GRADE ‘B’ DR- GEN/DEPR/DSIM

The Reserve Bank of India (RBI) is the central bank of India, playing a pivotal role in managing and governing the country's financial system.¹ It is a statutory body established in 1935 under the Reserve Bank of India Act, 1934, and was nationalized in 1949.²

Here's a breakdown of its key aspects:

1. History and Establishment:

• Hilton Young Commission: The idea for the RBI stemmed from the recommendations of the Hilton Young Commission (Royal Commission on Indian Currency and Finance) in 1926.³

  
  

• RBI Act, 1934: The Reserve Bank of India Act, 1934, provided the statutory basis for the bank's functioning.

• Commencement of Operations: The RBI commenced its operations on April 1, 1935.

• Nationalization: Originally a shareholders' bank, it was nationalized in 1949, making it fully owned and operated by the Government of India.⁴

  
  

• Headquarters: While initially incorporated in Kolkata, its Central Office permanently moved to Mumbai in 1937.⁵

  
  

2. Objectives of the RBI (as per its Preamble):

• Regulating the issue of banknotes.⁶

  
  

• Securing monetary stability in India.⁷

  
  

• Modernizing the monetary policy framework to meet economic challenges.

• Generally operating the currency and credit system of the country to its advantage.⁸

  
  

3. Key Functions:

• Monetary Authority:

  • Formulates, implements, and monitors the monetary policy.⁹

    
    

  • Its primary objective is to maintain price stability while keeping in mind the objective of growth.¹⁰

    
    

  • It manages the quantity of money in the economy to meet the needs of various sectors.¹¹

    
    

  • Tools include:

    • Repo Rate: The rate at which the RBI lends money to commercial banks.¹²

      
      

    • Reverse Repo Rate: The rate at which the RBI borrows money from commercial banks.

    • Cash Reserve Ratio (CRR): The percentage of a bank's net demand and time liabilities (NDTL) that it must hold as cash with the RBI.¹³

      
      

    • Statutory Liquidity Ratio (SLR): The percentage of NDTL that banks must maintain in safe and liquid assets like government securities, cash, and gold.¹⁴

      
      

    • Marginal Standing Facility (MSF): A window for banks to borrow from the RBI in an emergency situation.¹⁵

      
      

    • Open Market Operations (OMOs): Buying and selling of government securities to regulate liquidity.¹⁶

      
      

• Regulator and Supervisor of the Financial System:

  • Prescribes broad parameters of banking operations within which the country's banking and financial system functions.

  • Aims to maintain public confidence in the system, protect depositors' interests, and provide cost-effective banking services to the public.

  • Supervises commercial banks, cooperative banks, and non-banking financial companies (NBFCs).

  • Grants licenses for new banks, opens new branches, conducts inspections, and sets capital requirements.

• Regulator and Supervisor of Payment and Settlement Systems:

  • Ensures the development and functioning of safe, secure, and efficient payment and settlement mechanisms (e.g., NEFT, RTGS).

• Issuer of Currency:

  • Has the sole authority to issue currency notes (except one-rupee notes and coins, which are issued by the Ministry of Finance).

  • Ensures an adequate supply of clean and genuine currency notes and coins.

  • Destroys old and unfit notes.¹⁷

    
    

• Banker to the Government:

  • Manages the banking transactions of the Central and State governments.

  • Maintains government accounts, receives and makes payments on behalf of the government, and manages public debt.¹⁸

    
    

  • Acts as an advisor to the government on economic and monetary policies.

• Banker to Banks (Lender of Last Resort):

  • Maintains banking accounts of all scheduled banks.

  • Provides financial assistance to banks when they are in need of funds, acting as a lender of last resort to ensure financial stability.¹⁹

    
    

• Manager of Foreign Exchange:

  • Manages the Foreign Exchange Management Act (FEMA), 1999.²⁰

    
    

  • Facilitates external trade and payments and promotes the orderly development and maintenance of the foreign exchange market in India.²¹

    
    

  • Manages India's foreign exchange reserves.

• Developmental Role:

  • Plays a promotional role in developing the financial system.²²

    
    

  • Promotes financial inclusion by extending banking services to rural and unbanked areas.²³

    
    

  • Supports various sectors of the economy by ensuring adequate credit flow, including agriculture and small and medium-sized enterprises (SMEs).²⁴

    
    

4. Organizational Structure:

• The RBI's operations are governed by a Central Board of Directors, appointed by the Government of India.²⁵

  
  

• This board typically comprises the Governor, four Deputy Governors, and other directors representing various fields and government officials.²⁶ The Governor is the chief executive officer.

  
  

In essence, the RBI is the custodian of monetary stability, financial health, and economic development in India, working to create a stable and growth-oriented economic environment.²⁷

*source: google gemini