Bank Note Denominations and Monetary Policy in India

Study Notes

The Reserve Bank of India (RBI) has the authority to recommend bank note denominations to the Central Government.
The Central Government, based on the RBI's recommendations, approves the design, form, and material of bank notes.
Bank notes issued by the RBI are legal tender in India.
The Central Government can declare any series of bank notes not to be legal tender upon the recommendation of the RBI.
The RBI is responsible for the exchange of mutilated or torn bank notes.
Bank notes issued by the RBI are exempt from stamp duty.

The RBI Act establishes a statutory basis for the Monetary Policy Framework and the Monetary Policy Committee (MPC).
The Central Government, in consultation with the RBI, determines the inflation target every five years.
The MPC, comprised of the RBI Governor, Deputy Governor, one RBI officer nominated by the Central Board, and three members appointed by the Central Government, is responsible for determining the policy rate to achieve the inflation target.
The MPC's decisions are binding on the RBI, and the RBI publishes a document explaining the implementation of these decisions.
The MPC meets at least four times a year and publicizes its decisions following each meeting.

FEMA empowers the RBI to revoke authorization granted to authorized dealers in the public interest or when conditions of authorization are not met.
The RBI follows a prescribed procedure for revoking authorization as outlined in FEMA regulations.
Section 13 of FEMA details contraventions and penalties.
The RBI can compound certain contraventions under Section 15 of FEMA.

Different types of banks are regulated in India, including banking companies, State Bank of India, nationalized banks, regional rural banks, and cooperative banks.
The RBI is responsible for regulating and supervising all types of banks in the country.
The Banking Regulation Act, 1949 (BR Act, 1949) provides the RBI with powers to regulate and supervise banking companies.
The preamble of the BR Act outlines its purpose as consolidating and amending banking-related laws.
The BR Act outlines the RBI's powers regarding formulating banking policy, regulating and supervising banking business, and more.
Section 5(ca) of the BR Act defines banking policy as any policy determined by the RBI in the interest of the banking system, monetary stability, or sound economic growth, considering factors such as depositors' interests, deposit volume, bank resources, and equitable resource allocation.

The RBI's market operations aim to facilitate the transmission of monetary policy to the financial system.
The MPC determines the policy interest rate and stance to achieve the inflation target.
The weighted average call rate (WACR) serves as the operating target for monetary policy.
Through liquidity management operations, the RBI ensures the WACR aligns with the policy rate daily.
The RBI's Liquidity Management Framework, updated in 2020, includes various instruments to manage short-term and durable liquidity.

Short-term/transient liquidity management tools
- 14-day variable-rate repo/reverse repo auctions (main operation)
- Variable Rate Term Repo/Reverse Repo Auctions (overnight to 13 days, fine-tuning operations)
- Fixed Rate Reverse Repo Auctions
- Marginal Standing Facility (MSF)
- FX Swaps
- Standing Deposit Facility (SDF)
Durable liquidity management tools
- Long Term Variable Rate Repo Operation (LTRO) (tenor exceeding 14 days)
- Long Term Variable Rate Reverse Repo Operation (LTRRO) (tenor exceeding 14 days)

Pillar I: Focuses on a near-term (four to six weeks) assessment of system-level liquidity demand based on projections of autonomous drivers of liquidity.
- Key factors influencing demand include household currency demand, bank excess reserve demand, and government balances with the RBI.
- Forex market interventions are considered as and when information is available.
Pillar II: Assesses system-level liquidity over a longer time horizon, considering broad money growth, bank credit and deposits, and base money expansion. This assessment is compared with the breakdown of autonomous and discretionary liquidity drivers determined under Pillar I.