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
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Subject: Economics
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