How RBI is Saving India from an Economic Crisis. How does RBI earn money? Where does RBI spend money?
Today Pakistan is going through an economic crisis. Sri Lanka is bankrupt. And this financial crisis is slowly spreading in the whole of Asia. But why is India safe?
Because there is a government organization that works to save us from every economic disaster. Every government company looks something like this. Lazy, slack, and corrupt. Whose only job is to eat the common man’s money and have fun.
That’s why many government companies run under losses, except for one. It is one such government entity that earns not in pennies but in crores. In fact, in the last year, it has earned 2 lakh crores.
It’s RBI that is being discussed. What? RBI is a central bank.
It regulates banks and makes foreign exchange rules.
So how does RBI earn money?
‘How India Works’.
How RBI is saving India from an Economic Crisis?
Table of Contents
Who is RBI?
RBI is the Reserve Bank of India. nit is India’s central bank. It was made as a private institution in 1935. But it became nationalized in 1949.
That is, it became the government. RBI comes under the Ministry of Finance. And it sets up India’s monetary policy. Our monetary policy controls our money. How money is circulating in the economy, how much is being printed, how much is going out of the country, and how much is coming in, RBI makes all these decisions.
This is the entire task list of the RBI.
Let’s examine all these tasks one by one.
Monetary policy
One of the tasks of RBI is to take care of the overall economy. RBI studies what are the overall investment trends in India.
Where is the private sector investing money?
And where should the government focus?
And most importantly, inflation, means what is the impact of inflation on the economy? RBI controls money, to control inflation. RBI’s target is that inflation should be between 4-6%. And how will this happen?
For this, RBI has different tools. Like CRR or SLR. Cash Reserve Ratio and Statutory Liquidity Ratio. Imagine a bank has ₹100. Then it has to keep ₹4.5 CRR and ₹18 SLR with the RBI. This means their lending power, is not ₹100, which is less than that. This results in the bank not having the full ₹100 to lend as a loan, So the overall speed and amount of giving loans, both, reduced. That means growth will also slow down.
But why does RBI want to slow down growth? Because it helps in stopping inflation. These two reserve ratios are a kind of safety deposit. So that no bank exhausts all the money by giving loans.
Credit and Financial Inclusion
One of the focuses of RBI is that banking facilities in India should reach the entire population. The entire population should have a bank account.
So that they can also access Fin-Tech or financial technologies. At the same time, RBI also sees that the sectors that need credit or loans, get those loans. This is called Priority Sector Lending.
These categories are eligible for that. Every bank has to give 40% loan to applicants of Priority Sector Lending.
Financial Markets and Foreign Exchange Management
Last year news came in, that RBI took action on unauthorized forex trading platforms. RBI also issued many notices to not invest in these trading platforms.
This is risky. Apart from this, RBI also makes rules on how much foreigners can invest in India. It also decides which foreign transactions banks can do. How many loans can the banks take in foreign currencies, RBI even decides that.
Whether or not we want to make the rupee international, RBI also focuses on that. Which country can use our currency for what purpose, RBI takes decisions on that.
Regulation and Financial Stability
This year, America’s Silicon Valley Bank sank. RBI keeps monitoring so that Indian banks don’t sink like this.
How will this happen?
With stress tests. You may be going to the gym for your health, which shows how fit you are. Imagine RBI’s stress test is the gym of the banks.
Where bank fitness keeps getting tested. This is for the safety of the banks. In this function, RBI, 2022 launched the digital rupee in the form of an experiment. On the digital rupee and central bank digital currency,
Public Debt Management
RBI is the banker of the government. Whenever the Center or the State needs money, they go to RBI. RBI assures low expenditure for the borrower, the investor’s risk gets managed, and the borrowing market develops in India.
RBI helps the states and the Center in their debt management. RBI sees how much money the government is earning. How much it is spending? And whether or not it can pay the interest on the loan it is taking. RBI helps in developing investing in India.
RBI has recently launched a retail direct platform. From where we can directly buy government bonds from the RBI.
Currency Management
RBI has an important task of managing the currency. RBI takes the responsibility of supplying currency notes to banks. RBI prints and mint coins in India. RBI also keeps track of how many currency notes are circulating in the economy at a time.
This currency management is exciting. Banks have to place an order with RBI, how many notes they want, and according to those orders, the RBI prints the notes. But when there are so many notes, why print new ones? You must have noticed that you can deposit torn or dirty notes in the bank. Banks accept them and this money is credited to your account.
But on the back end, these torn and soiled notes are destroyed. In place of them, new notes are printed. The thing with coins is different. Coins are not minted again and again. Because it is not easy to destroy them. For example,
Soiled and dirty notes of this value were destroyed in the last financial year. Instead of these, notes of this value were printed. In currency management, RBI has one more task. Identifying counterfeit currency and stopping its circulation. You must have seen the Farzi series. In which RBI officers develop new technology to find new ways to catch fake currency. That too is RBI’s work.
Payment and Settlement Systems
RBI has set up your every payment system. We all know UPI. Which is made by the National Payments Corporation of India. They have also made IMPS, an immediate payment system, and payment systems like NACH and ECS. RBI itself too manages payment systems. NEFT and RTGS are managed by RBI.
For a user to make seamless payments, is a big responsibility. An entire department of RBI focuses on this full-time. Similarly, Bharat Bill Payment System,
Aadhar-based payments, rupay cards, fastag all these things fall under this department.
Research and Statistics.
RBI commissions many research studies on different topics related to the Indian economy. You will find its reports on RBI’s website.
How does RBI earn money?
We said that last year RBI had earned 2,35,000 crores. But how? Let’s understand.
Just like banks give you loans to earn money. Similarly, RBI gives loans to the government to earn money. Suppose, the Center, states, or different municipalities need money. Then they issue bonds. These bonds are bought by RBI and it earns interest on these bonds. The same is seen in the below table. RBI through the Center’s and State’s rupee bonds has earned ₹96,516 crores of interest income.
Not just in India, RBI also lends money internationally. It buys international bonds. RBI this year, in March had forex reserves of $509 billion. Now, if so much money is lying around, it will rot. RBI earns interest on that too. RBI keeps some of its forex reserves in foreign banks.
In March 2023, RBI had investments of $509 billion. Out of this, they invested $411 billion in different securities. Like US Treasury securities. They kept $75 billion in different central banks and banks of international settlements. And they have deposited $22 billion in international banks.
Now, you get the point. Even on these foreign exchange investments, RBI earns money. In the last financial year, RBI through these foreign investments earned ₹43,649 crores. And through foreign bank deposits, earned ₹16,419 crores. RBI is called the bank of banks. This means, if a bank wants to borrow money urgently, it borrows money from RBI’s liquidity adjustment facility.
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Let’s move towards other incomes.
In this table, the other amounts are quite small. But one amount is quite big. Exchange gained from foreign exchange transactions. Where did this money come from? Last year, the US Treasury’s head tried his best to break its economy and the whole world.
At what rate will people get loans, this is linked to the Fed’s interest rate. By adding a few percent to Fed’s rates banks give loans to people. In 2008, there was a financial crisis. And banks were in turmoil. To control the economy, the US Fed quickly reduced the rates and made it close to zero.
So what happened?
Money became cheaper. It became cheaper for people to take loans. So businesses took loans
And the economy gradually stabilized. Then even the Fed started increasing the rates gradually. But in 2020, there was another crisis. The pandemic. After which the Fed quickly reduced the rates again. But it had a bad effect on the economy. Because inflation increased.
So the Fed increased the interest rates by 80%. This is another reason why Silicon Valley Bank crashed.
Due to the increase in rates, US Government Bonds started becoming an attractive investment option. People withdrew money from India and invested in the US. The dollar became expensive in India. And to control this, the RBI started increasing the supply of dollars in the market. How? By selling its forex reserves. RBI had bought these dollars at a lower price, and the price has increased.
That is why RBI sold the dollars and earned ₹1,03,308 crores.
Where does RBI spend money?
RBI first deducts its expenses from its income. Their biggest cost is employee cost. Which means salaries. On which ₹6,004 crores are spent. After that, ₹4,600 crores are spent on printing currency notes or minting coins. ₹4,000 crores are spent on agency charges.
But compared to its income, these are very small expenses. What happens to the remaining money? RBI transfers a major part of its revenue to the reserves.
In 2022-23, it made provisions of ₹1,30,875 crores. These provisions are made in preparation for an uncertain event in the future. RBI is the central bank of the country. It invests in gold and other securities. Tomorrow if their investment decisions, don’t turn out to be right, then not only, the country will be at a loss. This is a very big risk.
So, to reduce this risk, RBI makes provisions. Reserve Bank does not pay any tax on its profits. But aside from its expenses and reserves the amount that is left, it gives all the amount to the government. This is a kind of bonus for the center.
This system is followed by many central banks in other countries. US Federal Reserve, Bank of England, Bank of Japan, all these banks too transfer their profits to the government. Even this annual bonus of RBI goes to the Consolidated Fund of India. Let’s see the trend of the last 20 years. It is seen in this graph that every year RBI gives more and more money to the government.
Apart from our taxes, even RBI’s work becomes an income source for the government.
Conclusion
Imagine, in the 1990s, just 30 years ago, India was in the same situation as Pakistan today. We only had forex reserves for the next 2 weeks of imports. But India rose from there.
In 2004, we crossed the 100 billion forex reserve mark for the first time. In 2020, we have more than 500 billion forex reserves in our treasury. These reserves are the only thing that brings relief to our lives in difficult times. RBI controls inflation. Keeps dollar prices under control.
RBI gives India a chance to move on the path of sustainable development. It saves us from an economic crisis. In the end, we have to understand that RBI does not only work on note printing but also makes an important contribution to the policies of the country.