Reserve Bank of India

The Reserve Bank of India (RBI, Hindi: भारतीय रिज़र्व बैंक) is the central banking system of India and
controls the monetary policy of the rupee as well as US$300.21 billion (2010)[1] of currency reserves. The
institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the
Reserve Bank of India Act, 1934[2] and plays an important part in the development strategy of the
government. It is a member bank of the Asian Clearing Union.

Establishment

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are
formulated.

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully
owned by the Government of India.

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."

Central Board

The Reserve Bank's affairs are governed by a central board of directors. The board is appointed
by the Government of India in keeping with the Reserve Bank of India Act.

 Appointed/nominated for a period of four years

 One each for the four regions of the country in Mumbai, Calcutta, Chennai and New
Delhi
 Membership:
 consist of five members each
 appointed by the Central Government
 for a term of four years

Main Functions

Monetary Authority

The Reserve Bank of India is the main monetary authority of the country and beside that the
central bank acts as the bank of the national and state governments. It formulates, implements
and monitors the monetary policy as well as it has to ensure an adequate flow of credit to
productive sectors. Objectives are maintaining price stability and ensuring adequate flow of
credit to productive sectors. The national economy depends on the public sector and the central
bank promotes an expensive monetary policy to push the private sector since the financial market
reforms of the 1990s.[25]

The institution is also the regulator and supervisor of the financial system and prescribes broad
parameters of banking operations within which the country's banking and financial system
functions. Objectives are to maintain public confidence in the system, protect depositors' interest
and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has
been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by
bank customers. The RBI controls the monetary supply, monitors economic indicators like the
gross domestic product and has to decide the design of the rupee banknotes as well as coins.[26]

MANAGER FOR EXCHANGE CONTROL

The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

ISSUER FOR CURRENCY

The bank issues and exchanges or destroys currency and coins not fit for circulation.The
Objectives are giving the public adequate supply of currency of good quality and to provide
loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to
issue bank notes, to maintain the currency and credit system of the country to utilize it in its best
advantage, and to maintain the reserves. RBI maintains the economic structure of the country so
that it can achieve the objective of price stability as well as economic development, because both
objectives are diverse in themselves.
Developmental role

The central bank has to perform a wide range of promotional functions to support national
objectives and industries.[6] The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of this problems are results of the dominant part of the public sector.[27]

Related functions

The RBI is also a banker to the Government and performs merchant banking function for the
central and the state governments. It also acts as their banker. The National Housing Bank
(NHB) was established in 1988 to promote private real estate acquisition.[28] The institution
maintains banking accounts of all scheduled banks, too.

There is now an international consensus about the need to focus the tasks of a central bank upon
central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate
described above. The recent financial turmoil world-over, has however, vindicated the Reserve
Bank's role in maintaining financial stability in India.

RBI has various weapons of control which are listed below

(a) Bank Rate: RBI (Reserve Bank of India) lends to the commercial banks through its discount
window to help the banks meet depositor’s demands and reserve requirements. The interest rate
the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the
liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce
the liquidity and money supply in the system, it will increase the bank rate.

(b) Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum
cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to
increase or decrease the reserve requirement depending on whether it wants to affect a decrease
or an increase in the money supply. An increase in CRR will make it mandatory on the part of
the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This
will reduce the size of their deposits and they will lend less. This will in turn decrease the money
supply.

(c) Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to
maintain liquid assets in the form of gold, cash and approved securities. RBI has stepped up
liquidity requirements for two reasons: - Higher liquidity ratio forces commercial banks to
maintain a larger proportion of their resources in liquid form and thus reduces their capacity to
grant loans and

advances – thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds
from loans and advances to investment in government and approved securities.
In well developed economies, central banks use open market operations- buying and selling of
eligible securities by central bank in the money market- to influence the volume of cash reserves
with commercial banks and thus influence the volume of loans and advances they can make to
the commercial and industrial sectors. In the open money market, government securities are
traded at market related rates of interest. The RBI is resorting more to open market operations in
the more recent years.

Generally RBI uses three kinds of selective credit controls:

a) Minimum margins for lending against specific securities. b) Ceiling on the amounts of credit
for certain purposes. c) Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

a) Part of the interest rate structure i.e. on small savings and provident funds, are administratively
set. b) Banks are mandatorily required to keep 25% of their deposits in the form of government
securities. c) Banks are required to lend to the priority sectors to the extent of 40% of their
advances.

Offices and branches

The Reserve Bank of India has branch offices at most state capitals and at a few major cities in
India[total of 18 places] - viz. Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh,
Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai,
Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-offices at Dehradun, Gangtok,
Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar.

The Bank has also two training colleges for its officers, viz. Reserve Bank Staff College at
Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training
Centres at Belapur, Chennai, Kolkata and New Delhi.