The Reserve Bank of India (RBI) is India’s central bank and regulatory body and is responsible for the issue and supply of the Indian rupee and the regulation of the Indian banking system. It also manages the country’s main payment systems and works to promote its economic development. Bharatiya Reserve Bank Note Mudran is one of the specialised divisions of RBI through which it mints Indian bank notes and coins. RBI established the National Payments Corporation of India as one of its specialised division to regulate the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialised division for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.
Until the Monetary Policy Committee was established in 2016, it also had full control over monetary policy in the country. It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934. The original share capital was divided into shares of 100 each fully paid. Following India’s independence on 15 August 1947, the RBI was nationalised on 1 January 1949.
The overall direction of the RBI lies with the 21-member central board of directors, composed of: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors; and four directors who represent local boards for Mumbai, Kolkata, Chennai, and Delhi. Each of these local boards consists of five members who represent regional interests and the interests of co-operative and indigenous banks.
It is a member bank of the Asian Clearing Union. The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the name ‘Mint Street’.
On 12th November 2021, the Prime Minister of India, Narendra Modi, launched two new schemes which aim at expanding investments and ensuring more security for investors. The two new schemes include the RBI Retail Direct Scheme and the Reserve Bank Integrated Ombudsman Scheme. The RBI Retail Direct Scheme is targeted at retail investors to invest easily in government securities. According to RBI, the scheme will allow retail investors to open and maintain their government securities account free of cost. The RBI Integrated Ombudsman Scheme aims to further improve the grievance redress mechanism for resolving customer complaints against entities regulated by the central bank.
The headquarter of RBI is in Mumbai , India.
And, The present Governor of RBI is Shakti kanta Das.
The Reserve Bank of India was established following the Reserve Bank of India Act of 1934. Though privately owned initially, it was nationalised in 1949 and since then fully owned by the Ministry of Finance , Government of India (GoI).
In 1926, the Hilton Young Commission recommended the setting up of the Reserve Bank of India.
At the time of establishment, the authorized capital of the Reserve Bank of India was ₹5 crores. The government’s share in this was only ₹20-22 lakhs.
Structure of the RBI :-
The RBI was founded in 1935 to tackle the economic difficulties arising in British ruled India after the First World War. Since then it has undergone a lot of changes in its organizational structure. Currently, the RBI consists of a central board of directors that overlooks its functioning.
The board of directors is formed of 21 members:
- Governor – appointed by the Government for a 4 year term
- Deputy Governors – up to 4
- Executive Directors – nominated from various fields and regions and also 2 directors nominated by the Government from the Ministry of Finance.
Functions of the Reserve Bank :-
The functions of the Reserve Bank today can be categorised as follows:
Regulation and supervision of the banking and non-banking financial
institutions, including credit information companies
Regulation of money, forex and government securities markets as also
certain financial derivatives
Debt and cash management for Central and State Governments
Management of foreign exchange reserves
Foreign exchange management—current and capital account management
Banker to Government :-
The Reserve Bank of India accepts and makes payment on behalf of Central
Government. It carries out its exchange, remittance, management of public debt
and other banking function of the Central Government. The Central Government
entrusts its money, remittance, exchange and banking transactions in India with
the Reserve Bank of India. It deals in repo or reverse repo.
Right to Issue Bank note
The Reserve Bank of India has the sole right to issue bank notes in India. The
bank notes are legal tender guaranteed by the Central Government. The issue of
bank note is conducted by a separate department called issue department. The
Central Government on the recommendation of Central Board specifies
denomination of bank notes including discontinuance of bank notes. The CentralGovernment approves design, form and material of Bank notes on consideration
of recommendations of the Central Board.
Formulates Banking policy :-
The Reserve is empowered to formulate banking policy in the interest of the
public or depositors banking policy in rela tion to advances and provide direction
on the purpose of the advances, margins to be maintained in a secured advances,
the maximum amount of advance may be made, the rate of interest, terms and
conditions for advances or guarantees may be given.
Monetary Authority :-
Monetary policy refers to the use of instruments under the control of the
central bank to regulate the availability, cost and use of money and credit.
The goal: achieving specific economic objectives, such as low and stable
inflation and promoting growth.
Financial supervision :-
The primary objective of RBI is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions, and non-banking finance companies.
The board is constituted by co-opting four directors from the Central Board as members for a term of two years and is chaired by the governor. The deputy governors of the reserve bank are ex-officio members. One deputy governor, usually the deputy governor in charge of banking regulation and supervision, is nominated as the vice-chairman of the board. The board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes deputy governor as the chairman and two directors of the Central Board as members. The BFS oversees the functioning of the Department of Banking Supervision (DBS), the Department of Non-Banking Supervision (DNBS) and the Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.
Issue of currency :-
Other than the Government of India, the Reserve Bank of India is the sole body authorised to issue banknotes in India.
The bank also destroys banknotes when they are not fit for circulation. All the money issued by the central bank is its monetary liability, i.e., the central bank is obliged to back the currency with assets of equal value, to enhance public confidence in paper currency. The objectives are to issue banknotes and give the public adequate supply of the same, to maintain the currency and credit system of the country to utilise it in its best advantage, and to maintain the reserves.
The RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development because both objectives are diverse in themselves.
For the printing of notes, RBI uses four facilities:
- The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the Government of India, has printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
- The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has printing facilities in Mysore, Karnataka and Salboni, West Bengal.
For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin production.
Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI), the RBI works as an agent of GoI for the distribution and handling of coins. RBI also works to prevent counterfeiting of currency by regularly upgrading security features of currency.
The RBI is authorised to issue notes with face values of up to ₹10,000 and coins up to ₹1,000 rupees.
New ₹500 and ₹2,000 notes were been issued on 8 November 2016. The old series of ₹1,000 and ₹500 notes were banned in 8 November 2016, and are no longer in use.
Earlier ₹1,000 notes have been discarded by the RBI.
Reverse repo rate (RRR) :-
As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is the short term borrowing rate in which commercial bank Park their surplus in RBI The reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which is always risky.
Repo rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Currently, reverse repo rate is 3.35%.
Liquidity adjustment facility (LAF) :-
Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with the RBI on an overnight basis against the collateral of government securities.
RBI accepts applications for a minimum amount of ₹5 crore (US$660,000) and in multiples of ₹ 50 million thereafter.
Cash reserve ratio (CRR) :-
CRR refers to the ratio of bank’s cash reserve balances with RBI with reference to the bank’s net demand and time liabilities to ensure the liquidity and solvency of the scheduled banks. The share of net demand and time liabilities that banks must maintain as cash with the RBI. The RBI has set CRR at 3%. A 1% change in CRR affects the economy by 1,37,000 crore. An increase draw this amount from the economy, while a decrease injects this amount into the economy. So if a bank has ₹2 billion (US$27 million) of NDTL then it has to keep ₹80 million (US$1.1 million) in cash with RBI. RBI pays no interest on CRR.
Let’s assume the economy is showing inflationary trends and the RBI wants to control this situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to 20% then bank will be left only with ₹600 million (US$8.0 million) for operations. Now it will be very difficult for the bank to maintain profitability with such a small amount of capital. The bank will be left with no choice but to raise its interest rate which will make borrowing by its customers more costly. This will in turn reduce the overall demand and hence prices will eventually come down.
Bank rate :-
Bank rate is defined in Section 49 of the RBI Act of 1934 as the ‘standard rate at which RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase’. When banks want to borrow long term funds from the RBI, it is the interest rate which the RBI charges to them. It is currently set to 4.25. The bank rate is not used to control money supply, but penal rates continue to be linked to the bank rate. If a bank fails to meet SLR or CRR requirements then the RBI will impose a penalty of 300 basis points above bank rate.
Role of RBI :-
RBI has 7 primary functions. Each function has an objective of managing a particular part of the economy.
Developmental Role :-
Performs a wide range of promotional functions to support national objectives. This includes work like providing timely credit to the productive sectors of the economy, creating institutions to build financial infrastructure like UPI, NEFT, etc., expanding access to affordable financial services and working on financial inclusion of all classes of the society.