Reserve Bank of India (RBI): Establishment, Appointment, Functions

Introduction

The Reserve Bank of India (RBI) serves as the central bank of India, overseeing the country’s monetary policy, currency issuance, and financial stability. Established in 1935, the RBI plays a crucial role in regulating and supervising the banking sector, managing foreign exchange reserves, and developing the overall financial infrastructure. 

It aims to maintain price stability and foster sustainable economic growth while ensuring the stability of the financial system. With its broad range of responsibilities, the Reserve Bank of India (RBI) is a key institution in India’s economic governance and financial landscape.

Establishment of Reserve Bank of India (RBI)

• Established on April 1, 1935, under the provisions of the Reserve Bank of India Act, of 1934.
• HQ: Initially established in Kolkata but was permanently moved to Mumbai in 1937. 
• Central Office: It is the place where the Governor sits and where policies are formulated.
• Originally privately owned, It was nationalised in 1949, the Reserve Bank is fully owned by the Government of India.

Composition and Governance of the Reserve Bank: Central Board of Directors

• Central Board of Directors: Governs the Reserve Bank”s affairs.
• Appointment: The board is appointed by the Government of India in accordance with the Reserve Bank of India Act.
  • Appointed/nominated for four years
• Constitution:
  • Official Director
    • Full-time: Governor and not more than four Deputy Governors
  • Non-Official Directors
    • Nominated by Government: Ten Directors from various fields and two government officials
  • Others: Four Directors, one each from four local boards.

Structure and Functions of Reserve Bank’s Local Boards

• Constituted for Western Area, Eastern Area, Northern Area and Southern Area.
• Consist of five members each.
• Members appointed by the Central Government.
• Members shall hold office for a term of four years.

Functions of RBI

• Issuing of the currency; 
• Controlling the money supply through methods like bank rates and reserve ratios;  
• Banker to the government.
• Banker of banks (Other banks retain their deposits with the RBI; The RBI lends funds to the commercial banks in times of need; The Reserve Bank of India (RBI) advises the commercial banks on monetary matters) [UPSC 2012]
• Lender of last resort ( Reserve Bank of India (RBI) offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse) [UPSC 2021]
• Custodians of foreign exchange reserves. 

Governor of Reserve Bank of India (RBI)

• Appointement: Appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary.
• Term: According to Section 8 (4) of the RBI Act, the Governor and Deputy Governors shall hold office for such term not exceeding 3 years as the Central Government may fix when appointing them.
• They are eligible for re-appointment. 
• Source of Authority: The Governor of the Reserve Bank of India (RBI) draws his power from the RBI Act 1934. [UPSC 2021]
• Qualification: The Reserve Bank of India (RBI) Act does not provide for any specific qualification for the governor.
• Removal: The governor can be removed by the central government.
• According to Section 7 of RBI ACT 1934, The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider it necessary in the public interest. There is no such provision in the constitution of India.[UPSC 2021]

Board for Financial Supervision

• Constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.
• Aim is to strengthen supervision and surveillance over the financial system and provide sharper focus to supervisory policy and skills.
• Exercises integrated supervision over commercial banks, financial institutions and non-banking financial intermediaries. 
• The Department of Supervision assists and provides secretarial support to BFS.

Minimum Reserve System of Reserve Bank of India (RBI): 

• With a minimum value of government-held gold of ₹200 crores (₹115 cr rupee should be in the form of Gold or gold bullion and rest ₹85 cr should be in the form of foreign currencies) and the remaining is backed by the government securities issued and held by RBI.

Publications of Reserve Bank of India (RBI)

• Report on Trend and Progress of Banking in IndiaAnnually 
• Financial stability report- Half yearly
• Monetary policy report- Half yearly
• Report on foreign exchange reserves- Half yearly 
• Bi-monthly Policy Statement
• Industrial Outlook Survey of the Manufacturing Sector (Quarterly)
• Consumer Confidence Survey (Quarterly) 
• Report on Financial Review

Various Committee Recommendations

• Usha Thorat Committee (2004) : RBI should maintain 18% of its total assets as reserves.
• Malegam Committee (2014) : Should transfer all entire net profits annually to RBI
• Bimal Jalan Committee (2019): The Committee has stated that the surplus distribution policy must take into the account the total realized equity. 
  • Only if realized equity is above its requirement (6.5 per cent to 5.5 per cent), the entire net income should be transferable to the Government.

Institutes Funded by the Bank

• Centre for Advanced Financial Research and Learning (CAFRAL): Fully funded by RBI
• Indira Gandhi Institute of Development Research (IGIDR): Fully funded by RBI
• Indian Institute of Bank Management (IIBM): RBI is a sponsor bank along with other banks and Financial Institutions.
• National Institute of Bank Management (NIBM): RBI is an ordinary member along with other banks and Financial Institutions.

Conclusion

• With its prudent monetary policy decisions, effective supervision of banks, and vigilant oversight of the financial markets, the RBI serves as a guardian of the nation’s economic well-being. 
• Its proactive measures and dynamic policies are instrumental in navigating the ever-evolving challenges and opportunities in the global economic landscape, cementing its position as a cornerstone of India’s financial infrastructure.