Introduction
(i) Monetary Policy is the macroeconomic policy laid down by the Central Bank towards the management of money, supply and interest rate. It is associated with Milton Friedman
1) Neutrality of Money
(i) Wicksteed, Hayek and Robertson are the chief exponents of neutral money.
(ii) They say that the monetary authority should aim at neutrality of money in the economy.
(iii) Monetary changes cause distortion and disturbances in the proper functioning of the economic system of the leading to all economic fluctuations.
2) Exchange Rate Stability
(i) It is a traditional objective from the Gold Standard period
(ii) When there was disequilibrium in the balance of payment, it was automatically corrected by movements.
(iii) It was popularly known as "Expand Currency and Credit when gold is coming in; Contract currency and credit when gold is going out."
(iv) If there is instability in the exchange rates, it would result in outflow or inflow of gold resulting in unfavorable balance of payments.
3) Price Stability
(i) Crustave Cassel and Keynes suggested price stabilization as a main objective of monetary policy.
(ii) Stable Price creates public confidence, promotes business activity and ensures equitable distribution of income and wealth leading to prosperity and welfare
(iii) Price stability does not mean price rigidity or price stagnation.
(iv) A mild increase in the price level provides a tonic for economic growth.
4) Full Employment
(i) Unemployment was socially dangerous, economically wasteful and morally deplorable.
(ii) Both Keynes' General Theory of Employment, Interest and Money in 1936, the objective of full employment became very important
5) Economic Growth
(i) Economic growth is the process whereby the real per capita income of a country increases
(ii) There is increase in the total physical or real output
(iii) Monetary policy should promote sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity for creating increase in saving and investment.
(iv) Flexible monetary policy is the best solution.
6) Equilibrium in the Balance of Payments (BoP)
(i) World trade was faster than world liquidity.
(ii) Increasing deficit in BoP reduces the ability of an economy to achieve other objectives.
(iii) Many less developed countries reduce their imports which adversely affects development activities, so monetary authority should make efforts to bring equilibrium in the BoP.

Introduction
(i) The Reserve Bank of India is India's central banking institution
(ii) It commenced its operations on 1 April 1935 and it was nationalised on 1 Jan, $1949 .$
1) Monetary Authority
(i) It controls the supply of money in the economy to stabilize exchange rate, maintain healthy balance of payment, attain financial stability, control inflation, strengthen banking system.
2) Issuer of currency
(i) It is the sole authority to issue currency
(ii) It also takes action to control the circulation of fake currency.
3) Issuer of Banking License
(i) Every bank has to obtain a banking license from RBI to conduct banking business in India.
4) Banker to the Government
(i) It is the banker to the central and the state governments.
(ii) It provides short term credit, manages all need issues of government loans, services the government debt outstanding
(iii) It advises the government on banking and financial matters.
5) Banker's Bank
(i) It is the bank of all banks in India as it provides loan to banks, accepts the deposit of banks and rediscounts the bills of banks.
6) Lender of last resort
(i) The banks can borrow from RBI by keeping eligible securities as collateral at the time of need when there is no other source.
7) Act as clearing house
(i) For settlement of banking transactions, RBI manages 14 clearing houses.
(ii) It facilitates the exchange of instruments and processing of payment instructions.
8) Custodian of foreign exchange reserves
(i) It administers and enforces the provision of Foreign Exchange Management Acr, 1999.
(ii) RBI buys and sells foreign currency to maintain the exchange rate of Indian rupee vs foreign currencies.
9) Regulator of Economy
(i) It controls the money supply in the system, monitors GDP, Inflation
10) Managing Government securities
(i) RBI administers investments in institutions when they invest specified minimum proportions of their total assets/liabilities in government securities.
11) Regulator and Supervisor of Payment and Settlement Systems
(i) RBI oversees the payment and settlement systems in the country.
(ii) It focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms.
12) Developmental Role
(i) It develops the quality of banking system in India and ensures that credit is available to the productive sectors of the economy.
(ii) It provides a wide range of promotional functions to support national objectives.
(iii) It establishes institutions which build the financial infrastructure.
(iv) It also helps in expanding access to affordable financial services and promotes financial education and literacy.
13) Publisher of monetary data
(i) It maintains and provides all essential bánking and other economic "data, formulating and critically evaluating the economic policies in India.
(ii) RBI collects, collates and publishes data regularly.
14) Exchange manager and controller
(i) RBI represents India as a member of the International Monetary Fund.
(ii) Most of thé commercial banks are authorized dealers of RBI.
15) Banking Ombudsman Scheme
(i) RBI introduced this Scheme in 1995
(ii) Those who have complaints including online, can appeal to the Ombudsman against the awards and the other decisions of the Banks.
16) Banking Codes and Standards Board of India
(i) To measure the performance of banks against Codes and Standards based on established global practices, the RBI has set up the Banking Codes and Standards Board of India.

Introduction
The functions of commercial banks are broadly classified into primary, and secondary functions
1) Primary Functions:
Accepting Deposits
Demand Deposits
1. It refers to deposits that can be withdrawn by individuals without any prior notice to the bank.
2. Depositors can withdraw money at any time by writing a withdrawal slip or a cheque or from ATM centres
Time Deposits
1. It refers to deposits that are made for certain committed period of time.
2. It has higher interest.
3. Deposits can be withdrawn only after a specific time period
Advancing Loans
1. Banks grant loans to individuals and businesses in the form of overdraft, cash credit and discounting bills of exchange.
2) Secondary Functions
Agency Functions
1. Commercial banks act as agents of customers by performing various functións.
Collecting Cheques
1. Banks collect cheques and bills of exchange on behalf of their customers through clearing house facilities provided by the central bank.
Collecting Income
1. Banks collect dividends, pension, salaries, rents and interests on investment on behalf of their customers.
2. A credit voucher is sent to customers for information when any income is collected by the bank.
Paying Expenses
1. Telephone bills, insurance premium, school fees and rents can be paid through banks.
2. A debit voucher is sent to customers for information when expenses are paid by the bank.
3) General Utility Functions
Providing Locker Facilities
1. Locker is provided for safe custody of jewellery, shares, debentures and other valuable items.
2. This minimizes the risk of loss due to theft at home.
Issuing Traveller's Cheques
1. Banks issue traveller's cheques to individuals for travelling outside the country.
2. These cheques are safe and easy way to protect money.
Dealing in Foreign Exchange
1. Banks provide foreign exchange to businessmen dealing in exports and imports.
2. But they need to take the permission of the Central Bank for dealing in foreign exchange.
4) Transferring Funds
1. Funds are transferred by means of draft, telephonic transfer and electronic transfer.
5) Letter of Credit
1. Commercial banks issue letters of credit to their customers to certify their credit worthiness.
Underwriting Securities
1. As public have full faith in the credit worthiness of banks, public do not hesitate in buying the securities underwritten by banks.
Electronic Banking
1. It includes services, such as debit cards, credit cards and Internet banking.
6) Other Functions
Money Supply
E.g: A bank lends Rs.5 lakh to an individual and opens a demand deposit in the name of that individual.
1. Bank makes a credit entry of 25 lakh in that account.
2. This leads to creation of demand deposits in that account.
3. Thus, without printing additional money, the supply of money is increased.
Credit Creation
1. It means the multiplication of loans and advances
2. Banks receive deposits from the public and use these deposits to give loans.
3. However, loans offered are many times more than the deposits received by banks.
Collection of Statistics
1. Banks collect and publish statistics relating to trade, commerce and industry and advice customers and public authorities on financial matters.

Introduction
(i) Commercial banks are institutions that conduct business with profit motive by accepting public deposits and lending loans.
Capital Formation
(i) Bank mobilize the small savings of the people scattered over a wide area through their network of branches and make it available for productive purposes.
(ii) Attractive schemes of the banks induce the people to save their money
Creation of Credit
(i) Credit creation leads to increased production, employment, sales and prices and thereby there is faster economic development.
Channelizing Funds towards Productive Investment
(i) Pooled savings is allocated to various sectors and productivity increases.
Encouraging Right Industries
(i) Banks give loan to right type of persons.
(ii) Banks grant loans and advances to manufacturers whose products are in great demand.
(iii) Manufacturers introduce new methods of production and assist in raising the national income of the country.
Banks Monetize Debt
(i) Banks transform the loan to be repaid after a certain period into cash, which can be immediately used for business activity.
(ii) Manufacturers and wholesale traders cannot increase their sales without selling goods on credit basis.
(iii) But credit sales may lead to locking up of capital.
(iv) So production is reduced.
(v) As banks are lending money by discounting bills of exchange, business concerns are able to carry out economic activities without gap.
Finance to Government
(i) Government needs finance for promoting industries.
(ii) Banks provide long-term credit to Government by investing their funds in Government securities and short-term finance by purchasing Treasury Bills.
(iii) RBI has given Rs.68,000 crores to the government of India in the year 2018-19.
Employment Generation
(i) Bank's branches are opened frequently and so new employment opportunities are created.
Banks Promote Entrepreneurship
(i) Banks induce new entrepreneurs to take up the well-formulated projects and provision of counseling services like technical and managerial guidance.
(ii) Conclusions Banks provide 100 % credit for worthwhile projects, which is also technically feasible and economically viable.
(iii) Thus commercial banks help for the development of entrepreneurship in the country.