cash when others won’t.
Regulating OTC Derivatives
Additionally, the Forward Contracts (Regulation) Act of 1952 and the Reserve Bank of India Act of 1934 govern the OTC derivatives trade repository that was set up by the Reserve Bank of India. Interest rate swaps, future rate agreements, options on foreign currencies, and options on the Indian rupee are all types of over-the-counter derivatives.
Banker to Banks
RBI is in charge of settling transactions between banks. Banks need a “clearing house” so they can process checks and other forms of payment. All other banks use the services of the central bank.
Developmental Role
The Reserve Bank of India works to make the country better. It does this by setting up financial infrastructure institutions and giving money to the sectors that make things. It’s a safety net for the economy that everyone can benefit from. It is an important role of RBI in money market.
Monitoring Inflation’s Growth
The Reserve Bank of India wants inflation to be 4% over the next five years, with a range of +/- 2%. When the Reserve Bank of India (RBI) lowers interest rates, most commercial banks also lower their own rates. Because of this, people want to buy stocks and spend more money on other things.
A rise in demand is what causes prices to go up. When interest rates go up, banks are less likely to borrow money. People buy less stocks when they have less money to spend. Because of this, the RBI is able to keep inflation in check.
Payment and Settlement Oversight
In order to control and manage the system, the RBI gave specialized tasks to other groups. The RBI also makes sure that these systems follow the law. The RBI came up with PSS ( Payment and Settlement Systems Act, 2007).
By this law, the RBI has the power to make rules about payment instructions, scheduling, fund transfers, and other things. The RBI has the authority to access records from the payment system, enter the payment system’s buildings for inspection, and conduct audits.
Government’s Financial Manager
The financial system of the government is run by the Reserve Bank of India. The Reserve Bank is where the Indian government puts its money reserves. It can be used as a bank by any country. On the other hand uses other banks to handle transactions for the government. Also, it is used by the federal government and state governments to handle their debt and get new loans.
Financial Oversight
There are many things that the Reserve Bank of India is in charge of. The goals of the policies are to keep the economy steady. Because of this, financial institutions are more efficient, have more money, and are more stable.
Infrastructure Stability Assurance
The Reserve Bank of India (RBI) is one of the few organizations with the power and resources to protect the financial markets of the country. The term “Financial Market Infrastructure” (FMI) refers to a global network that helps the institutions that are part of it process and record financial transactions like payments, securities, derivatives, and more. Some payment and securities settlement systems, central counter-parties, transaction repositories, and the Central Securities Depository are all part of the FMI.
To accomplish these tasks smoothly, one needs sufficient assistance. If financial markets are not managed well, they become a centre of risk and a multiplier of shocks. In order to deal with these problems, the RBI has set up groups and committees to improve the infrastructure of the financial market.
Monetary Management
The RBI comes up with and runs monetary policy. Monetary policy controls the amount and value of money. Stimulate the economy and raise productivity and inflation at the same time. It makes it easier for banks to lend money to businesses that are good for the economy.
Issuer of Currency
Central banks must be in charge of making and managing money. The RBI is responsible for manufacturing banknotes, distributing them, and maintaining a record of their usage and management. This makes sure that the government always has enough legal money. Because of this, there is less counterfeiting. Using fake money to pay for terrorism has a lot of negative effects.
Frequently Asked Questions
How RBI Regulates the Supply of Money in Money Market?
The Reserve Bank of India (RBI) can control the amount of money in circulation by making commercial banks pay more for loans (the discount rate). When it comes to customer deposits, financial institutions must keep a certain amount of cash on hand.
What is the Role of RBI in Money Market?
This organization is in charge of gold and money. The volume and value of trade and capital operations determine the daily FX rate. RBI is in charge of running financial institutions.
How does RBI Control the Flow of Money?
Repos and reverse repos control the movement of money. At the repo rate, the Central Bank lets commercial banks and other institutions borrow money for a short time.
Conclusion
India’s most important bank is the Reserve Bank of India. It is in charge of the government’s money, exchange rates, monetary policy, and banking system. Read on to discover everything there is to know about role of rbi in money market and to become a subject matter expert on it. Read structure of Indian money market to go beyond the obvious to continue your education.