The RBI is statutory mandated to maintain price stability while keeping the objective of growth in mind. Following the 2016 amendment to the RBI Act, 1934, India adopted a Flexible Inflation Targeting framework. The Central Government, in consultation with the RBI, fixes the inflation target once every five years in terms of the Consumer Price Index (CPI). The current target is set at 4% with an upper tolerance limit of 6% and a lower tolerance limit of 2%.
The Monetary Policy Committee (MPC)
Monetary policy decisions regarding the policy repo rate are determined by the MPC, a six-member statutory body. The committee consists of three internal members from the RBI (including the Governor as the ex-officio Chairperson) and three external members appointed by the Central Government. The MPC meets at least four times a year, and its decisions are published after each meeting.
Monetary Policy Instruments
The RBI deploys both quantitative and qualitative tools to regulate money supply and credit availability in the economy.
| Instrument | Type | Operational Mechanism |
| Cash Reserve Ratio (CRR) | Quantitative (Direct) | The liquid cash percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must maintain as a balance with the RBI. No interest is paid on CRR balances. |
| Statutory Liquidity Ratio (SLR) | Quantitative (Direct) | The liquid asset percentage (gold, cash, or approved government securities) that banks must maintain within themselves relative to their NDTL. |
| Liquidity Adjustment Facility (LAF) | Quantitative (Indirect) | Financial window allowing banks to borrow money through repo agreements or park funds via reverse repo/SDF agreements to manage day-to-day liquidity mismatches. |
| Repo Rate | Quantitative (Indirect) | The rate at which the RBI lends short-term money to commercial banks against the collateral of government securities. |
| Standing Deposit Facility (SDF) | Quantitative (Indirect) | The floor of the LAF corridor that allows the RBI to absorb liquidity from banks without providing government securities as collateral. |
| Marginal Standing Facility (MSF) | Quantitative (Indirect) | A penal rate window enabling banks to borrow overnight funds up to a specific percentage of their NDTL by dipping into their SLR quota. |
| Open Market Operations (OMO) | Quantitative (Indirect) | The outright sale or purchase of government securities in the open market to inject or absorb long-term liquidity. |
| Moral Suasion | Qualitative | A psychological tool involving persuasive letters, speeches, and informal discussions to align commercial bank lending patterns with RBI directives. |
Issuer of Currency and Coinage Management
Monopoly of Note Issue
Under Section 22 of the RBI Act, 1934, the RBI holds the sole right to issue banknotes in India, except for one-rupee notes and coins. Banknotes are legal tender throughout India and are guaranteed by the Central Government.
The Minimum Reserve System
Since 1957, the RBI has issued currency notes backed by the Minimum Reserve System. Under this framework, the RBI must maintain a minimum reserve of ₹200 crore at all times. Out of this total reserve, a minimum value of ₹115 crore must be held in gold (gold coin or gold bullion), while the remaining ₹85 crore can be held in foreign securities.
Management of Coins and One-Rupee Notes
The Minting of coins is governed by the Coinage Act, 2011. The Government of India retains the sole authority to design and mint coins of all denominations, as well as the one-rupee note. The RBI acts exclusively as an agent for the Central Government in distributing these coins and one-rupee notes into circulation.
Currency Operations Infrastructure
The RBI manages currency distribution through four currency printing presses and four mints located strategically across the country.
- Currency Printing Presses:
- Nasik (Maharashtra) – Owned by the Government of India via SPMCIL.
- Dewas (Madhya Pradesh) – Owned by the Government of India via SPMCIL.
- Mysore (Karnataka) – Owned by the RBI via its subsidiary BRBNMPL.
- Salboni (West Bengal) – Owned by the RBI via its subsidiary BRBNMPL.
- Government Mints (SPMCIL): Located at Mumbai, Kolkata, Hyderabad, and Noida.
Regulator and Supervisor of the Financial System
Comprehensive Legislative Mandate
The RBI derives its regulatory authority primarily from the Banking Regulation Act, 1949, and the RBI Act, 1934. It prescribes broad parameters for banking operations, covering licensing, branch expansion, liquidity management, asset classification, and amalgamation or liquidation of banking entities.
Regulated Financial Entities
The supervisory umbrella of the RBI extends beyond commercial banks to maintain systemic stability across the financial ecosystem:
- Commercial Banks: Includes Public Sector Banks (PSBs), Private Sector Banks, Foreign Banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Payments Banks.
- Cooperative Banks: Governed through a dual control structure involving the RBI and the respective State Registrars of Cooperative Societies (RCS) or Central Registrar. The Banking Regulation (Amendment) Act, 2020, brought urban and multi-state cooperative banks closer under the RBI’s direct regulatory oversight.
- Non-Banking Financial Companies (NBFCs): Regulated via a four-layered scale-based regulatory framework (Base Layer, Middle Layer, Upper Layer, and Top Layer) to prevent systemic contagion.
- All-India Financial Institutions (AIFIs): Includes apex development institutions like NABARD, SIDBI, NHB, EXIM Bank, and NaBFID.
Supervisory Interventions and Risk Frameworks
- Board for Financial Supervision (BFS): Constituted in November 1994 as a committee of the Central Board of the RBI to exercise dedicated supervisory functions.
- Prompt Corrective Action (PCA) Framework: A specialized watch-list framework that triggers mandatory and discretionary structured interventions when a bank breaches predefined risk thresholds related to Capital-to-Risk Weighted Assets Ratio (CRAR), Net Non-Performing Assets (NPA), and Return on Assets (RoA).
Banker to the Government
Statutory Obligations
Under Sections 20 and 21 of the RBI Act, 1934, the RBI is legally bound to accept monies, make payments, and manage the public debt and floatation of new loans for the Central Government. Under Section 21A, the RBI handles similar investment and banking operations for State Governments based on voluntary mutual agreements.
Short-Term Fiscal Mismatch Management
- Ways and Means Advances (WMA): Introduced in April 1997 to replace the automatic monetization of deficits through Ad-hoc Treasury Bills. WMA acts as a short-term credit facility provided by the RBI to the Central and State Governments to bridge temporary mismatches in their cash receipts and expenditures. These advances are repayable within three months from the date of making the advance.
- Overdraft Facility (OD): If the government draws more funds than the limit permitted under the WMA, it enters an overdraft state, which carries a higher interest penalty and is capped by strict operational time limits.
Banker to Banks and Lender of Last Resort
Inter-Bank Operations and Centralized Settlement
The RBI maintains current accounts for all scheduled commercial banks, facilitating seamless inter-bank fund transfers and acting as a common clearinghouse. This centralized clearing mechanism minimizes the physical transit of cash between banking entities.
Lender of Last Resort (LoLR)
When a solvent commercial bank faces severe, unexpected liquidity stress and fails to raise funds from the inter-bank call money market or alternative commercial avenues, it approaches the RBI for emergency financial assistance. The RBI provides liquidity support against eligible securities to prevent localized liquidity crunches from transforming into broader systemic insolvency crises.
Manager of Foreign Exchange
The Foreign Exchange Management Act (FEMA), 1999
The RBI is the designated custodian and manager of India’s foreign exchange reserves under the provisions of FEMA, 1999. It regulates external trade and payments, promotes the orderly development of the foreign exchange market in India, and maintains the external value of the Indian Rupee.
Components of Foreign Exchange Reserves (Forex)
The foreign exchange reserves managed by the RBI are divided into four distinct components:
- Foreign Currency Assets (FCA): Multi-currency investments in foreign government treasuries, institutional deposits, and bonds.
- Gold Reserves: Physical gold held in RBI vaults and deposited abroad with institutions like the Bank of England.
- Special Drawing Rights (SDRs): International reserve assets created by the International Monetary Fund (IMF) allocated to member states.
- Reserve Tranche Position (RTP): The foundational quota segment of financial assets that a member country contributes to the IMF, which can be accessed without administrative fees.
Developmental and Payment System Functions
Priority Sector Lending (PSL)
To ensure balanced regional and sectoral growth, the RBI mandates that all scheduled commercial banks allocate a specific percentage of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to designated priority sectors.
- PSL Target for Domestic Commercial Banks: 40% of ANBC.
- PSL Target for Regional Rural Banks and Small Finance Banks: 75% of ANBC.
- Primary Sectors Covered: Agriculture, Micro, Small and Medium Enterprises (MSMEs), Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, and Weaker Sections.
Regulation of Payment and Settlement Systems
Under the Payment and Settlement Systems Act, 2007, the RBI holds regulatory authority over all electronic and physical payment platforms in the country.
- Board for Regulation and Supervision of Payment and Settlement Systems (BPSS): A sub-committee of the Central Board that directs policy for payment networks.
- Operational Systems: The RBI directly operates systemically important payment infrastructures like Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
- Institutional Anchoring: The RBI anchored the creation of the National Payments Corporation of India (NPCI) to run retail payment solutions like UPI, IMPS, and RuPay.
- Central Bank Digital Currency (CBDC): The RBI spearheads the issuance and piloting of the Digital Rupee (e-Rupee), creating an official sovereign digital currency alternative to private crypto-assets.