Reserve Bank of India - Finance for RBI Grade B Officers exam

The Reserve Bank of India was established on April 1, 1935. It was established as a private bank. It was established as per the instructions of the Reserve Bank of India Act 1934. The Reserve Bank of India came completely under the control of the government of India after the Nationalisation of the banks in 1949.

Reserve Bank of India - Economy and Finance for RBI Grade B Officers and UPSC Civil Services


In the beginning the head office of the Reserve Bank was established in Calcutta. But, the head office was permanently moved from Calcutta to Mumbai in 1937. The governor of the RBI will be in the head office. And from there, different policies and regulations are framed.

Preamble


Just like the Constitution of India has The Preamble, the Reserve Bank of India also has a Preamble.

"to regulate the issue of bank notes and keeping of reserve with a view to securing monetary stability in India and Generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenges of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."

Administration


The matters of the Reserve Bank of India are handled by a central board of directors.  This board of directors is appointed by the government of India. The Government of India follows the rules of the Reserve Bank of India act, while appointing the Board of directors. These directors are appointed or nominated for a period of four years. The directors are divided into two categories. One- Official directors, and the other- Non-official directors. 

The duty of the official directors is full time. Official directors consists of one governor and not more than four deputy governors. Non-official directors are nominated by the government. Ten directors from various fields, two government officials and four from the local board are nominated by the government as non-official directors.

Present official board of directors (as of August 2017)


Governor: Dr. Urjit R Patel
Deputy Governors: Shri S S Mundra; Shri N S Viswanathan; Dr. Viral V Acharya; DR. B P Kanunga

Functions of RBI


The main functions of the Reserve Bank of India includes, Monetary Authority, Regulation and supervision of financial system, Managing of foreign exchange, Issuing of currency.

The Reserve Bank of India formulates and implements and monitors the Monetary Policy. The objective of this function of the Reserve Bank is to maintain price stability while keeping in mind the goal of growth.

The Reserve Bank of India prescribes the broad parameters of the banking operations. Within these banking operations, India's Banking and Financial System works. It's goal is to maintain the trust of the people in the system, protects depositor's interests and to provide cost-effective banking services to the public. This explains the function of Regulation and supervision of the financial system.

The Reserve Bank of India manages the Foreign Exchange Management Act 1999. It aims to help external trade and payment. It also targets to promote orderly development and maintenance of Foreign Exchange market in India. That is why it is called the manager of the foreign exchange.

The Reserve Bank of India issues and exchanges currency. It also has the power to destroy the currency notes and coins, which are not fit for circulation in the market. It aims to give the people, required quantity of supply of currency notes and coins which are of good quality. This is the reason why it is also known as the issuer of currency.

The Reserve Bank of India also performs different promotional functions to help the country in achieving its targets. The Reserve Bank also works as a merchant to both central and state governments. That is why it is also known as the banker to the government. RBI also maintains banking accounts of all scheduled banks. This i why it is also known as Banker to the banks. 

The Reserve Bank of India also fulfills the function of financial supervision under the Board of Financial Supervision (BFS)

Local Boards


There are four local boards, one each from the our regions of the country. They are located at Mumbai, Calcutta, Chennai and New Delhi. 

Each local board consists of five members. Each one is appointed by the central government. Each one has a team of four years.

These local boards function by advising the central board about the local matters. They represent the regional and economic interests of local cooperative and domestic banks. They are also present to perform functions delegated by the central board.

Acts that are managed by RBI


  • Reserve Bank of India Act 1934
  • Government Securities Act 2006
  • Government Securities Regulation Act 2007
  • Banking Regulation Act 1949
  • Foreign Exchange Management Act 1999
  • Securitisation and Reconstruction of Financial assets and Enforcement of Securities Interest Act 2002
  • Credit Information Companies Act 2005
  • Payment and Settlement Systems Act 2007
  • Factoring Regulation Act 2011

Other Facts about RBI


  • Before the Reserve Bank became the central bank of India, printing of the currency was done by the government of India. This authority of printing currency was later transferred to RBI.
  • RBI governor signs the currency notes from Rs. 2 to Rs. 2000. Finance secretary signs the Rs. 1 note.
  • Currency paper of cotton is printed in Hosangabadh in Madhya Pradesh. 
  • Currency printing is done by the Reserve Bank of India at different places like Nasik in Maharashtra, Mysore in Karnataka and Bewas in Madhya Pradesh.
  • To print currency, the Reserve Bank of India has to maintain gold stock up to Rs. 200 crore. More currency requires maintaining more gold. 
  • India follows deficit financing policy. It means that the expenditure is more for the government and the income is less.
  • RBI's monetary policy committee decides the policy rates like Cash Reserve Ratio, Repo Rate, Statutory Liquidity Ratio etc. To decide these rates and to discuss other issues, the monetary policy committee meets two times in every month.

There are 20 regional offices, mostly in state capitals. There are two colleges as a part of the Reserve Bank of India. They are College of agricultural banking and Reserve Bank of India staff college. They are three other colleges that run under RBI. But they function autonomously or independently.

There are three subsidiaries of the Reserve Bank of India. They are Deposit Insurance and Credit Guarantee Corporation of India DICGC, Bharatiya Reserve Bank Note Mudran Private Limited BRBNMPL and National Housing Bank NHB. These Subsidiaries are fully owned by the Reserve Bank of India.

Measurement of Growth and Development


l context, their meaning differs a lot from each other in economic scenario.

Growth means to increase in the output, the results that can be seen and measured comes under growth, whereas Development means improvement in the quality of goods and services and measuring how these improvements are affecting the quality of life of people in an economy. Though measurable, it is not so easy as measuring Economic growth.

Measuring Economic Growth


Economic growth which is a measure of output can be measured easily. It is a quantitative one. It is also not dependent on development. It doesn't care if there is development or not, it will grow when the conditions are favourable.

Economic growth of a country can be measured in percentage increase or decrease. This shows that economic growth may be positive or negative over a period of time. Economic growth follows the concept of 'annual' that means economic growth during one year period. If there is a decrease in the economic growth during that period, it is called negative growth. Gross Domestic Product or Gross National Product represents the Economic growth.

Indian economy for UPSC, Civil services and RBI Grade B officers exams

Measuring Economic Development


When economic growth is being implemented, then why there came a need for economic development?

During and after 1960s, there came many countries with high economic growth, but their quality of life was very poor. During that time, economists felt the need for developing the new concept of economic development. The economists set some variables to measure the quality of life of people of a country, to measure economic development. This shows that economic development is qualitative and is not so easy to measure, unlike economic growth. The different variables set by economists to measure economic development are the availability of education, health care, employment opportunities, safe drinking water, clean environment and levels of crime.

Economic development is dependent on economic growth. To achieve high economic development, there should be high economic growth. Growth can increase just by the increase in income. But development needs increase in certain variables. Some variables that achieve economic development are directly depending on economic growth. For example, one variable of development is availability of education. But it is an open fact that, not everyone in an economy can afford quality education. It comes at a cost. So, this needs an increase in income, which shows that development is dependent on growth.

Also, higher economic growth doesn't ensure higher economic development. It needs proper implementation and utilisation and also good governance.

The economies may vary in economic growth and development like - 
  • High Growth, High Development
  • High Growth, Low Development
  • Low Growth, High Development
  • Low Growth, Low Development

To measure Economic Development


New measures of economic development are being developed since the need for development arose. The economists cannot define one fundamental scale for measuring development. It is like the testing state of development, where trials are made and modifications are made from the lessons learned through the errors and again new concept comes in place. This process continues till a fundamental scale is approached. But it is a difficult process to measure the quality of life of people. It is forever changing. Some measures to measure Economic development are - 
  1. National Income and Per capita Income
  2. Physical Quality of Life Index
  3. Human Development Index
  4. Gross National Happiness
  5. Green GDP

National Income and Per capita Income


The traditional method to measure economic development is the Gross National Income, GNI or the per capita GDP. Gross National Income was previously known as Gross Domestic Product. World Bank uses the concept of per capita Gross National Income to measure the economic development of the countries and to classify them into categories accordingly. World Bank classified countries into four categories. They are :-
  • Low income countries - ≤ $ 1045
  • Low middle income countries - $ 1046 - $ 4125
  • Upper middle income countries - $ 4126 - $ 12735
  • High income countries - ≥ $ 12736

India falls into the category of Low middle income countries. Measuring all the countries based on the dollar value is not correct, it shows inequalities. These inequalities are due to the difference in exchange rates and the products purchased for the same amount may varies in different currencies.

To overcome this problem, economists introduced a new method to compare countries. That is PPP, Purchasing Power Parity. This means, how many goods can a local currency buys in the same amount as one US Dollar would buy in USA. The Purchasing Power Parity of India in 2015 is Rs. 17 per 1 USD.

The GDP growth rate target of India in the 12th five year plan is 8%. Per capita income alone cannot measure the economic development of a country. Economic development of a country can be seen through reducing poverty, providing basic needs for citizens, reducing the income inequalities, providing education and healthcare, providing safe environment and also good governance.

Physical Quality of Life Index PQLI


The Physical Quality of Life Index was developed by Morris D. Morris. This index has three indicators. They are life expectancy, Infant Mortality Rate and Literacy Rate. Each country is calculated according to the scaling of the index in each of the indicators. Then an overall measure is made by averaging the measures of all the three indicators together.

The PQL index shows the benefits attained by economic growth through improving the quality of human life. Still, the PQLI is criticised, because it gives more importance to health which includes life expectancy and infant mortality rate. It shows less focus towards the material end. It is also objected for not including social and psychological properties which are again the measures of quality of life of a human being.

Human Development Index


The United Nations Development Programme published ts first Human Development Report in 1990. The report contains Human Development Index. This was the first attempt to measure the economic development. The rank of India in 2015 Human Development Index out of 188 countries is 130.

This Human Development Report uses three parameters to measure development. They are - Health, Education and Standard of Living.

The education in the Human Development Index is measured by two indicators. Mean of years of schooling for adults and expected years of schooling for children. Health is measured by the life expectancy at birth. And the Standard of living is measured by the Gross National Income.

The team that developed the Human Development Index was led by Mahbub ul Haq and Inge Kaul. In 2010, the Human Development Index added three more parameters of measurement to make the index more precise. They are :-
  1. Multidimensional Poverty Index MPI
  2. Inequality-adjusted Human Development Index IHDI
  3. Gender Inequality Index GII

Multidimensional Poverty Index identifies people who are poor in all the dimensions of health, education and income. In this index all the three dimensions are given equal weightage. The MPI of India according to the 2015 Human Development Index was 0.282.

Inequality-adjusted Human Development Index measures the effect of inequality in the economic development of a country. The overall loss % of Inequality-adjusted Human Development Index of India according to 2015 Human Development Index was 28.6% and it's difference from HDI rank was 1.

Gender Inequality Index shows the downfall in achievement due to inequalities in reproductive health, empowerment and work participation. The rank of India in Gender Inequality Index according to 2015 HDI was 130, same as the rank of India in Human Development Index.

Gross National Happiness GNH


Bhutan rejected the concept of GDP and developed its own way of defining development. This way of measurement includes both material and non material aspects of life. This new concept f measurement of developed by Bhutan is called Gross National Happiness.

The parameters followed in the Gross National Happiness are:-
  • Higher real time per capita income
  • Good governance
  • Environmental protection and
  • Cultural promotion - This includes the ethical and spiritual values in life

The United Nations Sustainable Development Solutions Network publishes the World Happiness Report. In 2016 World Happiness Report, India stands at 118th place out of a total 157 countries, whereas the happiest country is Denmark. This report was released before United Nation's World Happiness Day which will be observed annually on March 20.

This World Happiness Report ranks nations based on six factors.
They are :-
  1. GDP per capita
  2. Healthy life expectancy
  3. Social support
  4. Freedom to male life choices
  5. Freedom from corruption
  6. Generosity

The first United Nations high level meeting on happiness and well being was held in April 2012. The meeting was chaired by the then Prime Minister of Bhutan, Jigme Thinley. In the same year, the first World Happiness Report was published.

Green GDP


Green GDP concept was introduced in 1990s. It makes an attempt to include the cost or expenditures caused by the loss or usage of natural resources and pollution that affected the human welfare. It is a measure of how a country is prepared for Sustainable Economic Development.

In India in 2009, the centre announced its plan to introduce the concept of Green GDP by 2015. For this purpose it appointed a committee in 2011 chaired by Partha DasGupta, to work out a framework for Green National accounts in India. But the concept of Green GDP is yet to come into force in India (it is 2016 now). The delay s due to the lack of micro level data and high costs. This is because the Green GDP takes into account the natural resources used and the costs involved.

A recent World Bank Study showed that in 2013, India suffered a loss of $ 550 billion only because of air pollution. If taken into account, the other types of pollution and depleted natural resources affecting the human welfare, the amount may be gigantic.

Living Planet Report from the World Wildlife Fund WWF, shows that 25% of India's total land is undergoing desertification. Another 32% is facing degradation. When all this costs and effects are included in the GDP as Green GDP, the economies may show negative growth. This is because the costs involved due to environmental degradation are so huge, which we are overlooking at present.

This is the reason why China discontinued the use of Green GDP in 2007 which it started in 2004 because of negative growth shown by several provinces.

Counting in the costs of environment will make a huge impact on the economic growth of a country.

Financial System in India - RBI Grade B Exam

India is a developing country, so is the financial system in India, which is rapidly expanding. There are a number of financial institutions or companies in India, like, banks, insurance companies, non banking institutions, pension fund, mutual fund and many other. This is because we have a huge population and finance or money is another basic need to satisfy the day to day needs and wants of each and every individual in our country. This applies not only to our country but to any other economy.

Going into the deeper picture of India's finance system, our's is a bank dominated economy. Commercial banks are ruling the finance sector of India. After the banks, second in place is the insurance. We also have regional rural banks and cooperative banks. Other than banks and insurance, there are many other segments in the economy. Some of them include - leasing, factoring, micro finance, infrastructure finance etc. These are collectively called Non banking financial institutions. Of these some can accept deposits too.

RBI Grade B Officers mains exam


Regulators in the finance sector


A financial regulator is an organisation or a body, that has supreme power over the services and products of particular sector. As it regulates the functions and actions of the companies and institutions under it, it is called a regulator.
In India, there are different regulators for different financial services. Of all the regulators in India, RBI supervises the major part of the financial system. Commercial banks, urban cooperative banks, some financial institutions and non banking financial companies comes under the supervision of RBI.

Another regulator is NABARD - it supervises regional rural banks and cooperative banks, whereas the National Housing Bank supervises the housing finance companies. Another financial regulator in India is SEBI. It controls capital market and mutual funds, whereas insurance sector is controlled by IRDA, Insurance Regulatory Development Authority. While the pension funds are regulated by PFRDA, Pension Fund Regulatory and Development Authority.

But sometimes we can see dual control of some services, which means a single service is controlled by two regulators at the same time. Let's see an example, the deposit taking activities of corporates registered under Companies act are regulated jointly by the Department of company affairs along with RBI and NABARD as per the service involved. But this dual control doesn't apply to the Non banking finance companies and companies which are under separate statute.

Important features of the regulators of India


Currently, the financial regulators in India are more about product regulation. That is, each regulator focuses on regulating separate and particular product. Like we have, fixed deposits and banking related products are regulated by RBI. Government of India takes care of small savings products. Mutual funds and Equity markets are regulated by SEBI. Insurance is regulated by IRDA. PRDA regulates New pension scheme. Our regulators give more importance to customers like investors, policy holders or pensioners.

These regulators were not born as a part of a particular plan. But they were evolved from time to time, whenever the need showed up. As we know that, necessity is the mother of invention. Each and every regulator has its own set of rules and codes to be followed. Still, their functioning is not so east. They have to deal with a certain set of problems, when multiple regulators are functioning simultaneously.

Problems with multiple regulators in India


As we know that, each regulator has to deal with separate products and each of them have their own rules and codes, the problem comes up when these set of rules from two companies collides. Like, we have different financial products, there comes some situations when a single product falls into two different categories dealt by two different organisations or when two products from different organisations have similar properties or functions. These requirements may lead to problems in trade, markets, sales and foreign exchange.

We have an example, where there is similarity between mutual funds regulated by SEBI and ULIPs regulated by IRDA. Both regulators have different levels of standards which may sometimes leads to confusion. Also banks, which work under RBI can distribute insurance products and mutual funds which once again comes under IRDA and SEBI respectively.

There are also some schemes and products in India, which no regulator came forward to take care of. Those schemes that were left alone. Some of them include Ponzi schemes, Chit-funds etc.

There are also drawbacks like, the actions of the regulators overlapping with laws and causing conflicts between the regulators and causing trouble to economic policy makers.


Financial legislative structure in India


Today, India has over 60 acts, rules or regulations that are governing the financial sector. Most of them were framed between 1950s and 1960s after getting independence. These acts and laws are formulated at that time because, as the power was transferred from British to India, it became the whole responsibility of our leaders and government to start finding solutions to the problems and for tackling different responsibilities. To handle problems in such a huge economy is easy task. So there came need when new acts are to be formulated. We have RBI act 1934, Insurance act 1938, Securities contracts act 1956 and so on.

If we observe, RBI act and insurance act were made even before we got independence. And we are following those same acts and rules till today, but with some modifications and amendments. These amendments were made to the acts only to cope up with the fast growing technology and rapidly occurring changes in the economy. Many things happened after these laws were framed, like we got ATMs, Debit and Credit cards, Mobile banking, Internet banking, Online transactions and many more. To really rung along with the same speed as the increasing technology, these amendments were not just enough. The change should spread to the legal grounds too. This may in turn demands for the Reforms in the Financial sector in India.


Economic growth and development - Economic and Social Issues

Indian economy - Growth and Development


Each country has its own wealth and natural resources. The growth of an economy doesn't totally depend on the mere presence of the resources within the country. But it depends on how well those resources are being utilised in the growth and development of the economy.

RBI Grade B officers - Growth and development of the economy

Growth vs development


When it comes to the meaning of the individual words, Growth and Development, they look similar. But there is a difference when it comes to the economic growth and economic development.

Economic growth is a quantitative thing, whereas economic development is a qualitative one. Economic growth means increase in output, which can be easily measured, whereas economic development includes improvement in the quality of the goods produced, organising the method of production and also improving the quality of life. Therefore, the measure of economic development is not easy.

Economic growth can be calculated using the Gross Domestic Product and Gross National Product per year. There are two types of economic growth - extensive and intensive. Extensive economic growth means the country uses more of its natural resources and human resources and grow. While intensive economic growth means the country uses the available resources more efficiently.


Refer the complete Syllabus for Phase II of RBI Grade B officers


Effect of government on economic development


For an economy to run efficiently, there must be production and distribution of goods and services. But these depends on government that is in power. The policies and schemes were run according to the ruling government. Thus the government is likely to control the factors of production.

But, things changed. Countries started to think out of the box. After the fall of the Soviet Communist State, globalisation started spreading, helping the countries to follow more efficient policies.

Even the countries like China and Vietnam, which were communist countries previously,  started following western ideas on economic development. They followed a growth model based on investment in international trade.

The countries started realising that the markets should be effectively regulated or else they will fail.

At that time, they realised that the government is not efficient to regulate the market and finance. All the countries including USA accepted the need of a separate strong and independent regulators to maintain market and finance.


Government's role in India's economic development


Though our's is a mixed economy, after the independence our's was more a capitalist economy.

After independence, the government decided to go with a planned economy, encouraging industrialisation. At that time, most of the organisations belonged to public sector. The thought of going towards industrialisation was that, there was a very little capital in India. To overcome, this problem, they regulated the imports drastically. They neglected foreign trade in the name of economic growth. The government imposed many restrictions on investments in India.

They thought that this could reduce poverty, so they shifted the labour from agriculture to industries, as they felt agriculture is a less productive sector. During that time the objectives were indusrialisation and urbanisation.

But in the mid 1960s, the country was hit by drought and food shortage, which made the leaders to think and take steps to develop agriculture and also steps to reduce poverty at the same time.

In 1970s, the government relaxed controls on exports and imports and also promised excess subsidies which left them in trouble and bankrupted in 1991.

This was the beginning of the economic reforms in India. This crisis made the rulers rethink and frame policies. They took down unnecessary subsidies. Providing excess subsidies is more a burden to the government than economic growth. That was the time when or government opened doors for foreign investment and trade, taking into account the advise of world bank, which helped India to come out of that crisis by lending money.

The measures include - Encouraging foreign investment in the country, liberalising the imports, lowering the exchange value of Indian rupee.

The economic reforms and policy initiatives of 1991 played an effective role in the economic growth in India. Since then those reforms and policies underwent many changes and modifications to suit the changing economy and situations. But the one that remained unchanged was staying away from stopping the controls and restrictions, thus making India a more liberalised economy.


Scheme and Syllabus of RBI Grade B officers exam


Scheme and Syllabus of RBI Grade B officers exam 2016

Scheme and Syllabus of RBI Grade B officers exam 

Scheme


The selection will be done in three stages.
  • Phase I - Written exam; Objective type; 120 minutes; 200 Marks;
    • Subjects - General Awareness; English; Quantitative Aptitude; Reasoning;
  • Phase II - Written exam; Three subjects; One Descriptive; Two Objective; Each 90 minutes; Each 100 marks; Total 180 minutes; Total 300 Marks;
    • Subjects - Economic and Social Issues; English Writing skills(Descriptive); Finance and Management;
  • Phase III - Interview; 50 marks;

Syllabus for Phase II exam

No need to mention the syllabus for Phase I particularly as they are the common sections in evey bank exam. Hope you might be familiar with those.

Phase II Syllabi

  1. Paper I - Economic and Social Issues

    • Growth and development
    • Measurement of growth
    • National Income and per capita income
    • Poverty Alleviation and employment generation in India
    • Sustainable development and environmental issues
    • Economic reforms in India
    • Industrial and labour policy
    • Monetary and fiscal policy
    • Privatization
    • Role of economic planning
    • Globalisation
    • Opening up of the Indian economy
    • Balance of Payments
    • Export-import policy
    • International economic institutions
    • IMF
    • World Bank
    • WTO - Regional economic cooperation
    • Social structure in India
    • Multiculturalism
    • Demographic trends
    • Urbanisation and migration
    • Gender issues
    • Social justice
    • Positive discrimination in favour of the under privileged
    • Social movements
    • Indian political system
    • Human development
    • Social sectors in India
    • Health and Education
  2. Paper III - Finance and Management

    1. Finance
      • Financial System
      • Financial Markets
        • Primary and secondary markets - Forex, Money, Bond, Equity; Functions; Instruments and recent developments
      • General
        • Risk management in banking sector
        • Basics of Derivatives - Forwards, Futures and Swap
        • Changing landscape of Banking sector
        • Recent developments in financial sectors, Portfolio investments, public sector reforms, disinvestments
        • Financial Inclusion - use of technology
        • Corporate governance in banking sector, role of e-governance in addressing the issues of corruption and inefficiency in government sector
        • The union budget - direct and indirect taxes; 
        • Non tax source of revenue; 
        • 13th finance commission 
        • GST
        • Finance commission
        • Fiscal policy
        • Fiscal responsibility and budget management act
        • Inflation
          • Definition, Trends, Estimates, Consequences and Remedies
        • WPI, CPI - components and trends
    2. Management
      • Management - its nature and scope
        • The management process
        • Planning
        • Organisation
        • Staffing
        • Directing and controlling
        • The role of a manager in an organisation
      • Leadership
        • Tasks of a leader
        • Leadership styles
        • Leadership theories
        • A successful leader vs an effective leader
      • Human Resource Development
        • Concept of HRD
        • Goals of HRD
        • Performance Appraisal
        • Potential appraisal and development
        • Feedback and performance counselling
      • Career planning
        • Training and development
        • Rewards
        • Employee welfare
      • Motivation, Morale and incentives
        • Theories of motivation
        • How managers motivate
        • Concept of Morale
        • Factors determining morale
        • Roles of incentives of building up morale
      • Communication
        • Steps in communication process
        • Communication channels
        • Oral vs written communication
        • Verbal vs non verbal communication
        • Upward, downward and lateral communication
        • Barriers to communication
        • Role of information technology
      • Corporate governance
        • Factors affecting corporate governance
        • Mechanisms of corporate governance
This is the total syllabus mentioned in the notification for Phase II of the exam. In Paper III of phase II, Management section is basic in nature. If you check the notification, they also mentioned the books that are to be referred for the above section. Anyways, I will try my best to post these topics in the coming days.

Good luck guys!!

Happy preparation!!