RBI as Banker to Government

One of the important role of RBI is being Banker to Governments - GOI & State Govts. It doesn't get much public attention because it does not directly impact prices/ policy rates/ GDP figures of the country. However it's an important role of RBI. RBI also gives financial advice to govt, whenever called to do so.

RBI - banker to Government.

Legal Framework:

RBI Act 1934:

RBI has the 'obligation' to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union.

RBI has the 'right' to transact Government business of the Union in India.

Accordingly RBI is also banker to all State Govts, as per the agreements they enter into, except J&K and Sikkim.

RBI does NOT get any remuneration for the conduct of ordinary banking business other than the advantages which may accrue to it from the holding of their cash balances free of obligation to pay interest thereon.

Banker to Central Govt:

Work relating to Govt. business is handled by Public Accounts Dept of RBI. Govt's Principal accounts are maintained at Central Accounts Section in Nagpur. Duties involve receipt & payment of moneys on behalf of various govt dept.

Each ministry/Dept has been allotted a Public Sector Bank for handling it's transactions based on principle of 'One Bank - One Ministry/Dept'. The responsibility of maintenance of accounts lies with individual Ministry/Department only. This includes arranging payments, accounting receipt, disbursal, auditing of transaction. RBI does NOT handle day-to-day transactions as before, except where nominated.

Banker to State Govts:

The financial transactions of State Govts are done at various agency bank branches in respective states. All the transaction are consolidated at 'Link cell' in State Capital & settled with RBI office in the state. All consolidated position are then ultimately booked in Principal Accounts of the resp. State maintained @ CAS (Central Accounts Section) Nagpur.

Meanwhile transactions at various agency offices (RBI, SBI, Nationalized banks' branches, treasuries etc) are done without any reference to cash position of the State Govt @ CAS.

Central Accounts (CAS@ Nagpur):

Each agency bank has set up a 'Link office' in Nagpur, for fund settlement with CAS. All the financial transactions thus merge into CAS Nagpur, which work out daily cash balance of each Govt.

RBI sends daily, monthly advice of balance in its books, ways & means granted, investments made to respective Govts. This is useful for govts in preparing 'Ways & Means budgets'.

Other Services:

Besides receipt & payment of money on behalf of Govts. RBI performs other services to govts for which it may receive nominal fees, often this don't even cover costs!

Being Banker to govt RBI provides: exchange, handle forex transaction of GOI, remittance transactions, management of public debt & issue of new loans, invest surplus funds, issue & management of special funds, bonds, pension schemes, safe custody facility and act as Adviser to Govt on various Monetary & economic perspectives.


a) Computerization: RBI's endeavor is to help common person to pay Govt's dues at bank branch of his choice, while ensuring instantaneous credit to Govt's a/c @ RBI.

RBI & Govts are working towards computerization of dealing branches, CAS, all PAOs (Pay & Accounts Offices)/ Circle Offices of Govt/ Drawing offices/ Treasury offices.

It is envisaged that real-time settlement of funds would handle shortcomings observed in manual system of handling transactions. Reconciliation at every level will be quicker with increased accuracy.

Instead of paper scrolls, Govt depts are geared up for accepting the same in e-format. Earlier all deposits in Govt's a/cs were to be accompanied by appropriate challans. Challans were in multiple copies, different shapes, sizes. Paying taxes & accounting for same was cumbersome, time-consuming process.

With the progress in banking it is possible for assesses to pay govt's dues using single pay-in-slip. Later electronically just by quoting PAN!

OLTAS (On-Line Tax Accounting System) introduced in 2004, for collection of Direct Taxes is a step in that direction. OLTAS can be accessed through Net-banking of Agency Banks & taxes can be paid by common taxpayer in minutes.

b) Expansion in Agency Banks: At present all public sector banks & 3 private sector banks (Axis, HDFC, ICICI bank) act as RBI's agent to do Govt business.

Agreement between State Govt & RBI provide that the RBI is not entitled for any remuneration for ordinary banking operations apart from the advantages which may accrue from holding cash balances free of obligation to pay interest thereon. However minimum balances doesn't adequately compensate RBI for the cost of conducting Govt's business.

Presently 'Agency commission' is given to commercial banks by RBI. This merely covers the cost of doing the transaction. In most of the countries this cost is borne by Govts themselves.

RBI is trying to create a climate of competition for Govt Business. It's suggested that system of 'bidding' would rationalize agency charges better rather than present 'cost system'

For more information read FAQs by RBI & speech by Sh. YV Reddy (former RBI Governor).

25 richest countries of the world

Top 25 countries of world in GDP per capita (nominal) terms.

Rank GDP per capita Country
1 $1,06,406  Luxembourg
2 $1,04,756  Qatar
3 $99,170  Norway
4 $78,881   Switzerland
5 $67,304  Australia
6 $56,426  Denmark
7 $54,815  Sweden
8 $52,300  Canada
9 $52,052  Singapore
10 $51,704  United States
11 $48,761  Kuwait
12 $46,707  Japan
13 $46,643  Austria
14 $46,011  Netherlands
15 $45,984  Ireland
16 $45,635  Finland
17 $43,774  United Arab Emirates
18 $43,615  Belgium
19 $42,725  Iceland
20 $42,402  Brunei
21 $41,866  Germany
22 $41,223  France
23 $39,161  United Kingdom
24 $38,255  New Zealand
25 $36,676  Hong Kong

India has a GDP per capita of $3,842. India finds place in lower portion of the list.

elasticity concepts Part 2

Elasticity concepts part 2

This note is in continuation of this Elasticity concept article. Now here we are in bit technical side. If you've read 1st article, it'll clear your "technical" knowledge. And make your answers perfect.

1) Price Elasticity of Demand (PED): 

is a measure which shows how much demand of a good will change in response to change in price of that good.

Price Elasticity of Demand = % change in quantity demanded / % change in Price

Here are various scenarios that happen:

If PED is 0, then the demand for that good is said to be perfectly price inelastic (or not responsive to change in price). That means even if there is an increase in price, people will still buy that stuff. Economists doubt if such product exists.

When PED is between 0 & 1, demand is said to be price inelastic i.e change in demand is less than change in price. If price changes 5% demand changes by 2%. Businesses try to evaluate PED to know how much change in price of their product will increase it's demand or sales!

Remember Apple iPhone 5C sales - low cost version but not much demand.

When PED is 1, it's said to be perfectly price elastic. That means 2% change in price will increase demand (or sales) of a good by 2% exactly.

If PED is more than 1, than it's said to be price elastic. That means change in demand is more than change in price. For e.g. if Burger price change by 2% than demand changes by say 3%.

2) Income Elasticity of Demand (YED):

(remember letter 'I' is for Investment, so Y for income): is a measure which shows how much demand of a good or service will change in response to change in real Income levels.

Income Elasticity of Demand = % change in quantity demanded / % change in income

If YED is between 0-1: demand is said to be income inelastic. For 'normal goods' with say 3% increase in income, demand will increase by 1%. For Inferior goods with 3% increase in income, demand will reduce by 1%.

If YED is more than 1: demand is said to be income elastic. For 'normal goods' with say 1% increase in income, demand increases by 2%.

When XED is +ve two goods are subtitutes, -ve then they are compliments. Size of XED tells the strength on the connection between 2 goods.

 4) Price Elasticity of Supply (PES):

 is a measure which shows responsiveness or elasticity of the quantity supplied of a good to changes in price of that good.

Price Elasticity of Demand = % Change in Quantity Supplied / % Change in Price.

When PES is 0: suppliers don't care about price, they continue producing whatever they were producing earlier. Perfectly inelastic supply.

When PES is between 0 &1: inelastic supply, supply don't change in as much proportion as price. If price increase by 2%, supply would change by 1%.

When PES is 1: supply is unitary elastic. If price increase by 1%, supply change by 1%.

When PES above 1: elastic supply, if price increase by 1%, supply change by 2%.