The Reserve Bank of India (RBI) is the Central Bank or Monetary Authority of India which issues, manages and controls the supply of the Indian Rupee, the official Indian currency. It also acts as the regulatory body for the Banking system of India. It started its operations on 1st April, 1935 as the Reserve Bank of India Act, 1934 came into force. The basic functions of the RBI, as stated in its preamble, are “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”
The origin of this central bank goes back to the British Era. In 1926, the Royal Commission of Indian Currency and Finance, also known as the Hilton Young Commission, recommended the creation of a Central Bank in the erstwhile British India. Based on these recommendations, a bill was introduced in the Legislative Assembly, but was withdrawn due to lack of consensus between different sections. Then due to the recommendations of both in the Indian Central Banking Enquiry Committee in 1931 and the White Paper on Indian Constitutional Reforms in 1933, the issue was revived.
This resulted in the introduction of a fresh bill, which was passed through the Legislative assembly and received the Governor General’s assent on 5th March 1934. The Act, called the Reserve Bank of India Act, 1934 (II of 1934), forms the statutory basis on which the central bank is established. It commenced operations as India’s Central Bank on the 1st of April, 1934. Also, it was set up as a private shareholder’s bank before being nationalized in 1949 under the Reserve Bank (Transfer of Ownership) Act, 1948. Originally headquartered in Kolkata (then Calcutta), it shifted its base to Mumbai (then Bombay) in 1937 from where it currently operates and functions.
The RBI also acted briefly as the Central Bank of Myanmar (then Burma), ceasing operations there in 1947, and as the Central Bank of Pakistan, ceasing operations there in 1948.
Overview of the Act
The main sections of the RBI Act, 1934 are as follows –
- Section 3: This section deals with the Establishment and incorporation of the Reserve Bank of India.
- Section 6: This section deals with establishment of Offices, branches and agencies of the Reserve Bank of India.
- Section 8: This section talks about the composition of the Central Board of Reserve Bank of India.
- Section 17: This section specifies the business that the Reserve Bank can carry out.
- Section 21: Under this section, the Reserve Bank has the right to transact Government business in India.
- Section 21A: Also, the Bank has the right to transact Government business of States on agreement.
- Section 22: This section ascertains the right of the Reserve Bank to issue bank notes.
- Section 24: This section specifies that the bank can issue notes with denominational values of two, five, ten, twenty, fifty, one hundred, five hundred, one thousand, five thousand and ten thousand rupees or of other denominational values, not exceeding ten thousand rupees.
- Section 27: For the Re-issue of notes, this section says that the Bank shall not re-issue bank notes which are torn, defaced or excessively soiled.
- Section 26 (1): This section defines legal tender of notes.
- The First Schedule of the RBI Act 1934 defines the 4 areas under which the Indian states should come. The 4 areas are Northern Area, Southern Area, Western Area, Eastern Area.
- The Second Schedule of the Act lists all the Scheduled Banks in India.
Objectives of the Bank
The Reserve Bank of India Act, 1934 sets out the objectives of the Reserve Bank –
“[i] to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; [ii] to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”
To simplify, it can be stated that the objectives of the Reserve Bank are –
a. To oversee the issue and flow of currency in the country.
b. To maintain monetary stability in the country.
c. To direct the use of currency and credit system to the advantage of the country.
d. To regularize the monetary policy framework to meet with modern challenges.
e. To navigate through complex economic conditions.
f. To accommodate the objective of growth with price stability.
Apart from these, the RBI is also responsible for monitoring and supervising the financial institutions of the country like the commercial banks or the Non-Banking Financial Companies (NBFCs).
Organizational Structure of the Bank
The organizational structure of the Central Bank of India, the Reserve Bank, is as follows:
The main managing authority of the bank is the Central Board of Directors, which consists of the following 21members–
1. The Governor
2. Four Deputy Governors
3. Fourteen Directors
4. Two Government Officials
Among these, the Governor and the Deputy Governors are appointed by the Central Government for a maximum period of five years, and the fourteen Directors, four of which are nominated from each of the four Local Boards, in accordance with the RBI Act, for a period of maximum four years, but can be re-elected. The Deputy Governors are responsible for specific operations of the bank. The RBI also consists of Local Boards responsible for region specific control and monitoring. These are divided into four parts – Northern, Southern, Eastern and Western with headquarters in New Delhi, Chennai, Kolkata and Mumbai respectively. These Local Boards consists of five members with a Chairman.
Apart from these, the bank has the following operating staff –
- Executive Governors
- Principal Chief General Managers
- Chief General Managers
- General Managers
- Deputy General Managers
- Assistant General Managers
- Assistant Managers
- Support Staff
The current governor of the Reserve Bank of India is Shri Shaktikanta Das.
Frequently Asked Questions
When and why was the Central Bank of India, the Reserve Bank established?
The Reserve Bank of India was established in 1934 by the Reserve Bank of India Act, 1934 on recommendation of the Hilton Young Commission.
What are the main Functions and Objectives of the Reserve Bank?
Its main functions are – to control the issue and flow of the Indian Currency; to regulate and monitor the financial institutions like Banks or NBFCs; to formulate the Monetary Policy of the country; and to act as the Banker for the Central and State Governments.
Who heads the Reserve Bank and what is its Organisational Structure?
The Reserve Bank is headed by the Governor who is part of the Central Board of Directors consisting of 21 members along with other operating staff of the bank.
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje
RBI, About Us – Preamble, https://www.rbi.org.in/Scripts/AboutusDisplay.aspx#EP1 (last visited Jan. 15, 2020, 7:16 PM (IST)).
RBI, Chronology of Events, https://www.rbi.org.in/Scripts/chronology.aspx (last visited Jan. 15, 2020, 9:56 PM (IST)).
Reserve Bank of India, Objectives,https://www.toppr.com/guides/general-awareness/banks/reserve-bank-of-india/ (last visited Jan. 16, 2020, 1:53 PM (IST)).
RBI, About Us – Organisation Structure, https://www.rbi.org.in/Scripts/AboutUsDisplay.aspx?pg=OrganisationStructure.htm (last visited Jan. 16, 2020, 3:45 PM (IST)).