Commerce Project

Reserve Bank Of India and Its Functions

Ashly Joshika
 Reserve Bank Of India and its functions

Introduction:
The Reserve Bank of India, abbreviated as RBI, is India's central bank and
regulatory body responsible for regulation of the Indian banking system. It is
under the ownership of Ministry of Finance, Government of India. It is responsible
for the control, issue and maintaining supply of the Indian rupee. It also manages
the country's main payment systems and works to promote its economic
development. Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised
division of RBI through which it prints and mints Indian currency notes (INR) in
two of its currency printing presses located in Mysore (Karnataka; Southern
India) and Salboni (West Bengal; Eastern India).[6] The RBI, along with the Indian
Banks' Association, established the National Payments Corporation of India to
promote and regulate the payment and settlement systems in India. Deposit
Insurance and Credit Guarantee Corporation was established by RBI as one of
its specialized 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,[7] it also had full
control over monetary policy in the country.[8] It commenced its operations on 1
April 1935 in accordance with the Reserve Bank of India Act, 1934.[9] The original
share capital was divided into shares of 100 each fully paid.[10] The RBI
was nationalised on 1 January 1949, almost a year and a half after India's
independence.[11]

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'.
[12]
History of RBI:
The origins of the Reserve Bank of India can be traced to 1926 when the
Royal Commission on Indian Currency and Finance – also known as the
Hilton-Young Commission – recommended the creation of a central bank for
India to separate the control of currency and credit from the Government and
to augment banking facilities throughout the country. The Reserve Bank
of India Act of 1934 established the Reserve Bank and set in motion a series
of actions culminating in the start of operations in 1935. Since then, the
Reserve Bank’s role and functions have undergone numerous changes, as
the nature of the Indian economy and financial sector changed.

There were several causes for the creation of a central bank. Though the
rupee was the common currency, there were several species of rupee coins
of different values in circulation. The authorities, however, endeavored to
evolve a standard coin. For many years, the Sicca of Murshidabad was, in
theory, the standard coin, and the rates of exchange of the various rupees in
terms of the Sicca rupee varied, the discount being called the batta.

The Government received enquiries from the Collectors as to the batta they
should charge on the different species they received from zamindars and
farmers. The proposed bank was to fix the value, in Sicca rupees, of the bills
it had to issue in return for the money received from the Collectors, on the
basis of the same batta. Thus, the bank was expected to assist in stabilizing
inland exchange and in enforcing the Sicca coin as the standard coin of the
Provinces.
Origin of RBI:
Origin Timeline

1926: The Royal Commission on Indian Currency and Finance

recommended the creation of a central bank for India.

1927: A bill to give effect to the above recommendation was introduced in the
Legislative Assembly. But it was later withdrawn due to lack of agreement
among various sections of people.

1933: The White Paper on Indian Constitutional Reforms recommended the

creation of a Reserve Bank. A fresh bill was introduced in the Legislative
Assembly.

1934: The Bill was passed and received the Governor General’s assent

1935: The Reserve Bank commenced operations as India’s central bank on

April 1 as a private shareholders’ bank with a paid up capital of rupees
five crores (rupees fifty million).

1942: The Reserve Bank ceased to be the currency issuing authority of

Burma (now Myanmar).
1947: The Reserve Bank stopped acting as banker to the Government of
Burma.

1948: The Reserve Bank stopped rendering central banking services to

Pakistan.

1949: The Government of India nationalized the Reserve Bank under the
Reserve Bank (Transfer of Public Ownership) Act, 1948.

Structure of RBI:
The central board of directors is the main committee of the central bank.
The Government of India appoints the directors for a four-year term. The
board consists of a governor, and not more than four deputy governors;
four directors to represent the regional boards;[44] two – usually
the Economic Affairs Secretary and the Financial Services Secretary – from
the Ministry of Finance and ten other directors from various fields. The
Reserve Bank – under Raghuram Rajan's governorship – wanted to create
a post of a chief operating officer (COO), in the rank of deputy governor
and wanted to re-allocate work between the five of them (four deputy
governor and COO).[45][46]

Two of the four deputy governors are traditionally from RBI ranks and are
selected from the bank's executive directors. One is nominated from among
the chairpersons of public sector banks and the other is an economist.
An Indian Administrative Service officer can also be appointed as deputy
governor of RBI and later as the governor of RBI as with the case of Y.
Venugopal Reddy and Duvvuri Subbarao. Other persons forming part of
the central board of directors of the RBI are Revathi Iyer, Sachin
Chaturvedi, Satish Kashinath Marathe, Swaminathan Gurumurthy, Anand
Gopal Mahindra, Venu Srinivasan, Pankaj Ramanbhai Patel, Ravindra H.
Dholakia, Ajay Seth, and Vivek Joshi.

Executive Directors (ED) consist of M. Rajeshwar Rao, Lily Vadera, Rabi N.

Mishra, Smt. Nanda S. Dave, Anil K. Sharma, S. C. Murmu, T. Rabi
Sankar, Janak Raj, P Vijayakumar, Indrani Banerjee, O.P. Mall and Sudha
Balakrishnan (Chief Financial Officer).[47]

Sudha Balakrishnan, a former vice-president at National Securities

Depository Limited, assumed charge as the first chief financial officer
(CFO) of the Reserve Bank on 15 May 2018; she was given the rank of an
executive director.[48]

The bank's current governor is Shaktikanta Das.[2] There are currently four
deputy governors Swaminathan J, M. Rajeshwar Rao,[49] Michael Patra[50][51]
[52]
and T. Rabi Shankar.[53]

Functions of RBI:
The central bank of any country executes many functions such as
overseeing monetary policy, issuing currency, managing foreign exchange,
working as a bank for government and as a banker of scheduled
commercial banks. It also works for overall economic growth of the country.
The preamble of the Reserve Bank of India describes its main functions as:

Financial supervision[edit]
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.

Regulator and supervisor of the financial system[edit]

The institution is also the regulator and supervisor of the financial system
and prescribes broad parameters of banking operations within which the
country's banking and financial system functions. Its objectives are to
maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India
(RBI) for effective addressing of complaints by bank customers. The RBI
controls the monetary supply, monitors economic indicators like the gross
domestic product and has to decide the design of the rupee banknotes as
well as coins.[64]

Regulator and supervisor of the payment and settlement systems[edit]

Payment and settlement systems play an important role in improving
overall economic efficiency. The Payment and Settlement Systems Act of
2007 (PSS Act)[65] gives the Reserve Bank oversight authority, including
regulation and supervision, for the payment and settlement systems in the
country. In this role, the RBI focuses on the development and functioning of
safe, secure and efficient payment and settlement mechanisms. Two
payment systems National Electronic Fund Transfer (NEFT) and Real-Time
Gross Settlement (RTGS) allow individuals, companies and firms to
transfer funds from one bank to another. These facilities can only be used
for transferring money within the country.

From 16 December 2019, one can transfer money online using the National
Electronic Funds Transfer (NEFT) route 24x7, i.e., any time of the day and
any day of the week. The Reserve Bank of India stated earlier in December
2019 that bank customers will be able to transfer funds through NEFT
around the clock on all days including weekends and holidays from 16
December.[66] In RTGS, transactions are processed continuously 24x7.[67]
Banker and debt manager to government[edit]
Just as individuals need a bank to carry out their financial transactions
effectively and efficiently, governments also need a bank to carry out their
financial transactions. The RBI serves this purpose for the Government of
India (GoI). As a banker to the Government of India, the RBI maintains its
accounts, receive payments into and make payments out of these
accounts. The RBI also helps the GoI to raise money from the public via
issuing bonds and government-approved securities. In Sep 2019, a
decision at RBI directors meet was taken to change the RBI financial
accounting year to March–April to align itself with the central government
calendar instead of the current June–July year.[68]

RBI issue taxable bonds for investments. From 1 July 2020, RBI is offering
Floating Rate Savings Bonds, 2020 (Taxable) – FRSB 2020 (T). The
interest on the bonds is payable semi-annually on 1 Jan and 1 July every
year. The coupon on 1 January 2021 shall be paid at 7.15%. The Interest
rate for next half-year will be reset every six months, the first reset being on
1 January 2021. There is no option to pay interest on cumulative basis.[69]

Managing foreign exchange[edit]

The central bank manages to reach different goals of the Foreign
Exchange Management Act, 1999. Their objective is to facilitate external
trade and payment and promote orderly development and maintenance of
foreign exchange market in India.

With the increasing integration of the Indian economy with the global
economy arising from greater trade and capital flows, the foreign exchange
market has evolved as a key segment of the Indian financial market and
the RBI has an important role to play in regulating and managing this
segment. The RBI manages forex and gold reserves of the nation.

On a given day, the foreign exchange rate reflects the demand for and
supply of foreign exchange arising from trade and capital transactions. The
RBI's Financial Markets Department (FMD) participates in the foreign
exchange market by undertaking sales/purchases of foreign currency to
ease volatility in periods of excess demand for/supply of foreign currency.

Issue of currency[edit]
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:[70]

 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.[70]

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 issued on 8 November 2016. The old
series of ₹1,000 and ₹500 notes were banned on 8 November 2016, and
are no longer in use.

Earlier ₹1,000 notes have been discarded by the RBI.

Bankers' bank
Nagpur branch holds most of India's gold deposits.[71][72][73][74]
Reserve Bank of India also works as a central bank where commercial
banks are account holders and can deposit money. RBI maintains banking
accounts of all scheduled banks.[75] Commercial banks create credit. It is
the duty of the RBI to control the credit through the CRR, repo rate, and
open market operations. As the bankers' bank, the RBI facilitates the
clearing of cheques between the commercial banks and helps the inter-
bank transfer of funds. It can grant financial accommodation to schedule
banks. It acts as the lender of the last resort by providing emergency
advances to the banks.

Regulator of the Banking System[edit]

RBI has the responsibility of regulating the nation's financial system. As a
regulator and supervisor of the Indian banking system it ensures financial
stability & public confidence in the banking system. RBI uses methods like
On-site inspections, off-site surveillance, scrutiny & periodic meetings to
supervise new bank licences, setting capital requirements and regulating
interest rates in specific areas. RBI is currently focused on implementing
norms.

Detection of fake currency[edit]

Main article: Fake Indian currency note
To curb the counterfeit money problem in India, RBI has launched a
website to raise awareness among masses about fake banknotes in the
market. www.paisaboltahai.rbi.org.in provides information about identifying
fake currency.[76]

On 22 January 2014; RBI gave a press release stating that after 31 March
2014, it will completely withdraw from circulation of all banknotes issued
prior to 2005. From 1 April 2014, the public will be required to approach
banks for exchanging these notes. Banks will provide exchange facility for
these notes until further communication. The reserve bank has also
clarified that the notes issued before 2005 will continue to be legal tender.
This would mean that banks are required to exchange the notes for their
customers as well as for non-customers. After 1 July 2014, to exchange
more than 15 pieces of '500 and '1000 notes, non-customers must furnish
proof of identity and residence as well as show aadhar to the bank branch
in order to exchange the notes.

This move from the reserve bank is expected to unearth black money held
in cash. As the new currency notes have added increased security
features, they would help in curbing the menace of fake currency.[77]

Developmental role[edit]
The central bank has to perform a wide range of promotional functions to
support national objectives and industries.[21] The RBI faces a lot of inter-
sectoral and local inflation-related problems. Some of these problems are
results of the dominant part of the public sector.[78]

Key tools in this effort include Priority Sector Lending such as agriculture,
micro and small enterprises (MSE), housing and education. RBI work
towards strengthening and supporting small local banks and encourage
banks to open branches in rural areas to include large section of society in
banking net.

Banker to the Government[edit]

The RBI is also a banker to the government and performs merchant
banking function for the central and the state governments. It also acts as
their banker. The National Housing Bank (NHB) was established in 1988 to
promote private real estate acquisition.[79] The institution maintains banking
accounts of all scheduled banks, too. RBI on 7 August 2012 said that
Indian banking system is resilient enough to face the stress caused by the
drought-like situation because of poor monsoon this year.[80]

Custodian to foreign exchange[edit]

The Reserve Bank has custody of the country's reserves of international
currency, and this enables the Reserve Bank to deal with crisis connected
with adverse balance of payments position.

CSD for G-Sec (Government Securities)[edit]

Public Debt Office (PDO) acts as CSD (Central Securities Depository) for
G-Sec.

MIFOR (Mumbai Interbank Forward Offer Rate)[edit]

With LIBOR cessation in 2021, RBI is set to replace MIFOR with a new
benchmark. MIFOR has LIBOR as one of the components and used in
interest rate swap (IRS) markets.

Quantitative tools of RBI:

The quantitative instruments are also known as general tools used by the
RBI (Reserve Bank of India). As the name suggests, these instruments are
related to the quantity and volume of the money. These instruments are
designed to control the total volume/money of the bank credit in the
economy. These instruments are indirect in their nature and are used to
influence the quantity of credit in the economy.

Bank Rate Policy

The bank rate is the minimum rate at which the central bank lends money
and rediscounts first-class bills of exchange and securities held by
commercial banks. When RBI gets a hint that inflation is rising, it increases
the bank interest rates so that commercial banks borrow less money and
the inflation stays under control.
Commercial banks also increase their lending rate to the public and
business enterprises so that people borrow less money, which will
eventually help to control inflation.
On the other hand, when RBI reduces bank rates, that means borrowing
from commercial banks will become cheaper and easier. This allows
commercial banks to lend money to borrowers at a lower

lending rate
, which will further encourage borrowers and businessmen.

Legal Reserve Ratios

Commercial banks have to keep a certain amount of reserve assets in the

form of reserve cash. Some portion of these cash reserves is their total
assets in the form of cash.

To maintain liquidity and to control credit in the economy, the RBI also
keeps a certain amount of cash reserves. These reserve ratios are known
as SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio).
CRR refers to a certain percentage of a commercial bank's net demand
and time liability that commercial banks have to maintain with the RBI at all
times. In India, the CRR remains between 3-15 per cent by the law.
SLR refers to a certain percentage of reserves to be maintained in the form
of gold and foreign securities. In India, SLR remains 25-40% by the law.
Any changes in SLR and CRR bring out a change in the position of
commercial banks.

Open Market Operations (OMO)

The sale and purchase of security in the long run/short run by the RBI in
the money market is known as open market operations. This is a popular
instrument of the RBI's monetary policy.

To influence the term and structure of the interest rate and to stabilize the
market for government securities, etc., the RBI uses OMO, and this
operation is also used to wipe out the shortage of money in the money
market.

If RBI sells securities in the money market, private and commercial banks
and even individuals buy it. This leads to a reduction in the existing money
supply as money gets transferred from commercial banks to the RBI. On
the other hand, when RBI buys securities from commercial banks, the
commercial banks that sell receive the amount they had invested in RBI
before.

There are certain factors that affect OMO, which include an

underdeveloped securities market, excess reserves with the commercial
banks, indebtedness of the commercial banks, etc.

Repo Rate

A Repo rate is a rate at which commercial banks borrow money by selling

their securities to the RBI to maintain liquidity. Commercial banks sell their
securities in case of a shortage of funds or due to some statutory
measures. It is one of the main instruments of the RBI to keep inflation
under control.

Reverse Repo Rate

Sometimes, the RBI borrows money from commercial banks when there is
excess liquidity in the market. In that case, commercial banks get benefits
by receiving the interest on their holdings with the RBI.

At times of higher inflation in the country, the RBI increases the reverse
repo rate, which encourages banks to park more funds with the RBI, which
will help it earn higher returns on excess funds.

Qualitative tools of RBI:

Qualitative instruments are also known as selective instruments of the
RBI's monetary policy. These instruments are used for discriminating
between various uses of credit; for example, they can be used for favouring
export over import or essential over non-essential credit supply. This
method has an influence on both borrowers and lenders.

Following are some selective tools of credit control used by the RBI:

Rationing of Credit
RBI fixes a credit amount to be granted to commercial banks. Credit is
given by limiting the amount available for each commercial bank. For
certain purposes, the upper credit limit can be fixed, and banks have to
stick to that limit. This helps in lowering the bank's credit exposure to
unwanted sectors. This instrument also controls the bill rediscounting.

Regulation of Consumer Credit

In this instrument, consumers' credit supply is regulated through the

instalment of sale and hire purchase of consumer goods. Here, features
like instalment amount, down payment, loan duration, etc., are all fixed in
advance, which helps to check the credit and inflation in the country.

Change in Marginal Requirement

Margin is referred to a certain proportion of the loan amount that is not

offered or financed by the bank. A change in margin can lead to a change
in the loan size. This instrument is used to encourage the credit supply for
the necessary sectors and avoid it for unnecessary sectors. That can be
done by increasing the marginal of unnecessary sectors and reducing the
marginal of other needy sectors.

Suppose RBI feels that more credit supply should be allotted to the
agricultural sector, then RBI will reduce the margin, and even 80-90% of
the loan can be allotted.

Moral Suasion

Moral suasion refers to the suggestions to commercial banks from the RBI
that help in restraining credits in the inflationary period. RBI implies
pressure on the Indian banking system without taking any strict action for
compliance with rules.

Through monetary policy, commercial banks get informed of the

expectations of RBI. The RBI can issue directives, guidelines, and
suggestions for commercial banks regarding reducing credit supply for
speculative purposes under moral suasion.

Final Thoughts
Monetary policy's quantitative and qualitative methods aim to accelerate
growth and stability by controlling the credit supply in the economy. Both
the quantitative and qualitative instruments have their own merits and
demerits, but both of the instruments are important for economic stability
and price stability in the economy. Both these methods are effective and
efficient in controlling inflation and deflation due to the movement of the
money supply in the economy.

Over the decades, it has been proven that the credit supply in the economy
can be controlled better with the coordination of both the general
(Quantitative) and selective (Qualitative) methods rather than implementing
them individually in the economy.

Subsidaries of RBI:
subsidiary company is an organization that is owned or controlled by any
other company. Following are the Fully Owned subsidiaries of RBI:

Deposit Insurance and Credit Guarantee Corporation of India (DICGC)

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

Reserve Bank Information Technology Private Limited (ReBIT)

Indian Financial Technology and Allied Services (IFTAS)

1. Deposit Insurance and Credit Guarantee Corporation of India (DICGC)

Establishment: 15th July 1978.

Headquarters: Mumbai

DICGC was formed by merging Deposit Insurance Corporation (DIC) and

Credit Guarantee Corporation of India Ltd. (CGCI)

The functions of the DICGC are governed by the provisions of the DICGC
Act 1961 framed by the Reserve Bank of India.DICGC was established for
providing insurance of deposits and guaranteeing credit facilities.

2. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

Establishment: 3rd February 1995

Headquarters: Bengaluru

The company manages 2 Presses:

Mysore in Karnataka

Salboni in West Bengal.

Apart from this, RBI has two more printing presses both owned by the
Government of India: Nasik (Maharashtra) and Dewas (Madhya Pradesh)

Coins are minted in four mints owned by the Government of India. The mints
are located in Mumbai, Hyderabad, Calcutta and NOIDA.

3. Reserve Bank Information Technology Private Limited (ReBIT)

Established: 2016

ReBIT delivers and manages IT projects of RBI.

4. Indian Financial Technology and Allied Services (IFTAS)

It is a wholly-owned subsidiary of the Reserve Bank of India.

The IFTAS has taken over the Indian Financial Network (INFINITE),
Structured Financial Messaging System (SFMS) and the Indian Banking
Community Cloud (IBCC) from the IDRBT (from April 01, 2016).

Conclusion:
The Reserve Bank of India (RBI) is India’s central bank, with the primary
responsibility of managing and governing the country’s financial system.
The Reserve Bank of India Act, 1934, established it as a legislative body in
1935. The Indian rupee’s issue and supply are regulated by the central
bank. It also manages the funds of the federal government. The central
bank oversees the banking sector and acts as a bankers’ bank. It also
contributes significantly to India’s development by assisting the government
with development projects and policies.