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.

 

foreign exchange reserves and Functions of RBI

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
    1. A salaried government official (except specifically nominated member of Government)
    2. Be adjudicated as insolvent or have suspended payments to creditors
    3. An officer or employee of any bank
    4. Found lunatic or becomes of unsound mind
 

Official Directors

  • Full-time
  • 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
 

Non-Official Directors

  • 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
 

Powers

  • 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
 

Board Meeting

  • 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
 

Local Boards

  • 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
 

Enforcement Department

  • 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

Monetary Authority

  • Formulates, implements and monitors the monetary policy for
    1. maintaining price stability, keeping inflation in check
    2. 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-
    1. maintaining public confidence in the system
    2. protecting depositors’ interest
    3. 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

  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. 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.
 
 

Developmental role

  • 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.
 
 

Banker’s bank

  • 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.
 
 

Note

  • 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.
 
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