Reserve Bank of India (RBI)

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Headquarters – Mumbai, Maharashtra
Established on – 1 April 1935
Bank rate – 4%
Emblem – Panther & Palm tree
Governor – Shaktikanta Das (as of 2020)

The Reserve Bank of India (RBI) is India’s central bank and apex institute that controls the monetary policy of the Indian economy. It was set up on 1 April 1935 under the Reserve Bank of India Act,1934. RBI controls and regulates the whole banking network in India.

Basic Facts:

  • Established on – 1 April 1935, Calcutta.
  • Nationalized on – 1 January 1949.
  • First Governor – Sir Osborne Smith (1935 – 1937).
  • First Indian Governor – C.D. Deshmukh (1943 – 1949).
  • First Woman Deputy Governor – K.J. Udeshi.
  • First & only Prime Minister who was the Governor of RBI – Manmohan Singh (1982 – 1985).
  • Long serving Reserve Bank Governor – Benegal Rama Rau.

History

During the First World War, India was the prime supplier of the raw materials for manufacturing arms and was responsible for sustaining the British wartime economy. 

After the First World War, many reforms like the Montagu-Chelmsford reforms were enacted by the British Govt as a concession for India's wartime services. 

But it was to protect the British interest and as a result, India faced many economic downturns.

After the World War, it was the Great Depression of 1929 that cripples the Indian economy. During the Depression, the British Govt. introduced economic policies that basically destroyed the economy of India while sustaining Britain's economy.

The words of Lord Willingdon, the Viceroy of India paint a vivid picture of what was going on with the Indian economy at the time:
For the first time in history, owing to the economic situation, Indians are disgorging gold. We have sent to London in the past two or three months, 25,000,000 sterling and I hope that the process will continue.
These circumstances sparked huge protests across the country. To alleviate the issue, the notion of a central bank was established in India.

A "Royal Commission on Indian Currency & Finance” known as Hilton Young Commission was set up in 1926. They formulated the guidelines for a central bank based on Dr. B.R. Ambedkar's book "The Problem of the Rupee – Its origin and its solution" published in the year 1923.

The Central Legislative Assembly passed these guidelines as the RBI Act 1934 and a central bank came into being on April 1, 1935, with Sir Osborne Smith as its first Governor. The emblem of RBI is Panther and the Palm tree and its logo were derived from East India Company Double Mohur.

Its headquarters was initially established in Kolkata but moved to Mumbai in 1937.

The RBI also acted as the central bank for both Burma(now Myanmar) and Pakistan until April 1947 and June 1948 respectively.

Preamble

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.

Structure

The 21 member Central Board of Directors controls the entire functioning of the RBI with the RBI Governor on the top. They are as follows:
  • Governor
  • 4 Deputy Governors,
    • Dr. Michael Debabrata
    • M. K. Jain
    • B.P. Kanungo (remaining position is still vacant).
  • 2 Finance Ministry representatives,
  • 4 Zonal Office directors of Mumbai, New Delhi, Kolkata & Chennai
    • The RBI has 4 zonal, 19 regional offices, and 11 sub-offices.
  • 10 government-nominated directors.
These directors are appointed for a term of 4 years by the Government of India under the Reserve Bank of India Act.

On July 6, 2005, a new department called the Financial Market Department (FMD) was constituted for strengthening the monetary policy and for the surveillance of financial markets.

Main Functions

  • Banker to the Government
    • The RBI acts as a banker, agent, and advisor to the Central Government of India and the other Indian States on economic and monetary policies.
  • Issuer of Currency Notes
    • RBI is the sole authority in India that can issue banknotes of the denomination values of Rs. 2, 5, 10, 20, 50, 100, 1000, 5000, and 10,000 except one rupee note.

    • The Reserve Bank has a Minimum Reserve System since 1957. Based on this policy, the central bank can issue currency notes as much as the country requires, provided India has the security deposit of Rs. 200 Crores, out of which 115 crores must be in gold and 85 crores must be in forex reserves.
  • Controller of Credit
    • RBI controls the monetary policy of the country by monitoring the credit rates of the commercial banks by several tools such as Bank Rate, SLR, Repo rate, Reverse Repo Rate, etc. Thus it controls inflation.
  • Lender of Last Resort
    • It lends money to the banking sector during a financial crisis. That is when a commercial bank is underperforming it can resort to RBI as the last measure in order to stabilize their situation.
  • Banker's Bank
    • RBI lends money to all commercial banks in the country in the same way that the bank performs its function to the common people.
  • Custodian of Foreign Currency Reserves
    • RBI acts as the representative for the Govt. of India in the IMF and keeps the foreign exchange rates stable. The foreign exchange control was first implemented in September 1939. Currently, India has a Foreign Exchange Reserve of around US $487 billion.

    • RBI acts as the custodian of the country’s stock of gold and international currencies. In order to maintain the stable exchange rates, RBI sells foreign currency and rupees in the foreign exchange market when its supply goes down and purchase the same when demand is up.
In 2016, the original RBI Act of 1934 was amended to provide the statutory basis for the implementation of the flexible inflation-targeting framework.

Training Colleges of RBI

There are six training colleges of RBI, of which three are autonomous. They are as follows:
  • Under RBI –
    • College of Agricultural Banking, Pune.
    • Reserve Bank Staff College, Chennai
    • Bharatiya Reserve Bank Staff College
  • Autonomous –
    • National Institute of Bank Management
    • IGIDR (Indira Gandhi Institute of Development & Research)
    • IDBRT (Institute of Development & Research in Banking Technology)

Subsidiaries of RBI

Fully Owned (100% Shares)
  • National Housing Bank (NHB),
  • Deposit, Insurance & Credit Guarantee Corporation (DICGC),
  • Bhartiya Reserve Bank Note Mudran Private Ltd. (BRBNMPL),
  • Reserve Bank Information Technology Private Limited (ReBIT),
  • Indian Financial Technology and Allied Services (IFTAS)
Majority Shares with RBI (More than 51%)
  • NABARD (National Bank for Agriculture & Rural Development)
Also, Refer:
  1. Currency Printing Press of RBI
  2. Click here for PSC Repeated Q&A for RBI

📝 SideNotes:

  • MANI application – launched by RBI for visually challenged persons to identify new currency notes.
    • Mobile Aided Note Identifier.
  • The Government of India is responsible for the minting of coins and printing of 1 rupee notes.
  • Currency notes have 15 languages printed on them.
Thanks for reading!!!