Reserve Bank of India


The apex institution of our financial system, the Reserve Bank of India, was set up on 1 April 1935, under the Reserve Bank of India Act. It was nationalised on l January 1949. RBI has a central board of directors headed by the Governor. The headquarter of RBI located in Mumbai with four local boards at Delhi, Kolkata, Chennai, and Mumbai.

Major Functions of RBI

Currency authority

RBI is the sole authority for the issue of currency other than one rupee notes and coins and other small coins (which are issued by the GOI). Controlling the supply of money and credit in the economy is the responsibility of the RBI.

Banker to government

RBI is in charge of all banking business of the central as well as state governments. The governments maintain accounts at RBI which makes loans and advances to them. RBI is also the manager of the public debt, both internal and external, of the country. Currently, GOI bonds are auctioned through the public debt of DO) of RBI.

Banker's bank and supervisor

The RBI holds part of the cash reserves of commercial banks, lends funds to them in times of need, provides them clearing facilities, and keeps a close watch on their activities. To banks, RBI is the lender of last resort. In India the demand for funds increases, steeply during the months of November to April to finance the marketing of major kharif crops. RBI lends to banks generously to help them meet this need. Credit provided by RBI, in its role as lender of last resort, is known as refinance. By varying the amount and cost of refinance of different types of loans, the RBI can use it as able instrument for influencing liquidity in the system.

Custodian of foreign exchange

RBI is entrusted with managing the country's foreign exchange reserves and maintaining the external value of the rupee. In the days before economic reform, the exchange rate of the rupee was rigidly controlled. Now the RBI intervenes in the foreign exchange market only to keep the market-determined rate within reasonable bounds.

Targets of Monetary Policy

The RBI conducts its monetary policy to attain the following major goals:

RBI Timeline

1935'''''''' RBI begins operations on April 1

1949'''''''' Nationalization of the Reserve Bank; Enactment of Banking Regulation Act.

1950' ' ' ' 'India embarks on planned economic development. The Reserve Bank becomes active agent and' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' 'participant.

1966'''''''' Cooperative banks come under RBI regulation.

1969'''''''' Nationalization of 14 major commercial banks (six more were nationalized in 1980).

1973'''''''' RBI strengthens exchange controls by amending Foreign Exchange Regulation Act (FERA)

1974'''''''' Introduction of priority sector lending targets.

1975'''''''' Regional Rural Banks set up.

1985'''''''' Financial market reforms begin with Sukhamoy Chakravarty and Vaghul Committee Reports.

1991'''''''' India faces balance of payment crisis; pledges gold to shore up reserves. Rupee devalued.

1993'''''''' Exchange rate becomes market determined.

1994'''''''' Board for Financial Supervision set up.

1997' ' ' ' 'Ad hoc treasury bills phased out ending automatic monetization; Regulation of Non-Banking Finance' ' ' ' ' ' ' ' ' ' ' ' ' 'Companies strengthened.

1998'''''''' Multiple indicator approach for monetary policy adopted.

2000' ' ' ' 'Foreign Exchange Management Act replaces FERA.

2004' ' ' ' 'Transition to a full-fledged daily liquidity adjustment facility (LAF) completed. Market Stabilization' ' ' ' ' ' ' ' ' ' ' ' ' ' ' 'Scheme (MSS) introduced to sterilize capital was; Real Time Gross Settlement System commences.

2005' ' ' ' 'Focus on financial inclusion and increasing the outreach of the banking sector.

2006' ' ' ' 'RBI empowered to regulate money, forex, G-sec and gold related securities market.

2007' ' ' ' 'RBI empowered to regulate Payment System.

2008/9' ' ' Pro-active efforts to minimize impact of global financial crisis.

2010' ' ' ' 'Platinum Jubilee celebrations

2011' ' ' ' 'Positioning RBI as a knowledge institution

High and Stable Employment

Unemployment results in not only intense suffering of labour class, but also causes loss of potential output to the economy. Therefore, reducing unemployment and keeping it at a low level is an important policy goal of all Central Banks.

Economic Growth

Steady rise in national income over time is absolutely essential for improving the standard of living of a country. When income and output are rising, firms get inducement for undertaking new investment in plant and equipment which results in further growth. Since productive activities cannot be sustained without the availability of adequate credit, sound management of monetary and credit policy is absolutely necessary for supporting the process of growth in an economy.

Price Stability

Inflation affects social welfare in a negative way. The poorer sections of the population, in particular, are hit especially hard in a situation of rising prices. For this, all Central Banks have adopted price stability as a major goal of economic policy. Growth in output, with price stability, has become the objective of affect economic policy and monetary management forms a very important part of it.

Stability in the foreign exchange market

Since international trade and foreign investment has become quite important to national economies after globalization, the exchange rate is now a crucial macroeconomic variable. A rise in the value of the rupee (appreciation) makes Indian exports less competitive abroad, whereas a decline in the value (depreciation) tends to stimulate inflationary pressures. Fluctuating exchange rate makes planning difficult for traders. As a result, in the post-reform period, preventing sharp fluctuations in the value of the rupee so as to maintain stable conditions in the foreign exchange market is considered as a major goal of the RBI.

Financial stability

A strong and stable financial system helps the growth process by smoothly channelling funds from surplus spenders, i.e. savers to spenders, i.e. business firms with profitable investment opportunities. Financial crises may cause severe setbacks in economic activity and lower economic welfare significantly. Promotion of a stable financial system which can avert crisis by absorbing shocks is thus an important goal of a Central Bank.

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