RESERVE BANK OF INDIA

Economics

INTRODUCTION

The Reserve Bank of India (RBI) is the central bank of India and the apex monetary authority of the country. It was established on 1st April 1935 under the provisions of the Reserve Bank of India Act, 1934, based on the recommendations of the Hilton Young Commission (1926). At the time of its establishment, RBI had a share capital of Rs 5 crore.

Initially, the Reserve Bank of India was privately owned. In 1949, RBI was nationalised and since then it is fully owned by the Government of India. RBI plays a pivotal role in India’s financial system by regulating currency, credit, banking and payment systems, and by supporting economic growth and financial stability.

ADMINISTRATION AND ORGANISATIONAL STRUCTURE OF RBI

The overall management and policy direction of the RBI is vested in the Central Board of Directors, which is the highest decision-making body of the Reserve Bank.

Central Board of Directors:

Total members: 21
Appointed or nominated by the Government of India
Tenure: Four years

Composition of the Central Board:

Governor of RBI
Four Deputy Governors
Two representatives from the Ministry of Finance: - Secretary, Department of Economic Affairs - Secretary, Department of Financial Services
Ten directors nominated by the Government of India
Four directors representing Local Boards headquartered at: - Mumbai - Kolkata - Chennai - New Delhi

Appointment of Governor and Deputy Governors:

Appointed by the Central Government
Appointment made by the Cabinet Committee on Appointments

LEGAL FRAMEWORK GOVERNING RBI

The primary legal foundation of RBI is the Reserve Bank of India Act, 1934. However, RBI also derives its authority from several other legislations, such as:

Foreign Exchange Management Act (FEMA), 1999
Payment and Settlement Systems Act, 2007
Banking Regulation Act, 1949
Various rules, regulations and guidelines issued under these Acts

FUNCTIONS OF THE RESERVE BANK OF INDIA

PUBLIC DEBT MANAGEMENT

Under Section 20 of the RBI Act, 1934:

The Central Government entrusts RBI with management of public debt
RBI manages government cash balances
RBI conducts market borrowings through issuance of government securities such as treasury bills and bonds

FOREIGN EXCHANGE MANAGEMENT

Under Section 10 of FEMA, 1999:

RBI authorises persons to deal in foreign exchange as authorised dealers
RBI acts as the custodian of India’s foreign exchange reserves
Facilitates external trade and payments
Ensures orderly development and maintenance of foreign exchange market
Maintains external value of the Indian Rupee

MONETARY FUNCTIONS

Issue of Currency:

RBI issues and circulates all currency notes in India except Rs 1 notes
Coins of all denominations and Rs 1 notes are issued by the Ministry of Finance but circulated by RBI

Minimum Reserve System:

RBI must maintain a minimum reserve of Rs 200 crore
This reserve consists of gold and foreign exchange

Monetary Policy Formulation and Implementation:

RBI formulates and implements monetary policy to ensure price stability
RBI Amendment Act provided statutory backing for Flexible Inflation Targeting
Inflation target: 4 percent with a tolerance band of +/- 2 percent
Monetary Policy Committee (MPC):
- Six-member committee
- Constituted by the Central Government
- Responsible for policy rate decisions

BANKER AND DEBT MANAGER TO GOVERNMENT

RBI maintains banking accounts of Central and State Governments
Receives and makes payments on behalf of governments
Assists government in raising funds through public borrowings
Provides Ways and Means Advances (WMA) to governments
In 2020, RBI enhanced WMA limits for states by 60 percent to manage pandemic-related stress

BANKER’S BANK AND LENDER OF LAST RESORT

Commercial banks maintain their accounts with RBI
RBI provides liquidity support to banks against approved securities
Rediscounts bills of exchange
Acts as lender of last resort during financial stress

DEVELOPMENTAL ROLE OF RBI

Supports national developmental objectives
Promotes institutional finance for agriculture and rural sectors
Directs banks to lend to priority sectors such as agriculture, MSMEs and weaker sections
Supports Small Scale Industries through credit policies

ROLE IN FINANCIAL INCLUSION

Promotion of No-Frills accounts with zero or minimal balance
Encourages use of technology such as ATMs, mobile banking and biometric identification
Supports digital financial services to expand banking access

CONTROLLER OF CREDIT AND INFLATION MANAGEMENT

Uses monetary policy instruments such as: - Cash Reserve Ratio (CRR) - Statutory Liquidity Ratio (SLR) - Repo Rate - Reverse Repo Rate
Regulates credit flow in the economy
Controls inflation by targeting medium-term inflation at 4 percent

PAYMENT AND SETTLEMENT FUNCTIONS

Payment and Settlement Systems Act, 2007 designates RBI as regulator
Supervises payment systems such as RTGS, NEFT, UPI and other digital platforms
Ensures safety, efficiency and reliability of payment systems

REGULATORY AND SUPERVISORY ROLE

Regulates commercial banks, cooperative banks and certain NBFCs
Protects depositor interests
Ensures financial stability and public confidence
Regulates All India Financial Institutions such as: - NABARD - EXIM Bank - NHB - SIDBI

SUBSIDIARIES OF RBI

Deposit Insurance and Credit Guarantee Corporation (DICGC):

Insures bank deposits up to Rs 5 lakh per depositor including principal and interest

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL):

Printing of currency notes

Reserve Bank Information Technology Private Limited (ReBIT):

IT services for RBI

Indian Financial Technology and Allied Services (IFTAS):

Technology and financial services support

INDEPENDENCE OF RBI

RBI does not enjoy absolute statutory autonomy
Central Government can issue directions to RBI after consultation with Governor
No explicit constitutional or statutory provision guaranteeing complete independence

BALANCE SHEET OF RBI

Assets:

Foreign currency assets
Gold coins and bullion
Rupee securities including treasury bills
Loans and advances to Central and State Governments
Loans to banks under Sections 17 and 18 of RBI Act

Liabilities:

Currency notes issued and in circulation
Deposits of Central and State Governments
Deposits of banks and financial institutions
Funds related to provident fund, gratuity and superannuation

RECENT INITIATIVES OF RBI

Microfinance Regulation:

Collateral-free loans up to households with annual income of Rs 3 lakh
Loan repayment capped at 50 percent of household income
Removal of caps on interest and processing fees

One Nation One Ombudsman:

Integrated Banking Ombudsman, NBFC Ombudsman and Digital Transactions Ombudsman
Centralised complaint processing centre at Chandigarh
RBI Executive Director acts as Appellate Authority

Revised Priority Sector Lending Norms:

Inclusion of start-ups
Enhanced limits for renewable energy and bio-gas plants

Central Bank Digital Currency (CBDC):

Digital form of fiat currency issued by RBI
Enables real-time payments
Reduces cost of currency management

Legal Entity Identifier (LEI):

Mandatory for RTGS and NEFT transactions above Rs 50 crore
Improves financial transparency and risk management

Operation Twist:

Simultaneous sale of short-term securities and purchase of long-term securities
Aims to reduce long-term interest rates

Retail Access to Government Securities:

Allows individuals to directly invest in government bonds
Broadens investor base and improves financial inclusion

Prompt Corrective Action (PCA) Framework:

Supervisory tool to restore bank health
Applies to banks and now extended to NBFCs

Lead Bank Scheme:

Introduced in 1969
District-level banking and credit planning using area approach

Regulatory Sandbox:

Controlled testing of fintech innovations
Encourages responsible innovation

Digital Payments Index:

Measures digital payment penetration
Published semi-annually since March 2021

PDF File:

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Subject: Economics

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