Reserve Bank of India (RBI)

Reserve Bank of India (RBI)

In India the Reserve Bank of India (RBI) is the apex authority in the Banking system. It was established on 1 April 1935 under the RBI Act 1934. Since the RBI was set up by an act of parliament, it is termed as a statutory body. Hence its responsibilities, authority and the tenure of members all have been defined by that Act of parliament.

RBI controls the monetary policy concerning the national currency, the Indian rupee. The basic functions of the RBI are the issuance of currency, to sustain monetary stability in India, to operate the currency, and maintain the country’s credit system. 

UPSC has asked multiple questions about Reserve Bank of India (RBI) in both Prelim (Pre) and Main Examination. Hence RBI becomes an important topic to read for UPSC aspirants.  

History

• The concept of Reserve Bank of India was based on the strategies formulated by Dr. Ambedkar in his book named “The Problem of the Rupee – Its origin and its solution”.
• This central banking institution was established based on the suggestions of the “Royal Commission on Indian Currency & Finance” in 1926. This commission was also known as Hilton Young Commission.

After Independence, the RBI was nationalized and brought under  the  control  of  the  Government  of  India.  For  this  purpose,  RBI  (Transfer  to  Public ownership) Act 1948 was passed. The nationalization took place on 1 January 1949. Earlier RBI was headquartered at Kolkata but later on its headquarter was transferred to Bombay.

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

The RBI is headed by a governor and it also has four deputy Governors. 

•         The first Governor of RBI was Sir Osborne Smith.
•         The first Indian Governor of RBI was C.D. Deshmukh.

At present Shaktikanta Das is the Governor of RBI. He became 25th Governor of RBI after Urjit Patel.

Responsibilities of RBI

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." 

In simpler terms RBI‘s responsibilities can be broadly classified into two different types. These responsibilities are Traditional and Non-traditional. Traditional responsibilities are permanent. They continue forever or till the time they are taken away from the RBI. On the other hand, Non-Traditional responsibilities are temporary and they are discontinued the moment they are completed. 

For example- Financial Inclusion is a temporary (Non-Traditional) responsibility of the RBI. It refers to connecting every citizens of the country with the Banking system. Similarly, even Financial Literacy is the temporary responsibility of the RBI. Once the people become financially literate such responsibilities will be automatically discontinued. 

The traditional responsibilities of the RBI, which are permanent in nature are as follows: – 

1.  The RBI is the Banker to the Government. It means that the RBI provides banking facilities to the Central Government as well as the State Governments. At present all the states except Sikkim avail banking facilities from the RBI. It is based on the choice of a state that whether it wants banking facility from the RBI or not. It means the RBI servers as the Banker to the Governments. The Governments may deposit their surplus with the RBI and whenever required they can borrow from the RBI.
2. The RBI is the Banker to the Banks. It means that the Banks may deposit their surplus money with the RBI and whenever they are in need they can also borrow from the RBI. That is the reason why the RBI is also termed as the lender of the last resort. 
3. The RBI regulates the entire Banking System in India. A scheduled bank cannot be set up in India without seeking license from the RBI. Even in case of expansion of branches an Indian Bank may set up branches anywhere provided that 1/4th of the total branches are set up in unbanked rural areas. For a foreign Bank, it is essential to seek permission from the RBI in order to set up a new branch. The RBI also has interference in functioning of Banks in India.
4. The  RBI  also  regulates  some  categories  of  Non-Banking  Financial  Company  (NBFC) operating in India.
5. The RBI formulates Monetary Policies in the country with the help of which it regulates the flow of money supply in the economy. If the liquidity increases, it leads to increase in demand and results in price rise (Inflation). If the money supply falls down, it affects the demand which adversely affects the Economic Growth. Hence, it can be said that with the help of Monetary Policies the RBI controls Inflation, manages Economic Growth and also maintains a stable Exchange Rate of Domestic Currency.
6. The  RBI  is  the  custodian  of  Foreign  Exchange  Reserve  in  India.  India  prefers  hard currencies such as American Dollar, Euro, Yen and Pound in its foreign exchange reserve. Hard currencies are those which are accepted by the entire world. Along with these even Gold and Special Drawing Rights (SDR) are maintained as a part of Foreign Exchange Reserve. Gold is a liquid asset which can be easily converted into cash and it is accepted by entire world. On the other hand, SDR is the currency of IMF. At present India has Foreign Exchange Reserve of approx 580 billion dollar.
7. The RBI issues currency Notes above the denomination of 1 rupee. The 1 rupee note and all the coins are issued by GOI. However, the responsibility for circulating the coins as well as 1 rupee note in the economy lies with the RBI.