Hello everyone, in the previous topic we had suggested you the Top 5 Best Books to Sharp Your Mind. Today we are going to talk about the Reserve Bank of India and its function, composition, zonal offices, and monetary policies.

Reserve Bank of India (RBI)

Introduction

The Reserve Bank of India (RBI) was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank of India is the Central Bank of India entrusted with the multidimensional role.

It performs important monetary functions from issue of currency note to maintenance of monetary stability in the country. Initially, the Reserve Bank of India was a private share-holders company that was nationalized in 1949.

Its affairs are governed by the Central Board of Directors appointed by the Government of India. Since its inception, the Reserve Bank of India had played an important role in the economic development and monetary stability of the country.

The role of RBI differs from other banks since it does not get engaged in day-to-day retail banking; does not do micro or macro regular financing. In the country, it is the Bankers’ Bank and formulates monetary guidelines and policies which are to be followed by all the banks operating in the country.

RBI logo is to remind and symbolize not just its governmental status, its links to the country but also its independence and a critical separation of the RBI from the government. The consideration, according to the RBI, in selecting the logo was, that “the seal should emphasize the Governmental status of the Bank, but not too closely” and that “it should have something Indian in the design.

The First Governor of RBI was Sir Osborne Smith and the First Indian Governor of RBI was C D Deshmukh.

The First woman Deputy Governor of RBI was K J Udeshi.

The only Prime Minister who had been the Governor of RBI was Dr. Manmohan Singh.

The current governor of RBI (2021) is Shaktikanta Das.

FUNCTIONS OF RESERVE BANK OF INDIA

Functions of the Reserve Bank of India are given below-

1. Banker to Government

The Reserve Bank of India accepts and makes payments on behalf of the Central Government. It carries out its exchange, remittance, management of public debt, and other banking functions of the Central Government. The Central Government entrusts its money, remittance, exchange, and banking transactions in India with the Reserve Bank of India. It deals in repo or reverses repo.

2. Right to Issue Bank Notes

The Reserve Bank of India has the sole right to issue bank notes in India. The bank notes are legal tender guaranteed by the Central Government. The issue of bank note is conducted by a separate department called the issue department.

The Central Government on the recommendation of the Central Board specifies the denomination of bank notes including the discontinuance of bank notes. The Central Government approves design, form, and material of Bank notes on consideration of recommendations of the Central Board.

3. Formulates Banking Policy

The Reserve is empowered to formulate banking policy in the interest of the public or depositors banking policy in relation to advances and provide direction on the purpose of the advances, margins to be maintained in a secured advance, the maximum amount of advance may be made, the rate of interest, terms, and conditions for advances or guarantees may be given.

4. Licensing Authority

The Reserve Bank of India is empowered to grant the license to commence banking business in India, including the power to cancel a license granted to a banking company.

5. Banker’s Bank

The banks listed in the second schedule and non-schedule banks shall maintain a cash reserve ratio with the Reserve bank of India with a view to securing the monetary stability in the country.

It provides loans and advances in foreign currency to scheduled Banks and to other financial institutions. It purchases, sells, or discount any bill of exchange or a promissory note or makes a loan or advances to the scheduled bank.

6. Depositor Awareness and Education

The Reserve Bank of India has constituted a fund called the “Depositor Education and Awareness Fund.” The fund is utilized for the promotion of depositors‟ interest and other purposes in the interest of the depositor.

7. Regulation and Management of Foreign Exchange

The Reserve Bank of India is empowered to regulate, prohibit, and restrict dealing in foreign exchange. It issues licenses to banks and other institutions to act as the authorized agency in the foreign exchange market.

Composition of RBI

Reserve Bank of India is controlled by a central board of directors. The directors are appointed for a 4-year term by the Government of India in keeping with the Reserve Bank of India Act.

The Central Board consists of:

• Governor. (Executive Head)
• 4 Deputy Governors. (Accompanied the Governor)
• 2 Finance Ministry representatives.
• 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai, and New Delhi.

Zonal Offices of RBI

• RBI has four zonal offices- New Delhi for North, Chennai for South, Kolkata for East, and Mumbai for West.
• The Reserve Bank of India has 19 regional offices and 11 sub-offices at present.
• The bank has two training colleges for its officers- Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune.

Monetary Policy of the RBI

RBI works as the monetary authority of India and there by operates the monetary policy. Reserve Bank of India announces Monetary Policy every year in the month of April. This is followed by three quarterly Reviews in July, October, and January.

But, RBI at its discretion can announce the measures at any point in time. The Annual Monetary Policy is made up of two parts they are-

Part A– macroeconomic and monetary developments.

Part B– Actions are taken and fresh policy measures.

The monetary policy of the RBI deals with almost all other vital topics such as financial stability, financial markets, interest rates, credit delivery, regulatory norms, financial inclusion, and institutional developments, etc.

The following are the principal objectives of the monetary policy of RBI are as follow-

1. Full Employment

Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but also because of the loss of social standing and self-respect.

 2. Price Stability

One of the policy objectives of monetary policy is to stabilize the price level. Both economists and laymen favor this policy because fluctuations in prices bring uncertainty and instability to the economy.

3. Economic Growth

One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time.”

4. Balance of Payments

Another objective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.

Instruments of Monetary Policy of RBI

Some of the following instruments are used by RBI as a part of their monetary policies are-

1. Open Market Operations

An open market operation is an instrument that involves buying or selling of securities like government bonds from or to the public and banks.  The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow.

2. Repo Rate (RR)

Repo Rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank of India(RBI).

3. Reverse Repo Rate (RRR)

Reverse Repo Rate is needed when RBI borrows money from banks when there is excess liquidity in the market the banks benefit is out of it by receiving interest for their holding with the central bank during high levels of inflation in the economy, the RBI increases the reverse repo rate.

4. Call Rate (CR)

Call rate is the rate of interest on call loans, which are loans that are due for payment on demand.

5. Marginal Standing Facility (MSF)

This is a window for banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up completely under the marginal standing facility, a bank can borrow funds up to 1% of their Net Demand and Time Liabilities (NDTL).

6. Cash Reserve Ratio (CRR)

Cash Reserve Ratio is a specified amount of bank deposits which banks are required to keep with the RBI in the form of reserves or balances. The higher the CRR with the RBI, the lower will be the liquidity in the system and vice versa.

7. Statutory Liquidity Ratio (SLR)

All financial institutions have to maintain a certain quantity of liquid assets with themselves at any point in time of their total time and demand liabilities. This is known as the Statutory Liquidity Ratio. The assets are kept in non-cash forms such as precious metals, bonds, etc.

8. Bank Rate Policy

It is also known as the discount rate, bank rates are interest charged by the RBI for providing funds and loans to the banking system. An increase in bank rate increases the cost of borrowing by commercial banks which results in the reduction in credit volume to the banks and hence the supply of money declines. An increase in the bank rate is the symbol of the tightening of the RBI monetary policy.

9. Credit Ceiling

With this instrument, RBI issues prior information or direction that loans to the commercial bank will be given up to a certain limit. In this case, a commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors. A few examples of credit ceilings are agriculture sector advances and priority sector lending.

10. Inflation

Inflation is the decline of purchasing power of a given currency over time.

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