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Reserve Bank of India – RBI
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
It established based on the suggestions of “Royal Commission on Indian Currency & Finance” in 1926.
This commission was also known as Hilton Young Commission.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.
Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Financial year of RBI – 1st July to 30th June
Palm tree and a Tiger is emblem of RBI
Concept of RBI came from the book, “The Problem of the Rupee: its Origin and its Solution” 1923, by Dr. B. R. Ambedkar.
Central Board of Directors
CBD as the administrative apex body of the RBI
Total no of members can be max 21
Board is appointed by Government of India in keeping with section 8 of RBI Act.
Section 7 empowers the government to supersede the RBI Board and issue directions to the central bank if they are considered to be “necessary in public interest”
Director of the RBI Board cannot be
A salaried government official (except specifically nominated member of Government)
Be adjudicated as insolvent or have suspended payments to creditors
An officer or employee of any bank
Found lunatic or becomes of unsound mind
1 Governor and up to 4 Deputy Governors
Governor and Deputy Governors hold office for max periods of 5 years
Term of the governor may be fixed by the government at the time of his appointment
They are eligible for reappointment or extension as per Section 8 (4) of the RBI Act
Appointment has been made based on the recommendation of the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary
Salaries and allowances determined by CBD, with approval of Central Government
Governor can be removed by government
Nominated by Government
Up to 10 Directors from various fields and 2 government Official
10 Directors hold office for 4 years, and government officials are to hold a term on RBI Board as long as the government want
Other 4 Directors – one each from four local boards
Board exercises all powers and does all acts and things that are exercised by the RBI.
Board is also to recommend to the government the design, form and material of bank notes and also when and where they can serve as legal tender
Governor has to call a Board meeting at least 6 times in a year, and at least 1 each quarter
Meeting can be called if a min of 4 Directors ask Governor to call a meeting
In absence of Governor, Deputy Governor authorised by him to vote for him and presides the Board meetings
In the event of split votes, Governor has a 2nd, or deciding vote
One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi
Consist of five members each
Appointed by the Central Government
For a term of 4 years
It started in 2017
It will enforce all laws to the banks or others as per surveillance from different departments of RBI
Functions of RBI
Formulates, implements and monitors the
monetary policy for
maintaining price stability, keeping inflation in check
ensuring adequate flow of credit to productive sectors
Regulator and administrator of the financial system
RBI controls the monetary supply
It monitors economic indicators like the GDP
Decide the design of the rupee banknotes as well as coins.
RBI is to undertake supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
Banking Ombudsman Scheme has been formulated by RBI
lays out parameters of banking operations within which the country’s banking and financial system functions for-
maintaining public confidence in the system
protecting depositors’ interest
providing cost-effective banking services to the general public
Managing Foreign Exchange Reserves
Reserve Bank of India manages Forex under the FEMA- Foreign Exchange Management Act, 1999.
Facilitate external trade and payment
Promote the development of foreign exchange market in India.
Components of Foreign exchange reserves of India
Foreign Currency Assets
Special Drawing Rights (SDRs)
Reserve Tranche Position
Special drawing rights
Its supplementary foreign-exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
The XDR is the unit of account for the IMF, and is not a currency
XDR was created in 1969 to supplement a shortfall of preferred foreign-exchange reserve
XDR basket now consists of USD 41.73%, Euro 30.93%, Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%
Reserve Tranche Position (RTP)
It is the difference between a member’s quota and the IMF’s holdings of its currency
Issuer of currency
Reserve Bank of India is authorized to issue currency in India.
All the money issued by the central bank is its monetary liability
For printing of notes, Security Printing and Minting Corporation of India Limited (SPMCIL)
It is a wholly owned company of the Government of India
It has set up printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), also has set up printing presses in Mysore in Karnataka and Salboni in West Bengal.
For the minting of coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata and Hyderabad for coin production.
RBI faces a lot of inter-sectoral and local inflation-related problems
Key tools in this effort is Priority Sector Lending
RBI work towards strengthening and supporting small local banks
Encourage banks to open branches in rural areas to include large section of society in banking network
Regulator of the Payment and Settlement Systems
Payment and Settlement Systems Act of 2007 (PSS Act) gives the RBI authority, including regulation and supervision, for the payment and settlement systems in the country.
In this role, the RBI focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms.
Two payment systems NEFT and RTGS managed by RBI
Banker and Debt Manager to Government
As a banker to the GoI, RBI maintains its accounts, receive payments into & make payments out of these accounts.
RBI also helps GoI to raise money from public via issuing bonds and government approved securities.
It works as a central bank where commercial banks are account holders and can deposit money.
Reserve Bank of India maintains banking accounts of all scheduled banks.
It is the duty of the RBI to control the credit
The RBI also advises the banks on various matters for example Corporate Social Responsibility.
Detection of fake currency
Reserve Bank of India has launched a website to raise awareness among masses about fake notes
Other Reserve of RBI
Asset Development Fund
Its created in 1997-98
To meet the internal capital expenditure and
New investments in its subsidiaries and associate institutions
Currency and Gold Revaluation Reserve (CGRA)
The CGRA is meant to cover a situation where the rupee appreciates against one or more of the currencies in the basket — and the basket has several currencies ranging from the dollar to the euro and the yen — or if there is a decline in the rupee value of gold.
The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
Contingency Fund Reserve of RBI
It used to cover depreciation in the value of the RBI’s holdings of government bonds domestic and foreign If yields rise and their prices fall.
To cover expenses from extraordinary events such as demonetisation, money market operations and currency printing expenses in a year of insufficient income
This reserve supports the mother of all guarantees – central bank’s role as the lender of the last resort
It cover the deposit insurance for Deposit Insurance and the Credit Guarantee Corporation (DICGC) a subsidiary of RBI.
1935 1st Governor of RBI was Sir Osborne Smith
1943 – 1st Indian Governor of RBI was CD Deshmukh, he participated in Bretton Woods
2003 – 1st women deputy Governor of RBI was KJ Udeshi.
Only Prime Minister who was the Governor of RBI was Manmohan Singh.