The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. It is situated permanently in Mumbai since 1937. The Reserve Bank of India (RBI) is India’s Central Bank, also known as Banker’s Bank and it controls monetary and other banking policies for the government of India.
Establishment of Reserve Bank of India
Government of India fully owned and operate the Reserve Bank of India.
The Preamble of Reserve Bank of India describes the basic functions of the Reserve Bank as:
• Regulating the issue of Banknotes
• Securing monetary stability in India
• Modernize the framework of monetary policy to meet economic challenges.
The operations of RBI are governed by a central Board of Directors, RBI is operated with a 21-member central board of directors who are appointed by the Government of India according to the Reserve Bank of India Act.
The Central board of directors comprised of:
• Official Directors – The governor who is nominated or appointed for four years along with four Deputy Governors.
• Non-Official Directors – Ten Directors from various fields along with two government Official
Legal Framework
The Reserve Bank of India comes under the following Acts:
• Reserve Bank of India Act, 1934
• Public Debt Act, 1944
• Government Securities Regulations, 2007
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• Credit Information Companies (Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007.
Functions and Characteristics of Central Bank
The monopoly of Note Issue:
The Reserve Bank of India acts as the sole currency authority of the country. It issues notes of every denomination, except one-rupee note and coins and small coins, by the Issue Department of the Bank.
The Government of India issued a one-rupee note or coins or small coins. But, the RBI also issues these coins on behalf of the Government of India. Presently, notes of denominations of rupees two, five, ten, twenty, fifty, one hundred and five hundred are issued by the RBI.
Before 1956, the principle of note issue of the RBI was based on a proportional reserve system. The proportional reserve system was replaced by the minimum reserve sys¬tem in 1956 under which the RBI was required to hold at least Rs. 115 crores worth of gold as back¬ing against the currency issued.
The rest Rs. 85 crores in foreign securities, so that together with gold and foreign exchange reserve the minimum value of these assets is Rs. 200 crores.
Banker’s Bank:
RBI is also known as the Banker’s Bank. RBI holds a part of the cash reserves of commercial banks and lends them funds for short periods. All banks need to maintain a certain percentage (lying between 3 percent and 15 percent) of their total liabilities. The main purpose of changing this cash reserve ratio by the RBI is to control credit.
RBI provides financial assistance to all Commercial and State cooperative banks through rediscounting of bills of exchange.
As the RBI meets the need of funds of commercial banks, the RBI functions as the Tender of the last resort’.
The RBI has been empowered by law to supervise, regulate and control the activities of commercial and cooperative banks. The RBI periodically inspects banks and asks them for returns and necessary information.
Banker to the Government:
The RBI acts as the banker to the government of India and State Governments (except Jammu and Kashmir). As such it transacts all banking business of these Governments.
These are the following:
(i) On behalf of the Government, the Reserve Bank of India accepts and pays money.
(ii) RBI also carries out exchange remittances and other banking operations.
As the Government’s banker, it provides short-term credit to the Government of India. This short-term credit is obtainable by the sale of treasury bills. The RBI also provides ways and means of advances which are repayable within 90- days to State Government. The Central Government is empowered to borrow any amount it likes from the RBI.
The RBI acts as an agent of the Government in respect of membership of the IMF and World Bank.
The RBI acts as the adviser of the Government not only on banking and financial matters but also on a wide range of economic issues (like financing patterns, mobilization of resources, institutional arrangements with regard to banking and credit matters, arrangements with regard to banking and credit matters, international finance), etc.
Controller of Credit:
The RBI controls the bank credit and total supply of money in order to serve the interest of the country. The RBI controls credit to ensure price and exchange rate stability.
The RBI uses all types of credit control instruments, qualitative, quantitative and selective. The most extensively used credit instrument of the RBI is the bank’s rate. The RBI also relies on the selective methods of credit control. This function is so important that it requires special treatment.
Exchange Management and Control:
The most essential central banking functions which are performed by the Bank is maintaining the external value of money. The external stability of the currency is related to its internal stability the inherent strength of the country’s economy and the way it conducts its monetary affairs and economy.
Domestic, fiscal and monetary policies have, therefore, an important role in maintaining the external value of the currency. Reserve Bank of India has a very important role to play in this area.
The RBI has the can enter into foreign exchange transactions both on its own account and on Government’s behalf.
Miscellaneous Functions:
The RBI collates, collects and publishes all monetary and banking data regularly in their weekly statements in the RBI Bulletin (monthly) and in the Report on Currency and Finance (annually).
“The views of the authors are personal“
Frequently Asked Questions
Under which Act, the RBI established and where is the Headquarter?
The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. It is situated permanently in Mumbai since 1937.
What are the different acts under which the RBI comes?
Reserve Bank of India Act, 1934, Public Debt Act, 1944, Government Securities Regulations, 2007, Banking Regulation Act, 1949, Foreign Exchange Management Act, 1999, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Credit Information Companies (Regulation) Act, 2005, Payment and Settlement Systems Act, 2007.
Why RBI is called as Banker’s Bank?
RBI is also known as the Banker’s Bank. RBI holds a part of the cash reserves of commercial banks and lends them funds for short periods. All banks need to maintain a certain percentage (lying between 3 percent and 15 percent) of their total liabilities. The main purpose of changing this cash reserve ratio by the RBI is to control credit.
