Reserve Bank of India

RESERVE BANK OF INDIA

The Hilton Young Commission’s recommendations served as the foundation for the establishment of RBI in 1935 On April 1, the Reserve Bank, a private shareholders’ bank with a paid-up capital of rupees five crores (rupees fifty million), officially opened for business as India’s central bank.

The purpose of the Reserve Bank of India’s establishment was to:

• Control the issuance of banknotes

• Retain reserves to ensure monetary stability and

• The Bank took over to begin its operations with the intention of using the country’s currency and credit systems for its own advantage.

• The role of the Controller of Currency in the government and government account management, public debt, and the Imperial Bank of India.

The Issue Department formally assumed the responsibilities of the currency offices that were previously located in Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore, and Cawnpore (Kanpur). Banking Department offices were established in Calcutta, Bombay, Madras, Delhi, and Rangoon.

Despite Burma’s (Myanmar) 1937 split from the Indian Union, the Reserve Bank of Burma remained the country’s central bank until the Japanese occupation of Burma and then until April 1947.

Until June 1948, when the State Bank of Pakistan began its operations, the Reserve Bank served as Pakistan's central bank after the partition of India.

After being founded in Kolkata at first, the Reserve Bank’s Central Office was permanently relocated to Mumbai in 1937. The governor sits at the Central Office, which also serves as the policy-making hub.

The Reserve Bank of India is wholly owned by the Indian government, despite having been privately owned until 1949 when it was nationalized.

Some facts about RBI

In India, it is the only authority with the power to print banknotes.

• First governor of the RBI from 1935 to 1937 was Sir

Osborne Smith.

• C.D. Deshmukh (1943–1949) was the first Indian appointed governor of the Reserve Bank of India.

• The only Prime Minister to have served as RBI Governor (1982–1985) is Man Mohan Singh.

• RBI is a part of the International Monetary Fund.

• A panther and palm tree are the emblem of RBI.

Central Board

• There is a central board of directors that oversees the Reserve Bank. Following the Reserve Bank of India Act, the Indian government appoints the board members:

• Nominated or appointed for a four-year term

• Constitution:

• Official Directors

• Full-time: The Governor and four Deputy Governors.

• Non-Official Directors

• Nominated by Government: Ten directors representing several industries and two Finance Ministry Representative

• Others: four Directors - one each from four local boards (Mumbai, Kolkata, Chennai and Delhi).

Organization & Management

• The Reserve Bank of India serves as the nation’s central bank and is the hub of the financial and monetary system in India.

• In contrast to other central banks like the Federal Reserve Board of the United States, the Bank of England, and the Riksbank of Sweden, it is relatively new. It is conceivably the most established central bank among the developing nations.

• It started operating on April 1, 1935, in accordance with the RBI Act 1934. Up until January 1949, the institution was privately held. However, in accordance with the RBI (Transfer to Public Ownership) Act of 1948, it afterwards became a State-owned institution.

• This Act gives the Central Government the authority to give the Bank any recommendations that they deem necessary in the public interest, after consulting with the Bank’s Governor. Additionally, the Central Government employs the Bank’s Governor as well as each of the Deputy Governors.

• The governor, four deputy governors and fifteen directors appointed by the central government make up the central board, which has ultimate authority over the bank.

RELATIONSHIP BETWEEN RESERVE BANK OF INDIA AND GOVERNMENT

Role of Union government

• Throughout history three levers have been used by the Union government to exert control on the RBI:

• The RBI Act, which was passed during the colonial era and gives the government broad authority, is the first lever. For example, the RBI Act’s Section 30 gives the government the authority to “supersede” the RBI central board. The central board’s authority to enact regulations is limited by Section 58 and can only be exercised with the “prior sanction” of the federal government. As per Section 7 (1), the Union government is authorized to occasionally provide the central bank with orders that it deems essential in the public interest, following consultation with the bank’s governor.

• The choice of governors and deputy governors to lead RBI is the second lever of control. According to an examination of the RBI’s annual reports, seven out of ten governors since the country’s independence have previously held positions in the finance ministry.

• The central board, the top decision-making body of the RBI, and its personnel make up the third lever of government control.

RBI and its Functions

• Both traditional central bank duties and developmental and promotional duties are carried out by the RBI.

Traditional Functions

• The Bank of England served as the blueprint for the RBI’s establishment. As such, it was given the responsibility of carrying out every task that the Bank of England had been handling. These duties are typically referred to as central bank traditional duties.

Issue of Currency Notes

• With the exception of one rupee note and coins with lower denominations, the RBI is the only entity with the exclusive right, power, and monopoly to print money.

•
These banknotes, which were issued by the RBI, are legitimate money. At the moment, there are denominations of Rs. 2, 5, 10, 20, 50, 100, and 500.

• The RBI has the authority to exchange these banknotes for other denominations in addition to issuing and withdrawing them.

• It issues these notes in exchange for foreign assets, rupee coins, gold bullion, exchange bills, promissory notes, and government of India bonds.

Banker to other Banks

• The RBI, as the country's top financial organization, is required to supervise, assist, and give orders to other commercial banks.

• The RBI has the authority to regulate bank reserve volumes and to permit other banks to extend credit in that ratio.

• A portion of each commercial bank’s reserves must be kept with the RBI, the bank’s parent. Similar to this, when these banks require money urgently, they apply to the RBI. As a result, it is known as the lender of last resort.

Banker to the Government

• As the highest monitoring authority, the RBI is required to act as a representative of both the federal and state governments.

• It performs a number of banking duties, including taking deposits, filing taxes, and making payments on behalf of the government.

• Even internationally, it serves as the government’s representative.

• It keeps up government accounting and gives the government financial guidance.

• On the government’s behalf, it oversees the management of public debt and keeps foreign currency reserves. When the government is in financial trouble, it offers an overdraft facility to it.

Exchange Rate Management

• It is one of the RBI’s primary responsibilities.

• The preparation of domestic measures in that direction is necessary to ensure the stability of the rupee’s foreign value. Additionally, it needs to create and carry out a foreign exchange rate policy that will aid in achieving exchange rate stability.

• It has to bring demand and supply of the foreign currency (the US dollar) near to one another in order to preserve exchange rate stability.

Credit Control Function

• In the nation, credit is extended by commercial banks in response to economic demand. However, this credit expansion will send the economy into inflationary cycles

if it is uncontrolled or unregulated. On the other side, when credit creation falls short of the necessary level, the economy’s ability to grow is hampered.

• In its capacity as the country’s central bank, the RBI has to pursue both growth and price stability. Thus, it employs a variety of credit control instruments to limit the ability of commercial banks to create credit.

Supervisory Function

• The Reserve Bank of India (RBI) has been granted extensive authority to oversee the nation’s banking sector. The following list includes a few of its supervisory duties:

• Granting license to banks: Banks are granted licenses by the RBI to conduct business. A license is also granted to start new branches, extension counts, and even to close down already-existing branches.

• Bank Inspection: Banks that follow instructions and operate sensibly without taking unnecessary risks are granted licenses by the RBI. It may also request monthly data on certain aspects of assets and liabilities from banks.

• Control over NBFIs: The implementation of monetary policy has no effect on non-bank financial institutions. That being said, the RBI is entitled to periodically provide directives to the NBFIs concerning their operations. It can regulate the NBFIs by routine inspection.

• Implementation of the Deposit Insurance Scheme: To safeguard small depositors’ money, the RBI established the Deposit Insurance Guarantee Corporation. In the event of a bank failure, the RBI works to implement the Deposit Insurance Scheme.

Developmental / Promotional Functions of RBI

• Central banks, particularly those in developing nations like India, have a variety of duties in addition to the standard traditional ones. These are function-specific to each country and are subject to change based on national needs. Since its founding, the RBI has served as a promoter of the financial system. Below are some of the RBI’s primary development functions.

Development of the Financial System

• The financial system is made up of markets, financial instruments, and financial institutions.

• The formation of major banking and non-banking institutions has been promoted by the RBI in order to meet the credit needs of various economic sectors.

Development of Agriculture

• The RBI has to pay particular attention to the credit requirements of agriculture and related industries in an agrarian economy such as India.

• By expanding the flow of credit to this industry, it has effectively provided a service in this direction.

• Previously, the National Bank for Agriculture and Rural Development (NABARD), Regional Rural Banks (RRBs), and the Agriculture Refinance and Development Corporation (ARDC) handled the credit.

Provision of Industrial Finance

• Accelerating economic development requires rapid industrial growth. It is crucial that small, medium, and big businesses have access to sufficient and timely funding in this regard.

• The RBI has always played a key role in this area, helping to establish unique financial institutions like ICICI Ltd., IDBI, SIDBI, and EXIM BANK, among others.

Provisions of Training

• The RBI has always made an effort to give banking industry employees the necessary training.

• The RBI has established training institutions for bankers in several locations. A few to name include the College of Agriculture Banking (CAB), Bankers Staff College (BSC), and National Institute of Bank Management (NIBM).

Collection of Data

• The RBI, which is the nation’s supreme financial body, collects, compiles, and disseminates statistical data on a variety of subjects.

• Interest rates, inflation, savings, investments, and other factors are included. Researchers and policy makers find great value in this data.

Publication of the Reports

• The Reserve Bank maintains a distinct publication section. This department gathers and disseminates information on a number of economic sectors.

• The RBI releases the reports and bulletins on a regular basis. Reports on the Trend and Progress of Commercial Banks in India, RBI Annual Report, RBI Weekly Reports, and so on are included.

• Additionally, this information is provided to the public at a reduced cost.

Promotion of Banking Habits

• The RBI, as the highest authority, consistently endeavors to encourage the nation’s banking practices. It took steps to expand the banking network and institutionalized savings.

• It established numerous establishments, including the Deposit Insurance Corporation (1962), IDBI (1964), NABARD (1982), NHB (1988), and so forth.

• These groups help people form and increase their banking habits.

Promotion of Export through Refinance

• The RBI consistently works to promote the resources available for financing international trade, particularly Indian exports.

• Refinancing helps the Export Credit Guarantee Corporation of India (ECGC) and the Export-Import Bank of India (EXIM Bank India) with their export- oriented lending.

RBI’s Sources of Income

• The RBI generates revenue in a number of ways. One of the RBI’s main sources of revenue is open market operations, which involve central banks buying and selling bonds on the open market to control the amount of money in the economy.

• The RBI may benefit from favorable changes in bond prices in addition to the interest it receives from these bonds.

• The RBI’s transactions in the foreign exchange market could also boost the bank’s earnings.

• To make money, the RBI for example, may buy dollars at a discount and then sell them for a premium later on.

• It should be highlighted, nevertheless, that the RBI’s main goal is to maintain the value of the rupee rather than make money like commercial banks do. Therefore, its frequent operations to form monetary policy result in profit and loss as a byproduct.

Economic Capital Framework of the Reserve Bank of India

• The RBI Act of 1934’s Section 47 requires that the right amount of profit distribution and risk provisions be made. The economic capital framework offers a technique for calculating these amounts. This clause mandates that the central bank, after deducting bad and doubtful debts, asset depreciation and employee contributions, deliver the remaining portion of its profits to the central government.

• In November 2018, the Reserve Bank of India (RBI) established a committee headed by Dr. Bimal Jalan to examine the existing framework for economic capital, after consulting with the national government. The current framework for economic capital was created between 2014 and 2015, and it became effective in 2016 and 2017

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