Reserve Bank of India (RBI): Origin, Structure, Functions, & More

Priyanka December 26, 2023 04:55 7352 0

The Reserve Bank of India or RBI is India's central bank and regulatory body responsible for regulating the banking system in the country. It operates under the Ministry of Finance.

Provision: The Reserve Bank of India or RBI is India’s central bank and regulatory body responsible for regulating the banking system in the country. It operates under the Ministry of Finance.

Reserve Bank of India (RBI): Origin

Formation: The Reserve Bank of India (RBI) was established through the Reserve Bank of India Act of 1934, based on the recommendations of the Hilton Young Commission, with a share capital of Rs. 5 crore.
- The Central Office of the Reserve Bank was set up in Kolkata but was permanently shifted to Mumbai in 1937.
- Initially, the RBI was owned privately but was nationalized in 1949. It is completely owned by the Government of India.
- RBI acted as Burma’s (Myanmar) central bank until April 1947 and also as the central bank for Pakistan until June 1948.
Mandate: RBI is responsible for the control, issuing, and maintaining supply of the currency in the country. It also manages the country’s main payment systems.

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Reserve Bank of India (RBI): Organisation Structure

The operation of the Reserve Bank of India lies with a 21-member central board of directors consisting of:
- Governor;
- 4 Deputy Governors;
- 2 Finance Ministry representatives;
- 10 government-nominated directors;
- 4 directors to represent local boards’ headquarters of RBI.

Reserve Bank of India (RBI): Objectives

Regulating the nation’s currency and credit system.
Securing monetary stability in India by maintaining reserves.
Issuing bank notes.
Maintaining financial stability ineffective activities and isolating itself from any political impact.
Ensuring economic growth and supporting planned advancement of the country’s economy.
Performing the role of Banker’s bank, Banker to government, and note-issuing authority.

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Reserve Bank of India (RBI): Functions

Regulate Money Supply: The Reserve Bank of India (RBI) is responsible for the control, issuing, and maintaining supply of the Indian rupee. It also prints currency based on requirements.
Managing Payment Systems: RBI manages the main payment system in the country and also aims to promote its economic development.
Insuring Deposits: RBI has established the Deposit Insurance and Credit Guarantee Corporation for the purpose of providing insurance of deposits and guaranteeing all Indian banks credit facilities.
Financial Supervision: RBI carries out consolidated supervision of the financial sector comprising commercial banks, financial institutions, and non-banking finance companies.
Banker to the Government: RBI serves as a banker to the Government of India by maintaining its accounts, receiving payments into and making payments out of these accounts.
Manager of Foreign Exchange: The Reserve Bank of India also facilitates external trade and payment and promotes orderly development and maintenance of the foreign exchange market in India.
Banker of Banks: RBI plays the role of central bank where commercial banks are account holders and can deposit money. All scheduled banks maintain their banking accounts with RBI.
Regulate Banking System: RBI plays the role of regulator and supervisor of the Indian banking system by ensuring financial stability & public confidence in the banking system.
Developmental Contribution: RBI has to ensure a smooth flow of credit to developmental activities such as agriculture, micro and small enterprises (MSE), housing education etc.
Represent India: The RBI acts as the representative of the Government in the International Monetary Fund and represents the membership of India.

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Reserve Bank of India (RBI): Significance

Autonomous Body: There is no legal act mandating the autonomy of the Reserve Bank of India. However, it functions as an autonomous body while regulating banking activities.
Upholding Public Interests: The RBI upholds the interests of the public when it comes to banking policies and actions.
Currency Value Stabilization: The RBI keeps the exchange value of the rupee in check by not allowing it to depreciate or appreciate sharply.
Payment Mechanisms: The RBI introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.

Reserve Bank of India (RBI): Criticism

Interference: RBI’s functioning is always influenced by the government’s interference. This has led to a continuous tug-of-war between the entities.
Failure to Reign-in NPAs: RBI has been criticized for failing to check the growth of Non-Performing Assets in the banking system.
Inflation Control: In recent times, RBI has not been able to keep the inflation rate within the stipulated range.
Contractionary Policies: RBI has faced criticism from many quarters regarding its contractionary policies that have prevented rapid economic growth in India.

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Reserve Bank of India and Its Monetary Policy Tools

Repo Rate: Repo rate is the rate at which the Reserve Bank of India lends funds to commercial banks. RBI uses it as a tool to keep money supply in check.
Reverse Repo: Reverse Repo is the short-term borrowing rate at which commercial bank park their surplus with RBI. Raising the reverse repo rate means banks will get a higher rate of interest from RBI, ensuring they lend to RBI instead of the public.
Statutory Liquidity Ratio: This is the minimum requirement for banks to maintain liquid assets in the form of gold, cash, and approved securities. It has anti-inflationary effects.
Cash Reserve Ratio (CRR): CRR is the share of net demand and time liabilities that banks must maintain as cash with the RBI. No interest is paid on CRR.
Bank Rate: It is the rate at which RBI charges banks when they want to borrow funds for a long term.
Open Market Operations: It is the practice of buying and selling of government securities in the open market to regulate the supply of money in the banking system.
Marginal Standing Facility (MSF): MSF is a provision for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up.

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Reserve Bank of India FAQs

RBI is India's central bank and regulatory body responsible for regulating the banking system in the country. It operates under the Ministry of Finance.

RBI is responsible for the control, issue, and maintaining supply of the currency in the country. It also manages the country's main payment systems.

RBI was established through the Reserve Bank of India Act of 1934, based on the recommendations of the Hilton Young Commission.

RBI plays the role of a central bank where commercial banks are account holders and can deposit money. All scheduled banks maintain their banking accounts with RBI.

RBI uses monetary policy tools such as Repo Rate, Reverse Repo Rate, Statutory Liquidity Ratio, Cash Reserve Ratio, Bank Rate, Open Market Operations, and Marginal Standing Facility.

Open Market Operations is the practice of buying and selling government securities in the open market to regulate the supply of money in the banking system.

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Reserve Bank of India (RBI): Origin, Structure, Functions, & More

Reserve Bank of India (RBI): Origin

Reserve Bank of India (RBI): Organisation Structure

Reserve Bank of India (RBI): Objectives

Reserve Bank of India (RBI): Functions

Reserve Bank of India (RBI): Significance

Reserve Bank of India (RBI): Criticism

Reserve Bank of India and Its Monetary Policy Tools

Reserve Bank of India FAQs

What is the Reserve Bank of India (RBI)?

What is the main function of the Reserve Bank of India (RBI)?

Reserve Bank of India (RBI) was formed based on the Recommendations of which Commission?

Why is the Reserve Bank of India (RBI) called the Banker of the Banks?

What are the Monetary Policy Tools used by RBI to control Money Supply?

What is Open Market Operations?

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