Establishment

• The Reserve Bank of India was established on April 1,

1935 in accordance with the provisions of the Reserve
Bank of India Act, 1934.
• The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to
Mumbai in 1937. The Central Office is where the
Governor sits and where policies are formulated.
• Though originally privately owned, since nationalisation
in 1949, the Reserve Bank is fully owned by the
Government of India.
 Preamble

• The Preamble of the Reserve Bank of India describes the basic

functions of the Reserve Bank as:

"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."
 Functions
• Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability while keeping in mind the
objective of growth.
• Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which
the country's banking and financial system functions.
Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to
the public.
• Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market
in India.
• Issuer of currency:
Issues and exchanges or destroys currency and coins not fit
for circulation.
Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.
• Developmental role
Performs a wide range of promotional functions to support
national objectives.

Related Functions
• Banker to the Government: performs merchant banking
function for the central and the state governments; also acts as
their banker.
• Banker to banks: maintains banking accounts of all
scheduled banks.
 Functions

• The Reserve Bank of India (RBI) is vested with the responsibility

of conducting monetary policy. This responsibility is explicitly
mandated under the Reserve Bank of India Act, 1934.
• Monetary policy refers to the policy of the central bank with
regard to the use of monetary instruments under its control to
achieve the goals specified in the Act.
 The goal(s) of monetary policy
• The primary objective of monetary policy is to maintain price
stability while keeping in mind the objective of growth. Price
stability is a necessary precondition to sustainable growth.

• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was
amended to provide a statutory basis for the implementation of
the flexible inflation targeting framework.

• The amended RBI Act also provides for the inflation target to be
set by the Government of India, in consultation with the Reserve
Bank, once in every five years. Accordingly, the Central
Government has notified in the Official Gazette 4 per cent
Consumer Price Index (CPI) inflation as the target for the period
from August 5, 2016 to March 31, 2021 with the upper tolerance
limit of 6 per cent and the lower tolerance limit of 2 per cent.
• The Central Government notified the following as factors that
constitute failure to achieve the inflation target:
(a) the average inflation is more than the upper tolerance level of
the inflation target for any three consecutive quarters; or
(b) the average inflation is less than the lower tolerance level for
any three consecutive quarters.

• Prior to the amendment in the RBI Act in May 2016, the flexible
inflation targeting framework was governed by an Agreement on
Monetary Policy Framework between the Government and the
Reserve Bank of India of February 20, 2015.
 Instruments of Monetary Policy
• Repo Rate: The (fixed) interest rate at which the Reserve Bank
provides overnight liquidity to banks against the collateral of
government and other approved securities under the liquidity
adjustment facility (LAF).

• Reverse Repo Rate: The (fixed) interest rate at which the Reserve
Bank absorbs liquidity, on an overnight basis, from banks against
the collateral of eligible government securities under the LAF.

• Liquidity Adjustment Facility (LAF): The LAF consists of

overnight as well as term repo auctions. Progressively, the Reserve
Bank has increased the proportion of liquidity injected under fine-
tuning variable rate repo auctions of range of tenors. The aim of
term repo is to help develop the inter-bank term money market,
which in turn can set market based benchmarks for pricing of
loans and deposits, and hence improve transmission of monetary
policy. The Reserve Bank also conducts variable interest rate
reverse repo auctions, as necessitated under the market conditions.
• Marginal Standing Facility (MSF): A facility under
which scheduled commercial banks can borrow additional
amount of overnight money from the Reserve Bank by
dipping into their Statutory Liquidity Ratio (SLR)
portfolio up to a limit at a penal rate of interest. This
provides a safety valve against unanticipated liquidity
shocks to the banking system.

• Bank Rate: It is the rate at which the Reserve Bank is

ready to buy or rediscount bills of exchange or other
commercial papers. The Bank Rate is published under
Section 49 of the Reserve Bank of India Act, 1934. This
rate has been aligned to the MSF rate and, therefore,
changes automatically as and when the MSF rate changes
alongside policy repo rate changes.
• Cash Reserve Ratio (CRR): The average daily balance that a
bank is required to maintain with the Reserve Bank as a share of
such per cent of its Net demand and time liabilities (NDTL) that
the Reserve Bank may notify from time to time in the Gazette of
India.
• Statutory Liquidity Ratio (SLR): The share of NDTL that a
bank is required to maintain in safe and liquid assets, such as,
unencumbered government securities, cash and gold. Changes in
SLR often influence the availability of resources in the banking
system for lending to the private sector.
• Open Market Operations (OMOs): These include both,
outright purchase and sale of government securities, for injection
and absorption of durable liquidity, respectively.
• Market Stabilisation Scheme (MSS): This instrument for
monetary management was introduced in 2004. Surplus liquidity
of a more enduring nature arising from large capital inflows is
absorbed through sale of short-dated government securities and
treasury bills. The cash so mobilised is held in a separate
government account with the Reserve Bank.
 ISSUER OF CURRENCY
• The Reserve Bank is the nation's sole note issuing authority.
Along with the Government of India, we are responsible for the
design, production and overall management of the nation's
currency, with the goal of ensuring an adequate supply of clean
and genuine notes.
• The Government of India is the issuing authority of coins and
supplies coins to the Reserve Bank on demand. The Reserve
Bank puts the coins into circulation on behalf of the Central
Government.
• In consultation with the Government of India, we work towards
maintaining confidence in the currency by constantly
endeavouring to enhance integrity of banknotes through new
design and security features.
 ISSUER OF CURRENCY

• The Department of Currency Management at Central Office,

Mumbai, in cooperation with the Issue Departments of the
Reserve Bank’s Regional Offices across India oversees
currency management.
• The function includes supplying and distributing adequate
quantity of currency throughout the country and ensuring the
quality of banknotes in circulation by continuous supply of
clean notes and timely withdrawal of soiled notes.
• This is achieved through a wide network of more than 4000
currency chests of commercial banks. Currency chests are
extended arms of the Reserve Bank Issue Departments and are
responsible for meeting the currency requirements of their
respective regions.
 ISSUER OF CURRENCY
• Four printing presses print and supply banknotes. These are at
Dewas in Madhya Pradesh Nasik in Maharashtra
Mysore in Karnataka Salboni in West Bengal.

• The presses in Madhya Pradesh and Maharashtra are owned by the

Security Printing and Minting Corporation of India
(SPMCIL), a wholly owned company of the Government of
India.

• The presses in Karnataka and West Bengal are owned by the

Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL), a wholly owned subsidiary of the Reserve Bank.

• Coins are minted by the Government of India. The Reserve Bank

is the agent of the Government for distribution, issue and handling
of coins. Four mints are in operation:
Mumbai in Maharashtra Noida in Uttar Pradesh,
Kolkata Hyderabad.
 FINANCIAL INCLUSION AND DEVELOPMENT

• This role encapsulates the essence of renewed national focus on

Financial Inclusion, promoting financial education and literacy
and making credit available to productive sectors of the
economy including the rural and MSME sector.
• Credit flow to priority sectors: Macro policy formulation to
strengthen credit flow to the priority sectors. Ensuring priority
sector lending becomes a tool for banks for capturing untapped
business opportunities among the financially excluded sections
of society.
• Financial inclusion and financial literacy: Help expand
Prime Minister’s Jan Dhan Yojana (PMJDY) to become a
sustainable and scalable financial inclusion initiative.
• Credit flow to MSME: Stepping up credit flow to micro,
small and medium enterprises (MSME) sector, rehabilitation of
sick units through timely credit support.
• Institutions: Strengthening institutional arrangements, such as,
State Level Bankers Committees (SLBCs), Lead bank scheme,
etc., to facilitate achievement of above objectives.
 BANKER AND DEBT MANAGER TO GOVERNMENT

• Managing the government's banking transactions is a key

RBI role. Like individuals, businesses and banks,
governments need a banker to carry out their financial
transactions in an efficient and effective manner, including
the raising of resources from the public.
• As a banker to the Government, the Reserve Bank receives
and pays money on behalf of the various Government
departments.
• The Reserve Bank also undertakes to float loans and manage
them on behalf of the Governments. It provides Ways and
Means Advances – a short-term interest bearing advance – to
the Governments, to meet temporary mismatches in their
receipts and payments.
• Besides, like a portfolio manager, it also arranges for investments of surplus
cash balances of the Governments. The Reserve Bank acts as adviser to
Government, whenever called upon to do so, on monetary and banking
related matters. The Central Government and State Governments may make
rules for the receipt, custody and disbursement of money from the
consolidated fund, contingency fund, and public account. These rules are
legally binding on the Reserve Bank as accounts for these funds are with the
Reserve Bank .

• The banking functions for the governments are carried out by the Public
Accounts Departments at the offices/branches of the Reserve Bank. As it
has offices and sub-offices in 29 locations, the Reserve Bank appoints other
banks to act as its agents for undertaking the banking business on behalf of
the governments.

• The Reserve Bank pays agency bank charges to the banks for undertaking
the government business on its behalf. As of now, management of public
debt, including floatation of new loans, is done by the Internal Debt
Management Department at the Central Office and Public Debt Office at
offices/branches of the Reserve Bank. Final compilation of Government
accounts, of the Centre and the States, is done at Nagpur office of the
Reserve Bank which has a Central Accounts Section.
 Banker to the Central Government
• Under the administrative arrangements, the Central Government
is required to maintain a minimum cash balance with the
Reserve Bank. Currently, this amount is Rs.10 crore on a daily
basis and Rs.100 crore on Fridays, as also at the annual account
closing day of the Centre and the Reserve Bank (end of March
and June).
• Under a scheme introduced in 1976, every ministry and
department of the Central Government has been allotted a
specific public sector bank for handling its transactions. Hence,
the Reserve Bank does not handle government’s day-to-day
transactions as before, except where it has been nominated as
banker to a particular ministry or department.
• As banker to the Government, the Reserve Bank works out the
overall funds position and sends daily advice showing the
balances in its books, Ways and Means Advances granted to the
government and investments made from the surplus fund. The
daily advices are followed up with monthly statements.
 Banker to State Governments

• All the State Governments are required to maintain a minimum

balance with the Reserve Bank, which varies from state to state
depending on the relative size of the state budget and economic
activity. To tide over temporary mismatches in the cash flow of
receipts and payments, the Reserve Bank provides Ways and
Means Advances/Overdraft to the State Governments.
• A State Government account can be in overdraft for a maximum
14 consecutive working days with a limit of 36 days in a
quarter. The rate of interest on such is linked to the Repo Rate.
• Surplus balances of State Governments are invested in
Government of India 14-day Intermediate Treasury Bills
automatically in accordance with the instructions.
 Management of Public Debt
• The Reserve Bank manages public debt on behalf of the
Central and the State Governments. It involves issue of new
rupee loans, payment of interest and repayment of these loans
and other operational matters such as debt certificates and their
registration.

• To formulate borrowing programme for the year, a number of

other factors are also taken into account, such as, the amount
of Central and State loans maturing during the year, the
estimated available resources, market appetite and the
absorptive capacity of the market.

• The Reserve Bank also acts a cash manager to the central and
the State governments. For cash management as also for
liquidity management purposes, flows or changes in the
Governments’ cash balances are monitored and projected
based on history and experience.
 BANKER TO BANKS

• Like individual consumers, businesses and organisation of all

kinds, banks need their own mechanism to transfer funds and
settle inter-bank transaction-such as borrowing from and
lending to other banks-and customer transactions. As the
banker to banks, the Reserve Bank fulfills this role.
• Banks are required to maintain a portion of their demand and
time liabilities as cash reserves with the Reserve Bank. For this
purpose, they need to maintain accounts with the Reserve
Bank.
• They also need to keep accounts with the Reserve Bank for
settling inter-bank obligations, such as, clearing transactions of
individual bank customers who have their accounts with
different banks or clearing money market transactions between
two banks, buying and selling securities and foreign currencies.
• In order to facilitate a smooth inter-bank transfer of funds, or to
make payments and to receive funds on their behalf, banks need
a common banker. By providing the facility of opening accounts
for banks, the Reserve Bank becomes this common banker,
known as ‘Banker to Banks’ function. The function is performed
through the Deposit Accounts Department (DAD) at the Reserve
Bank’s Regional offices. The Department of Government and
Bank Accounts oversees this function and formulates policy and
issues operational instructions to DAD.
 Reserve Bank as Banker to Banks
• The Reserve Bank continuously monitors operations of these
accounts to ensure that defaults do not take place. Among other
provisions, the Reserve Bank stipulates minimum balances to be
maintained by banks in these accounts. Since banks need to settle
transactions with each other occurring at various places in India,
they are allowed to open accounts with different regional offices
of the Reserve Bank.
• The Reserve Bank also facilitates remittance of funds from a
bank’s surplus account at one location to its deficit account at
another. Such transfers are electronically routed through a
computerised system called e-Kuber.
• In addition, the Reserve Bank has also introduced the
Centralised Funds Management System (CFMS) to
facilitate centralised funds enquiry and transfer of funds
across DADs. This helps banks in their fund
management as they can access information on their
balances maintained across different DADs from a
single location.
• Currently, 75 banks are using the system and all DADs
are connected to the system. As Banker to Banks, the
Reserve Bank provides short-term loans and advances
to select banks, when necessary, to facilitate lending to
specific sectors and for specific purposes. These loans
are provided against promissory notes and other
collateral given by the banks.
 Lender of Last Resort

• As a Banker to Banks, the Reserve Bank also acts as the

‘lender of the last resort’. It can come to the rescue of a
bank that is solvent but faces temporary liquidity
problems by supplying it with much needed liquidity
when no one else is willing to extend credit to that bank.
The Reserve Bank extends this facility to protect the
interest of the depositors of the bank and to prevent
possible failure of the bank, which in turn may also affect
other banks and institutions and can have an adverse
impact on financial stability and thus on the economy.
 FOREIGN EXCHANGE MANAGEMENT

• With the transition to a market-based system for determining

the external value of the Indian rupee the foreign exchange
market in India gained importance in the early reform period.
• Exchange control was introduced in India under the Defence
of India Rules on September 3, 1939 on a temporary basis. The
statutory power for exchange control was provided by the
Foreign Exchange Regulation Act (FERA) of 1947, which was
subsequently replaced by a more comprehensive Foreign
Exchange Regulation Act, 1973.
• Extensive relaxations in the rules governing foreign exchange
were initiated, prompted by the liberalisation measures
introduced since 1991 and the Act was amended as a new
Foreign Exchange Regulation (Amendment) Act 1993.
• Significant developments in the external sector, such as,
substantial increase in foreign exchange reserves, growth in
foreign trade, rationalisation of tariffs, current account
convertibility, liberalisation of Indian investments abroad,
increased access to external commercial borrowings by Indian
corporates and participation of foreign institutional investors in
Indian stock market, resulted in a changed environment.
Keeping in view the changed environment, the Foreign
Exchange Management Act (FEMA) was enacted in 1999 to
replace FERA. FEMA became effective from June 1, 2000.
• Liberalised Approach
• Foreign Investment
• Foreign investment comes into India in various forms. Following the
reforms path, the Reserve Bank has liberalised the provisions relating to
such investments. The Reserve Bank has permitted foreign investment in
almost all sectors, with a few exceptions. In many sectors, no prior
approval from the Government or the Reserve Bank is required for non-
residents investing in India. Foreign institutional investors are allowed to
invest in all equity securities traded in the primary and secondary markets.
Foreign institutional investors have also been permitted to invest in
Government of India treasury bills and dated securities, corporate debt
instruments and mutual funds. The NRIs have the flexibility of investing
under the options of repatriation and non-repatriation.
• Similarly, Indian entities can also make investment in an overseas joint
venture or in a wholly-owned subsidiary abroad upto a certain limit.
 Currency Futures

• Exchange-traded currency futures are permitted in India. Such

trading facilities are currently being offered by the National
Stock Exchange, the Bombay Stock Exchange and the MCX-
Stock Exchange. As the product is exchange traded, the
conduct of currency futures trading facility is being regulated
jointly by the Reserve Bank and the Securities and Exchange
Board of India.
 Exchange Rate Policy
• India’s exchange rate policy has evolved in tandem with the domestic as well as
international developments. The period after independence was marked by a fixed
exchange rate regime, which was in line with the Bretton Woods system prevalent
then. The Indian Rupee was pegged to the Pound Sterling on account of historic links
with Britain. After the breakdown of Bretton Woods System in the early seventies,
most of the countries moved towards a system of flexible/managed exchange rates.
With the decline in the share of Britain in India’s trade, increased diversification of
India’s international transactions together with the weaknesses of pegging to a single
currency, the Indian Rupee was de-linked from the Pound Sterling in September
1975.
• The exchange rate subsequently came to be determined with reference to the daily
exchange rate movements of an undisclosed basket of currencies of India’s major
trading partners. As the basket-linked management of the exchange rate of the Rupee
did not capture the market dynamics and the developments in the exchange rates of
competing countries fully, the Rupee’s external value was allowed to be determined
by market forces in a phased manner following the balance of payment difficulties in
the nineties.
• A significant two-step downward adjustment in the exchange rate of the
Rupee was made in 1991. In March 1992, Liberalised Exchange Rate
Management System (LERMS) involving the dual exchange rate was
instituted. A unified single market-determined exchange rate system based
on the demand for and supply of foreign exchange replaced the LERMS
effective March 1, 1993.
• The Reserve Bank’s exchange rate policy focusses on ensuring orderly
conditions in the foreign exchange market. For the purpose, it closely
monitors the developments in the financial markets at home and abroad.
When necessary, it intervenes in the market by buying or selling foreign
currencies. The market operations are undertaken either directly or through
public sector banks.
• In addition to the traditional instruments like forward and swap contracts,
the Reserve Bank has facilitated increased availability of derivative
instruments in the foreign exchange market. It has allowed trading in
Rupee-foreign currency swaps, foreign currency-Rupee options, cross-
currency options, interest rate swaps and currency swaps, forward rate
agreements and currency futures.
 Foreign Exchange Reserves Management
• The Reserve Bank of India, is the custodian of the country’s foreign exchange reserves
and is vested with the responsibility of managing their investment. The legal provisions
governing management of foreign exchange reserves are laid down in the Reserve Bank
of India Act, 1934.
• The Reserve Bank’s reserves management function has in recent years grown both in
terms of importance and sophistication for two main reasons.
First, the share of foreign currency
assets in the balance sheet of the Reserve Bank has substantially increased.
Second, with the increased volatility in
exchange and interest rates in the global market, the task of preserving the value of
reserves and obtaining a reasonable return on them has become challenging.
• The basic parameters of the Reserve Bank’s policies for foreign exchange reserves
management are safety, liquidity and returns.
• While safety and liquidity continue to be the twin-pillars of reserves management, return
optimisation has become an embedded strategy within this framework. The Reserve
Bank has framed policy guidelines stipulating stringent eligibility criteria for issuers,
counterparties, and investments to be made with them to enhance the safety and liquidity
of reserves. The Reserve Bank, in consultation with the Government, continuously
reviews the reserves management strategies.
 PAYMENT AND SETTLEMENT SYSTEMS

• Payment and settlement systems play an important role in improving overall

economic efficiency. They consist of all the diverse arrangements that we use to
systematically transfer money-currency, paper instruments such as cheques, and
various electronic channels.

• Electronic Payments
• The initiatives taken by the Reserve Bank in the mid-eighties and early-nineties
focused on technology-based solutions for the improvement of the payment and
settlement system infrastructure, coupled with the introduction of new payment
products by taking advantage of the technological advancements in banks. The
continued increase in the volume of cheques added pressure on the existing set-up,
thus necessitating a cost-effective alternative system.

• Electronic Clearing Service (ECS) Credit

• The Reserve Bank introduced the ECS (Credit) scheme during the 1990s to handle
bulk and repetitive payment requirements (like salary, interest, dividend payments)
of corporates and other institutions. ECS (Credit) facilitates customer accounts to
be credited on the specified value date and is presently available at all major cities
in the country.
• Electronic Clearing Service (ECS) Debit
• The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting
periodic and repetitive collections of utility companies. ECS (Debit) facilitates consumers /
subscribers of utility companies to make routine and repetitive payments by ‘mandating’ bank
branches to debit their accounts and pass on the money to the companies. This tremendously
minimises use of paper instruments apart from improving process efficiency and customer
satisfaction. There is no limit as to the minimum or maximum amount of payment. This is
also available across major cities in the country.

• Electronic Funds Transfer (EFT)

• This retail funds transfer system introduced in the late 1990s enabled an account holder of a
bank to electronically transfer funds to another account holder with any other participating
bank. Available across 15 major centers in the country, this system is no longer available for
use by the general public, for whose benefit a feature-rich and more efficient system is now in
place, which is the National Electronic Funds Transfer (NEFT) system.

• National Electronic Funds Transfer (NEFT) System

• In November 2005, a more secure system was introduced for facilitating one-to-one funds
transfer requirements of individuals / corporates. Available across a longer time window, the
NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time
transfer of funds. Certain other unique features viz. accepting cash for originating
transactions, initiating transfer requests without any minimum or maximum amount
limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time
of credit to the account of the beneficiaries, etc., are available in the system.
• Real Time Gross Settlement (RTGS) System

• RTGS is a funds transfer systems where transfer of money takes place from one bank to another on a
"real time" and on "gross" basis. Settlement in "real time" means payment transaction is not
subjected to any waiting period. "Gross settlement" means the transaction is settled on one to one
basis without bunching or netting with any other transaction. Once processed, payments are final and
irrevocable. This was introduced in in 2004 and settles all inter-bank payments and customer
transactions above ` 2 lakh.

• Clearing Corporation of India Limited (CCIL)

• CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to function as an
industry service organisation for clearing and settlement of trades in money market, government
securities and foreign exchange markets.

• The Clearing Corporation plays the crucial role of a Central Counter Party (CCP) in the government
securities, USD –INR forex exchange (both spot and forward segments) and Collaterised Borrowing
and Lending Obligation (CBLO) markets. CCIL plays the role of a central counterparty whereby, the
contract between buyer and seller gets replaced by two new contracts - between CCIL and each of
the two parties. This process is known as ‘Novation’. Through novation, the counterparty credit risk
between the buyer and seller is eliminated with CCIL subsuming all counterparty and credit risks. In
order to minimize the these risks, that it exposes itself to, CCIL follows specific risk management
practices which are as per international best practices. In addition to the guaranteed settlement, CCIL
also provides non guaranteed settlement services for National Financial Switch (Inter bank ATM
transactions) and for rupee derivatives such as Interest Rate Swaps.

• CCIL is also providing a reporting platform and acts as a repository for Over the Counter (OTC)
products.