Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the central bank of India. It was established on April 1, 1935, under the Reserve Bank of India Act, 1934. The RBI’s head office was initially located in Kolkata but was later permanently moved to Mumbai in 1937. The Governor of RBI presides over the Central Office and formulates policies.

RBI Study Notes for Competitive Exams

These RBI study notes are designed to guide finance aspirants preparing for upcoming competitive exams.

Initially, the RBI was privately owned. However, it was nationalized in 1949, making it fully owned by the Government of India. As of October 2020, Mr. Shaktikanta Das serves as the Governor of RBI, with Shri M. Rajeshwar Rao, Dr. M. D. Patra, Shri M. K. Jain, and Shri B. P. Kanungo as Deputy Governors.

Primary Functions of RBI

The primary function of the RBI is to control and regulate the monetary policy concerning the Indian Rupee. Its other functions include:

• Issuance of currency
• Operating the currency
• Maintaining monetary stability in the country
• Sustaining the country’s credit system

RBI Structure, Functions, and Importance

These study notes cover various aspects of the RBI, including its structure, functions, importance, monetary policy committee, and more. They are essential for preparing for the UPSC Indian Economy and other banking exams.

RBI Timeline

The Reserve Bank of India (RBI) plays a crucial role in shaping the Indian economy. Understanding the RBI timeline is essential for preparing for the upcoming RBI Grade B exam.

RBI – Definition & Interesting Facts

The RBI is a nationally important institution and the cornerstone of the Indian economy. Here are some interesting facts about the RBI:

• The concept of RBI was formulated based on the strategies developed by Dr. Ambedkar in his book “The Problem of the Rupee – Its Origin & Its Solution.”
• The “Royal Commission on Indian Currency & Finance,” also known as Hilton Young Commission, suggested the formulation of the RBI.
• The RBI regulates the currency and credit system in the country.
• The RBI was completely privately-owned before being nationalized in 1949. It also became a member bank of the Asian Clearing Union.

Reserve Bank of India: Ensuring Financial Stability and Public Trust

The Reserve Bank of India (RBI) plays a pivotal role in safeguarding the interests of depositors, maintaining public confidence in the financial system, and providing cost-effective banking services through commercial and cooperative banking.

The Preamble of RBI

The preamble of the Reserve Bank of India elaborates its basic functions as:

“..to regulate the issue of Bank Notes and keeping of reserves to secure monetary stability in India and generally to operate the credit system and currency of the country to its advantage.”

Composition of the Reserve Bank of India

The affairs of the RBI are regulated by a central board of directors.

Structure of the Reserve Bank of India:

• The board of RBI follows the guidelines of the RBI Act and is appointed by the government of India.
• The directors of RBI are either appointed or nominated for a term of four years.
• Official directors include: one full-time governor and not more than four deputy governors.
• Non-official Directors: 10 directors nominated by the government from miscellaneous sectors along with 02 government officials.
• Others: 04 directors, one each from four regional boards.

Functions of the RBI

Monetary Authority:

• The RBI is responsible for formulating and implementing monetary policy.
• It regulates the money supply and credit in the economy.
• It manages the foreign exchange reserves of the country.

Banker to the Government:

• The RBI acts as the banker to the government of India.
• It manages the government’s accounts and provides financial advice.
• It issues government securities and manages the public debt.

Banker to Banks:

• The RBI acts as the banker to commercial banks.
• It provides them with loans and advances.
• It regulates the operations of commercial banks and ensures their financial stability.

Developmental Role:

• The RBI plays a developmental role in the Indian economy.
• It promotes financial inclusion and access to credit for all.
• It supports the development of the financial markets.

Regulatory Role:

• The RBI regulates the financial sector in India.
• It ensures the safety and soundness of the financial system.
• It protects the interests of depositors and investors. # Functions of the Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the central bank of India. It is responsible for supervising the monetary policies, implementing the monetary policies, and ensuring price stability in the country with respect to the national economic growth.

Issuing Notes

• The RBI is responsible for providing the public with an adequate supply of currency coins and notes.
• The RBI maintains the quality of currency notes and coins, exchanges them, and destroys those that are not fit for circulation.

Banker to the Government

• The RBI acts as an agent, banker, and advisor to the government of India and all the states.
• It performs all the banking functions of the central and state governments and provides overdraft facilities to both the central and state governments.

Foreign Reserve Management

• The RBI maintains the foreign exchange rates by buying and selling foreign currencies.
• It buys and sells foreign currency in the Forex market when its demand increases and vice versa.

Developmental Functions

• The RBI performs a wide array of developmental functions to support the national objectives, including making institutional arrangements for agricultural finance.

Collection and Publication of Data

• The RBI regularly collects and compiles data on banking and financial operations, FDIs, BOP, exchange rates, industries, prices, etc., of the Indian economy.
• It publishes a monthly publication indicating the relevant and most updated numbers on a regular basis.

Controls Credit Supply

• The RBI uses qualitative and quantitative techniques to control the credit supply in the economy.
• It squeezes the money supply through tight monetary policy when the economy has sufficient money supply and vice versa.

Promotional Functions

• The RBI’s promotional functions include promoting banking habits and enhancing the banking system, providing training to banking staff, supporting the agriculture and cooperative sectors, developing a financial system, export promotion through refinance facilities, and extending support for industrial finance.

Supervisory Functions

• The RBI is entrusted with certain non-monetary roles, including giving licenses to banks, bank inspection and inquiry, controlling non-banking financial institutions, and periodic review of the working of commercial banks.

Lender of the Last Resort

• One of the prime functions of the RBI is to act as the lender of the last resort to banks and financial institutions.
• It provides liquidity to banks and financial institutions facing temporary shortages of funds.

The Role of the Reserve Bank of India (RBI) in Monetary Policy

The Reserve Bank of India (RBI) serves as the lender of last resort for banks in need of funds. Under the Banking Regulation Act of 1949, the RBI has extensive powers to control and supervise the nation’s banking system.

RBI’s Instruments of Monetary Policy

The RBI’s monetary policy aims to maintain control over the supply of currency within the economy to achieve general economic goals. The main instruments of monetary policy include:

• Cash Reserve Ratio (CRR): Banks are required to keep a certain percentage of their deposits with the RBI as reserves. An increase in the CRR reduces liquidity in the money supply, while a decrease has the opposite effect.

• Statutory Liquidity Ratio (SLR): Financial institutions must maintain a certain level of liquid assets, such as government bonds, as a percentage of their total liabilities. The RBI can increase the SLR to reduce credit flow during inflation and vice versa.

• Open Market Operations (OMO): The RBI buys and sells government securities to regulate the flow of credit in the economy. Selling securities reduces credit flow, while buying securities increases it.

• Bank Rate Policy: The bank rate is the interest rate charged by the RBI for lending to banks. A higher bank rate makes borrowing more expensive for banks, reducing credit volume and money supply.

• Repo Rate: The repo rate is the interest rate at which the RBI lends short-term money to banks. The RBI increases the repo rate to reduce money supply during inflation and decreases it during deflation.

Monetary Policy Committee

The Monetary Policy Committee (MPC) is responsible for setting the RBI’s monetary policy. The MPC consists of six members, including the RBI Governor, two Deputy Governors, and three external members appointed by the Government of India. The MPC meets every two months to review the monetary policy and make necessary adjustments.

The Monetary Policy Committee (MPC) is a six-member committee responsible for strategizing monetary policies in India. It was introduced by the government under section 45ZB of the RBI Act and later amended in 1934. The MPC meets at least four times a year, with a quorum of four members. Each member has one vote, and in case of a tie, the Governor has a casting vote.

Recent Developments by the RBI

Amid the economic crisis caused by the Covid-19 pandemic, the Reserve Bank of India (RBI) has introduced several developments:

• Extended the enhanced borrowing facility provided to banks to meet the SLR until September 30, 2020.
• Extended the relaxation on the minimum daily maintenance of the CRR at 80% till September 2020.
• Proposed to restrict promoters from holding the CEO position for more than 10 years to strengthen governance in commercial banks.
• Sought an extension of tenure for external members on its rate-setting panel until March 2021 due to the Covid-19 pandemic.
• Announced another round of the bond-swapping program, known as India’s Operation Twist, to aid monetary transmission.
• Created a Payments Infrastructure Development Fund with an initial contribution of INR 250 crore to promote digital payments nationwide.
• Brought cooperative banks under the regulatory framework of the RBI by amending the Banking Regulation Act through a presidential decree.

These developments aim to guide candidates preparing for competitive exams like the UPSC and Banking PO. For more detailed notes and exam-preparatory material, consider downloading the Testbook App and taking advantage of daily offers and deals.

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