The Reserve Bank of India (RBI) is the central bank of India,
The RBI was originally set up as a private entity in 1935, but it was nationalized in 1949.
The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions, and non-banking finance firms.
RBI Timeline
The central bank of India, RBI, is considered as an important instrument for formulating strategies in the Indian economy.
Event | Year |
The British passed the RBI Act | 1934 |
Establishment of RBI in Calcutta | 1935 |
RBI headquarters permanently moved from Calcutta to Bombay | 1937 |
RBI being nationalized after independence after being held by private stakeholders | 1949 |
RBI – Definition & Interesting Facts
The RBI or Reserve Bank of India is considered as one of the nationally important institutions and the cornerstone of the Indian economy.
The RBI is a member of the International Monetary Fund (IMF) alongside other national banks belonging to the different countries of the world.
Based on the strategies developed by Dr. Ambedkar in his book “The Problem of the Rupee – Its Origin & Its Solution” the concept of RBI was formulated.
The “Royal Commission on Indian Currency & Finance”, also known as Hilton Young Commission, suggested the formulation of the RBI.
The RBI regulates the currency and the credit system in the country.
The RBI was completely privately-owned before being nationalized in the year 1949. It also became a member bank of the Asian Clearing Union.
The Reserve Bank of India is primarily responsible for protecting the interests of the depositors, maintaining the confidence of the public in the system, and offering cost-effective banking services in the form of commercial banking and cooperative banking.
The Preamble of RBI
After the timeline, let us also have an understanding of the preamble of the Reserve Bank of India. Interestingly, the preamble of RBI elaborates its basic functions as below:
“..to regulate the issue of Bank Notes and keeping of reserves to secure monetary stability in India and generally to operate the credit system and currency of the country to its advantage.”
Composition of the Reserve Bank of India
All the affairs of the RBI are regulated by a central board of directors. Following are the important details regarding the structure of the Reserve Bank of India:
The board of RBI follows the guidelines of the RBI Act and is appointed by the government of India
The directors of RBI are either appointed or nominated for a term of four years
The official directors include: one full-time governor and not more than four deputy governors
Non-official Directors: 10 directors nominated by the government from miscellaneous sectors along with 02 government officials
Others: 04 directors, one each from four regional boards
Functions of the RBI
Monetary Authority: As a monetary authority, the RBI is responsible for supervising the monetary policies, implementing the monetary policies, and ensuring price stability in the country with respect to the national economic growth.
Issuing Notes: The RBI is entrusted with the responsibility of providing the public with adequate supply of currency coins and notes. Besides, the RBI is also in-charge of maintaining the quality of the currency notes and coins, their exchanges and destruction of the ones that are not applicable for circulation.
Banker to the government: The RBI acts as an Agent, Banker, and Adviser to the government of India and all the states. It performs all the banking functions of the Central and the State governments along with tendering useful advice on economic and monetary policies. It also provides overdraft facilities to both the central and the state government.
Foreign reserve management: The Reserve Bank of India is in-charge of maintaining the foreign exchange rates by buying and selling the foreign currencies. It is responsible to buy and sell the foreign currency in the Forex market when its demand increases and vice-versa.
Developmental functions: Apart from the above, the RBI also performs a wide array of developmental functions to support the national objectives including making institutional arrangements for agricultural finance and so on.
Collection and publication of data: The RBI regularly collects and compiles the data based on banking and financial operations, FDIs, BOP, Exchange Rate and industries, prices, etc. of the Indian economy. For that, the RBI publishes a monthly publication indicating the relevant and most updated numbers on a regular basis.
Controls credit supply: Undertaking the function of controlling the credit supply in the economy, the RBI uses two methods, which are qualitative and quantitative techniques. When the RBI observes that the economy has sufficient money supply and it may cause an inflation in the economy, it squeezes the money supply through the tight monetary policy and vice versa.
Promotional functions: The RBI’s promotional functions includes promoting banking habits and enhancing the banking system, providing training to the banking staff, supporting the agriculture sector and cooperative sector, developing a financial system, exporting promotion through refinance facility and extending support for industrial finance.
Supervisory functions: Apart from the monetary functions, the RBI is also entrusted with certain non-monetary roles. These include giving license to the banks, bank inspection and enquiry, controlling over non-banking financial institutions, and periodic review of the working of the commercial banks.
Lender of the last resort: One of the prime functions of the RBI is that it acts as the lender of the last resort. Wherein, the banks can approach the Reserve Bank of India when they are in need of funds. The RBI lends money to all the commercial banks across the country. As per the Banking Regulation Act, 1949, the RBI is entrusted with the extensive powers to control and supervise the nation-wide banking system.
RBI’s Instruments of Monetary Policy
The RBI’s monetary policy is a set of regulatory policies wherein it maintains its control over the supply of currency within the economy to achieve general economic goals. The main instruments of monetary policies of the RBI are:
CRR: The Cash Reserve Ratio (CRR) is the particular amount of bank deposits which the banks are required to keep with the RBI in the form of balances or reserves. An increase in the CRR with the RBI results in a decrease of the liquidity in the money supply and vice versa. During inflation, the RBI increases the CRR and vice versa.
SLR: The Statutory Liquidity Ratio (SLR) is the number of liquid assets out of their total time and demand liabilities which all the financial institutions are required to maintain at any given point of time. In case of inflation, the RBI increases SLR and vice versa.
OMO: Open Market Operations (OMO) are the instruments which involve buying and/or selling of securities like the government bonds to or from the public and banks. The RBI sells the government securities in order to regulate the flow of credit in the economy and buys the government securities to increase the credit flow.
Bank Rate Policy: Also known as the discount rate, the bank rate refers to the interest charged by the RBI for lending loans and funds to the banking system. When the bank rate increases, the cost of borrowing by commercial banks results in reduction in the credit volume to the banks and so the supply of money reduces and vice versa.
Repo Rate: It is the rate of interest at which the RBI lends short-term money to the banks in order to control inflation, money supply, and economic growth. During inflation, the government increases the repo rate to reduce the money supply and vice versa when it is deflation.
Monetary Policy Committee
The Monetary Policy Committee (MPC) is a six-member committee that decides different policy rates including MSF, repo rate, liquidity adjustment facility, etc. Is entrusted with strategizing monetary policies by using the tools like repo rate, bank rate, reverse repo rate, CRR, and SLR. The MPC was introduced by the government of India under section 45ZB of the RBI Act, and later amended in 1934.
The Committee is mandated to meet at least four times a year with the quorum of the meeting being four members. Each member has one vote, and in case of an equality of votes, the Governor performs a second or casting vote.
Recent Developments by the RBI
Following are some of the recent developments introduced by the Reserve Bank of India amid the economic crisis due to the Covid-19 pandemic.
The RBI decided to extend the enhanced borrowing facility provided to the banks to meet the SLR until September 30, 2020.
The RBI also extended the relaxation on the minimum daily maintenance of the CRR at 80% till September 2020.
With a view to strengthen the governance in the commercial banks, the RBI proposed to restrict promoters from holding the CEO position for more than 10 years.
The RBI approached the Centre seeking an extension of tenure of external members on its rate-setting panel until March 2021 due to the Covid-19 pandemic situation.
The RBI announced another round of the bond-swapping program billed as India’s Operation Twist in order to help monetary transmission.
The RBI said it is creating a Payments Infrastructure Development Fund in order to promote digital payments across the country. An initial contribution of INR 250 crore will be made by the RBI with a view to cover half the fund.
India brought cooperative banks under the regulatory framework of the RBI by amending the 70-year old Banking Regulation Act through a presidential decree.
