Reserve Bank of India (RBI)
The Reserve Bank of India (RBI)
The RBI was established on 1st April 1935 under the RBI Act, which was passed on 6th March 1934. After the establishment, RBI took over the functions of issuing paper currency from the central government and the controlling of the credit from the Imperial Bank of India (now called as State Bank of India). The bank was nationalized on 1st January 1949 in terms of the RBI Act 1948. The RBI head office is located at Mumbai since its inception.
The management of RBI is vested in the central board of directors which comprises of one full time Governor and not more than four Deputy Governors appointed by the central government under section 8 (1) (a) of the RBI Act 1934. 10 directors from various fields of business, industry, finance and cooperation may nominate by central government. Four directors nominated by the central government. One from each of the four local boards, One Government official nominated by the central Government. RBI has four local boards in Mumbai, Kolkata, Chennai and New Delhi. The local boards carry out the functions of advertising the central board of directors on such matters of local importance. Generally the local boards deals with the management of regional commercial transactions. To carry out functions smoothly and efficiently, the RBI has 15 departments.
According to the Preamble to the Reserve Bank of India Act 1934, the primary objective of the Bank is to regulate the issue of bank notes and keeping of reserve with a view to securing monetary stability in India and generally to operate the currency and the credit system of the country to its advantage. The major functions of RBI are mentioned below.
Major Functions of RBI
Under section 22 of the RBI act, it is the sole authority for the issue of currency other than one rupee coins, one rupee notes and subsidiary coins are issued by the Ministry of Finance, Government of India, but these are put into circulation through RBI. AN important task before the Central Government is to maintain the stability of currency and it can discharge this responsibility efficiently only if it exercises proper control on commercial banks. The RBI has also the responsibility of advising the government on financial matters. If the RBI has full control over the issue of currency then its task is tendering the right type of advice becomes easy. Therefore, the monopoly of note issue has been the prerogative of central banks in different countries.
Under the section 20, 2, and 21 A of the RBI act, the bank looks after the current financial transactions of the government and manages the public debt of the government. As a government banker, the RBI conducts banking business with out any charge, viz., accepting money on government account, making payments on its behalf etc. It also provides short-term advances to state governments, which are called ways and means advances. In addition, the RBI gives advisory services to the government on all monetary and banking matters i.e., industrial finance, cooperative organizations, international finance etc.
RBI serves as a clearing agent for commercial banks. It provides clearing and remittance facilities to the scheduled commercial banks at centers where it has offices or branches. RBI has been vested with a wide range of powers and supervision and control over Commercial and Cooperative Banks. RBI also serves as a lender of last resort by re-discounting eligible bills of exchange of commercial banks during the period of credit stringency. The RBI performs its functions as banker's bank on the basis of the statutory authority vested in it to discharge its supreme duty of controlling the volume of credit and money supply and maintaining the stability of the currency.
As a controller of credit, the RBI must have a complete control over currency and banking system in the country. This is essential because credit plays a very dominant role in the settlement of monetary and business transactions of all kinds and thus it represents a powerful force of good or evil. RBI adopts quantitative or general methods such a s bank rate, open market operations and the power to vary the reserve requirements of the banks, but also extensive power of selective credit controls and direct actions. By adopting such methods, the RBI tires to influence and control credit creation by commercial banks in order to stabilize economic activity in India.
The RBI has responsibility to maintain not only the internal value of rupee, but also to maintain the external value of rupee. In this connection the RBI sells and purchases the foreign exchange of fixed rates through its exchange control department. RBI has the responsibility of maintaining the fixed exchange rates with all other member countries of the international monetary fund. It has also the responsibility of maiontaining the exchange value fo the rupee in terms of the US dollar or gold as accepted by IMF. The RBI manages the exchange control operations by supplying foreign currencies to importers and persons visiting foreign countries on business, studies, etc, in keeping with the rules laid down by the Government of India.
RBI acts as a source of all economies, financial and Banking data, which are essential for the critical evaluation of economic policies. For this purpose, the RBI publishes the data continuously in its weekly statements in the monthly RBI bulletin, trends and progress of banking in India and other periodic publications. These publications provide valuable statistical information on the monetary and financial developments in the economy and also on the working of the banking system.
RBI performs a number of developmental and promotional functions. Some of the promotional functions are given below.
Here are some important points to remember about RBI :
Deputy Governors :
The following monetary instruments are in the hands of RBI to control credit and to bring economic stability in the economy :
Functions / Duties of the RBI Governor
What Does RBI Governor Do ?
The Reserve Bank of India (RBI)
The RBI was established on 1st April 1935 under the RBI Act, which was passed on 6th March 1934. After the establishment, RBI took over the functions of issuing paper currency from the central government and the controlling of the credit from the Imperial Bank of India (now called as State Bank of India). The bank was nationalized on 1st January 1949 in terms of the RBI Act 1948. The RBI head office is located at Mumbai since its inception.
The management of RBI is vested in the central board of directors which comprises of one full time Governor and not more than four Deputy Governors appointed by the central government under section 8 (1) (a) of the RBI Act 1934. 10 directors from various fields of business, industry, finance and cooperation may nominate by central government. Four directors nominated by the central government. One from each of the four local boards, One Government official nominated by the central Government. RBI has four local boards in Mumbai, Kolkata, Chennai and New Delhi. The local boards carry out the functions of advertising the central board of directors on such matters of local importance. Generally the local boards deals with the management of regional commercial transactions. To carry out functions smoothly and efficiently, the RBI has 15 departments.
According to the Preamble to the Reserve Bank of India Act 1934, the primary objective of the Bank is to regulate the issue of bank notes and keeping of reserve with a view to securing monetary stability in India and generally to operate the currency and the credit system of the country to its advantage. The major functions of RBI are mentioned below.
Major Functions of RBI
- Monopoly of Note Issue :
Under section 22 of the RBI act, it is the sole authority for the issue of currency other than one rupee coins, one rupee notes and subsidiary coins are issued by the Ministry of Finance, Government of India, but these are put into circulation through RBI. AN important task before the Central Government is to maintain the stability of currency and it can discharge this responsibility efficiently only if it exercises proper control on commercial banks. The RBI has also the responsibility of advising the government on financial matters. If the RBI has full control over the issue of currency then its task is tendering the right type of advice becomes easy. Therefore, the monopoly of note issue has been the prerogative of central banks in different countries.
- Banker to the Government :
Under the section 20, 2, and 21 A of the RBI act, the bank looks after the current financial transactions of the government and manages the public debt of the government. As a government banker, the RBI conducts banking business with out any charge, viz., accepting money on government account, making payments on its behalf etc. It also provides short-term advances to state governments, which are called ways and means advances. In addition, the RBI gives advisory services to the government on all monetary and banking matters i.e., industrial finance, cooperative organizations, international finance etc.
- Bankers Bank :
RBI serves as a clearing agent for commercial banks. It provides clearing and remittance facilities to the scheduled commercial banks at centers where it has offices or branches. RBI has been vested with a wide range of powers and supervision and control over Commercial and Cooperative Banks. RBI also serves as a lender of last resort by re-discounting eligible bills of exchange of commercial banks during the period of credit stringency. The RBI performs its functions as banker's bank on the basis of the statutory authority vested in it to discharge its supreme duty of controlling the volume of credit and money supply and maintaining the stability of the currency.
- Controller of Credit :
As a controller of credit, the RBI must have a complete control over currency and banking system in the country. This is essential because credit plays a very dominant role in the settlement of monetary and business transactions of all kinds and thus it represents a powerful force of good or evil. RBI adopts quantitative or general methods such a s bank rate, open market operations and the power to vary the reserve requirements of the banks, but also extensive power of selective credit controls and direct actions. By adopting such methods, the RBI tires to influence and control credit creation by commercial banks in order to stabilize economic activity in India.
- Exchange Management :
The RBI has responsibility to maintain not only the internal value of rupee, but also to maintain the external value of rupee. In this connection the RBI sells and purchases the foreign exchange of fixed rates through its exchange control department. RBI has the responsibility of maintaining the fixed exchange rates with all other member countries of the international monetary fund. It has also the responsibility of maiontaining the exchange value fo the rupee in terms of the US dollar or gold as accepted by IMF. The RBI manages the exchange control operations by supplying foreign currencies to importers and persons visiting foreign countries on business, studies, etc, in keeping with the rules laid down by the Government of India.
- Monetary Data and Publications :
RBI acts as a source of all economies, financial and Banking data, which are essential for the critical evaluation of economic policies. For this purpose, the RBI publishes the data continuously in its weekly statements in the monthly RBI bulletin, trends and progress of banking in India and other periodic publications. These publications provide valuable statistical information on the monetary and financial developments in the economy and also on the working of the banking system.
- Other Promotional Functions :
RBI performs a number of developmental and promotional functions. Some of the promotional functions are given below.
- RBI has expanded banking facilities in rural and semi urban areas by reducing inter regional disparities
- To improve the working of Indian money market, RBI introduced bill market scheme
- RBI has also assisted the emergence and growth of development banking and other term lending institutions, such as the Unit Trust of India (UTI).
- The RBI has helped the establishment of Export Import bank in India to provide finance to exporters.
- RBI appoints ad-hoc committees / expert group from time to time, to enquiry into specific banking problems and make recommendations to solve them.
Here are some important points to remember about RBI :
- RBI's central office is in Mumbai.
- RBI has 22 regional offices.
- It was nationalized on 1st January 1949.
- It prints Currency in 15 Languages.
- Its predecessor was Imperial Bank of India (1921).
- RBI came into existence on the recommendation of Hilton Young (Royal) commission as per RBI act 1934.
- It is the member bank of Asian Clearing Union (ACU) and IMF (International Monetary Fund).
- RBI has Board of Directors with 21 (Governor and 4 Deputy Governors etc)
- The present Governor of RBI is Raghuram Rajan.
Deputy Governors :
- Rama Subramaniam Gandhi
- Urjit Patel
- Anand Sinha
- Harun Rashid Khan.
- Currency notes are issued by RBI under "Minimum Reserve System 1957" with backing of Rs. 200 Cr Reserve (Gold : Rs. 115 Cr + Foreign Securities Rs. 85 Cr)
- RBI Invests foreign exchange reserves in multi-currency, multi-market portfolios such as securities, other central banks and Bank of International Settlements (BIS) and deposits in foreign commercial banks. The yield on such investments is low.
- RBI does not pay interest on Govt. deposits with it.
The following monetary instruments are in the hands of RBI to control credit and to bring economic stability in the economy :
- Bank Rate : Rate of rediscount at which the RBI discounts the first class bills of exchange brought by the banks.
- Repo Rate : Injection of liquidity by the RBI is termed as " Repo Rate" . This was introduced in Dec. 1992 and Reverse Repo Rate in Nov. 1996. RBI buys Govt. Securities for a short period usually a fortnight, with an agreement to sell it later. Thus repo rate is a short-term money market instrument to stabilize short term liquidity in the economy.
- Reverse Repo Rate
- Repo Rate is the rate at which the RBI lends to commercial banks where as the Reverse Repo Rate is the rate at which the RBI borrows from the commercial banks against securities for a very short period.
- Repo and Reverse Repo rates are used as policy instruments for day-to-day liquidity management under the liquidity adjustment facility.
- Cash Reserve Ratio (CRR) : It refers to the percentage of net demand and time deposits which the scheduled commercial banks have to keep with RBI at zero interest Rate as per RBI act 1934.
- Statutory Liquidity Ratio (SLR) : It refers to the percentage of net demand and time deposits which the scheduled commercial banks have to keep with themselves. i.e. by purchasing Govt. Securities or in the form of cash or gold as per Banking Regulation Act 1949, Sec 24.
- SLR is a mechanism used by Commercial Banks for providing credit to the Govt.
- Open market operations : RBI buys or sells Govt. Bonds in the second Ratio.
- RBI Amendment Bill 2005 provides flexibility to RBI in fixing the CRR and SLR.
- Though RBI is responsible for the safety and stability of the Banking sector, it is not legally independent.
Functions / Duties of the RBI Governor
What Does RBI Governor Do ?
- He sits at the Central Office of the Reserve Bank (which was initially established in Calcutta but was permanently moved to Mumbai in 1937) and formulates all the policies.
- Ofcourse, he cant sign on every note issued by RBI as I was thinking, but His autograph appears on all currency notes and he controls the country's monetary, currency and credit systems.
- In simple words, we can call him the bankers' banker. He is also the banker to the government.
- He totally influences a wide range of micro and macro economic issues in the country.
- His actions influence not only the entire banking system, but also the stock markets, the economy and people's lives in general. Indeed, if he sneezes, the markets tend to catch a cold.
- He heads an institution which is the sole authority for issuing bank notes. The central bank chief also supervises all banking operations in the country. He supervises and administers exchange control and banking regulations.
- Besides administering the government's policy, he also issues licenses for new banks, private banks and foreign banks.
- He helps formulates, implement and monitor the monetary policy. The objective is to maintain price stability and ensure adequate flow of credit to productive sectors.
- The central bank chief announces the biannual Monetary and Credit Policy. The governor announces the changes (if any) in the policy for the year: whether there will be a cut in the cash reserve ratio, bank rate, lending rate, and interest rate. It will also project the gross domestic product growth of the country for the year.
- He controls the country's interest rates on deposits and advances, but only to the extent of prescribing interest rate on saving accounts and a minimum lending rate. He prescribes the minimum cash reserve and liquid assets to be maintained as a ratio of net demand and time liabilities, and also lays down norms for investments in other assets by primary co-operative banks.
- He regulates and supervises the nation's financial system. He sets down broad parameters of banking operations within which the country's banking and financial system functions. The aim is to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
- He manages the Foreign Exchange Management Act, 1999 to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
- He monitors the issues and exchange (or destruction) of currency and coins not fit for circulation to give the public adequate quantity of supplies of currency notes and coins and in good quality.
- He also monitors the implementation of government-sponsored poverty alleviation schemes.
- He plays a vital role in helping promote functions to support national objectives.
- He, with his deputy governors constantly reviews rules and regulations imported by RBI to make them more customer-friendly.
- He also governs and supervises primary co-operative banks, popularly known as 'urban co-operative banks,' through his Urban Banks Department.
- The RBI governor also has a say in monitoring and facilitating flow of credit to rural, agricultural and small-scale industries' sectors, framing policies on priority sector lending, giving support to agriculture banks, and regulates regional rural banks, state/central co-operative banks and local area banks.
- Present Governor of RBI is Mr. Raghuram Rajan. Deputy Governors are K. C. Chakravarthi, Anand Sinha, Harun Rashi Khan, Urijit Patel.
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