Answer in detail
1) Explain the role of money market in India.
Ans: The following points outline the role of the money market in India :
Short-term requirements of borrowers: Money market provides reasonable access for meeting the short-term financial needs of the borrowers at realistic prices.
Liquidity Management: Money market is a dynamic market. It facilitates better management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and development of the country.
Portfolio Management: Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.
Equilibrating mechanism: Through the rational allocation of resources and mobilization of savings into investment channels, the money market helps to establish equilibrium between the demand for and supply of short-term funds.
Economizes the use of cash: Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.
2) Explain the functions of RBI.
Ans: Following are the functions of RBI.
Issue of Notes: The Reserve Bank has a monopoly for printing the currency notes in the country. It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies.
Banker to the Government: The second important function of the Reserve Bank is to act as the Banker, Agent, and Adviser to the Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government.
Banker’s Bank: The Reserve Bank performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of the country.
Controller of the Credit: The RBI undertakes the responsibility of controlling credit creation by commercial banks. RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country. When RBI observes that the economy has sufficient money supply and it may cause an inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.
Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the Reserve Bank buys and sells foreign currencies and also protects the country’s foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently, India has a Foreign Exchange Reserve of around US$ 360bn.
Other Functions: The Reserve Bank performs a number of other developmental works. These works include the function of clearinghouse arranging credit for agriculture (which has been transferred to NABARD) collecting and publishing the economic data, buying and selling of Government securities (gilt edge, treasury bills, etc) and trade bills, giving loans to the Government buying and selling of valuable commodities, etc. It also acts as the representative of the Government in the International Monetary Fund (I.M.F.) and represents the membership of India.