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Money and banking, Forex Reserves:Foreign exchange reserves are reserve…
Money and banking
Supply of money
Printing of money.
Currency notes:
- In India, currency notes are printed by the Reserve Bank of India.
- Section 22 of the RBI act, 1934 gives the bank the authority to issue currency notes.
- Printing of currency is carried by Public Sector Unit called Securities Printing & Minting Corporation of India.
Coins:
Coins are minted by government of India(distribution undertaken
by RBI as an agent of government.)
Important Terms
Fiat Money: Any currency lacking intrinsic value that is declared legal tender by a government. In this respect, unlike currencies backed by gold or silver, fiat money does not have any intrinsic value.
Legal Tender: Coins, notes or other instruments that are legally recognized as a medium of exchange. The national currency is legal tender in practically every country and it can only be issued by the Central bank. (RBI in the case of India)
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Definition: Total Stock of money in Circulation among the public at a particular point of time is the Supply of Money
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Reserve Bank of India
- RBI is the central bank of India set up in 1935 by the virtue of RBI Act, 1934.
- Formation of RBI was recommended by the Hilton Young Commission and it first started with a share capital of Rs. 5 Crore.
- It was nationalised in 1949 and is currently fully owned by the Government of India.
Functions of RBI
1. Sole authority to issue currency: Along with the Government of India, it is responsible for the design, production and overall management of the nation's currency, with the goal of ensuring adequate supply of clean and genuine notes.
- Banker's bank:
- Enables swift clearing and settlement of inter-bank transactions
- Provides efficient means of fund transfer for all banks.
- Enable banks to maintain their accounts with RBI for statutory reserve requirements and maintenance of transaction balances.
- Acts as a lender of last resort.
3. Lender of the last resort:
- RBI comes to rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
- RBI extends this facility to protect the interest of depositors of the bank and to prevent possible failures of the bank, which in turn may also affect other banks and institutions and can have an adverse effect on financial stability of other institutions and thus on the economy.
- Government's bank: As a banker of Government, RBI performs the following functions:
- Lends to the Government.
- Raises loans from various sources on behalf of the Government.
- Acts as an agent of Government with respect to international bodies such as IMF and world bank.
- Custodian of Forex reserves: RBI's Forex reserve comprise of the following:
- Foreign Currency Assets ($+€+£+¥)
- Gold
- Special Drawing Rights (SDR) to IMF
- Reserve Trance Position (RTP) in IMF
- Formulates Monetary Policy (Controller of Credit)
- Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the RBI Act.
- The RBI is Vested with the responsibility of conducting monetary policy as mandated under the Reserve Bank of India Act, 1934.
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- Manages Foreign Exchange Management Act. (FEMA)
Functions of Money
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Unit of Account or Measure of value; In other words, the value of all goods and services can be expressed in monetary units.
Eg: If a cellphone is worth Rs.20,000 and a bed is worth Rs.5,000 then we can say that the cellphone is worth 4 such beds.
Store of value or Saving: money can be stored in lockers, banks, wallets etc., and can be used in the future.
Standard of Deferred Payments:
- Deferred payments are payments which are made some time in the future.
- Use of money as the standard of deterred or delayed payments immensely simplifies borrowing and lending operations because money generally maintains a constant value through time.
- In this way money facilitates the formation of capital markets and work of financial intermediaries like stock exchange, investment trust and banks.
Demand of holding money
Liquidity preference: The preference of holding liquid asset over securities or long term interest bearing investments.
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Money
Definition: An officially issued legal tender and a commonly accepted medium of exchange usually in the form of coins or bank notes.
Important Terms
Liquidity: The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.
Legal tender: A medium of payment recognised by a legal system(Government of the state) to be valid for meeting a financial obligation.
- Forex Reserves:Foreign exchange reserves are reserve assets held by a central bank in foreign currencies used to bank liabilities on their own issued currency as well as to influence monetary policy.
- Special Drawing Rights: Supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund. The SDR is the unit of Account for the IMF, and is not a currency per se.
- Reserve Trance Position: Each member of the IMF is assigned a quota, part of which is payable in SDRs, and part in the member's own currency. The difference between a member's quota and the IMF's holdings of its currency is a country's Reserve Trance Position(RTP).