Important Institutions: RBI

Formation

In accordance with the guidelines of the Reserve Bank of India Act 1934, the Reserve Bank of India was founded on April 1, 1935.

  • When the Reserve Bank was first founded, its Central Office was located in Calcutta. However, in 1937, it was relocated permanently to Mumbai. The GovernorGovernor works out policy in the Central Office, which also serves as his office.
  • The Reserve Bank was initially privately owned, but since being nationalized in 1949, the Indian government has wholly owned the institution.

What Does the RBI's Preamble Say?

The Reserve Bank of India's primary responsibilities are listed in the Preamble as follows:

  • In order to ensure monetary stability in India and generally to run the Currency and credit system of the nation in a way that benefits it, it is necessary to regulate the issuance of banknotes and the keeping of reserves.
  • To possess a contemporary framework for monetary policy to tackle the problem of an escalatingly complex economy.
  • Keeping the goal of growth in mind while maintaining price stability.

What is RBI's organizational structure?

  • A central board of directors oversees all operations at the Reserve Bank. In accordance with the Reserve Bank of India Act, the board is chosen by  government of india.
  • For four years, the directors are chosen or appointed.

What exactly does RBI stand for?

  • Official Directors (central board of directors)
    • Full-time: A maximum of four Deputy Governors and the Governor.
      • The current GovernorGovernor of the RBI is Shri Shaktikanta Das.
  • Non-Official Directors
    • The government nominated ten directors from different fields and two government officials.
    • Additionally, there are four directors, one from each of the four regional local boards.

What are the RBI's primary responsibilities?

  • Monetary Authority:
    • It oversees the execution of the monetary policy, maintains price stability, and keeps growing as a goal in mind.
    • The statutory foundation for implementing the flexible inflation targeting framework was provided by an amendment to the RBI Act, 1934, which was made in May 2016. 
    • An empowered six-member Monetary Policy Committee (MPC) shall be established by the Central Government by notification in the Official Gazette, under Section 45ZB of the amended RBI Act of 1934.

Monetary Policy Committee

  • In 2016, it was formed.
  • It was established to increase accountability and transparency in monetary policy decisions.
  • The MPC determines the policy interest rate needed to hit the inflation target.
  • Six people make up the committee, with Governor RBI serving as the official chairman. The government chooses three members, three of whom are from RBI.
  • In consultation with the Reserve Bank, the Government of India sets an inflation target once every five years.

The current inflation target is pegged at 4% with a -2/+2 tolerance till March 31, 2021.

  • Financial System Supervisor and Regulator:
    • Prescribes broad parameters for banking activities, such as issuing licenses, branch expansion, asset liquidity, bank mergers, etc., within which the nation's banking and financial system operate.
    • Objective: Uphold public trust in the system, safeguard depositors' interests, and offer affordable banking services to the general public, including commercial and cooperative banking.
  • Manager of Foreign Exchange:
    • Oversees India's foreign exchange reserves.
    • It promotes the orderly growth and maintenance of India's foreign exchange market and facilitates payments and trade with other countries.
    • Additionally, it keeps the rupee's external value intact.
  • The issuer of Currency:
    • Releases money, exchanges it or destroys unfit-for-circulation coins.
    • Giving sufficient public supplies of high-quality currency notes and coins is the goal.
  • Developmental Role:
    • Makes institutional arrangements for rural or agricultural finance, among other promotional tasks that support national goals.
    • In accordance with the guidelines (Priority Sector Lending) periodically issued by the Reserve Bank of India, commercial banks provide loans to small-scale industrial units.
  • Financial Inclusion:
    • The Reserve Bank of India has chosen a bank-led approach to promote financial inclusion. RBI has taken several policy initiatives. Among the significant ones are:
      • Accounts with no minimum balance requirements or very low minimum balance requirements, as well as minimal fees, would make these accounts available to large segments of the population.
      • The use of technology, including ATMs, handheld devices to identify user accounts through a card and biometric identifier, deposit-taking machines, Internet banking, and mobile banking capabilities, will make it easier to provide banking services to all facets of society.
  • Related Functions:
    • For the federal and state governments, a banker to the government handles merchant banking tasks.
    • It manages the public debt and the money, remittances, and exchange of the central government.
    • It serves as a lender of last resort by providing money to banks while maintaining all scheduled banks' accounts.

Which Acts are Administered by the RBI?

  • Reserve Bank of India Act, 1934
  • Public Debt Act, 1944/Government Securities Act, 2006
  • Government Securities Regulations, 2007
  • Banking Regulation Act, 1949
  • Foreign Exchange Management Act, 1999
  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II)
  • Credit Information Companies (Regulation) Act, 2005
  • Payment and Settlement Systems Act, 2007
    • Payment and Settlement Systems Act, 2007, As Amended up to 2019
    • Payment and Settlement Systems Regulations, 2008, As Amended up to 2022
  • Factoring Regulation Act, 2011

What actions has RBI taken so far?

  • The GovernorGovernor of the Reserve Bank of India (RBI) recently opened the RBI Innovation Hub in Bengaluru.
    • To establish an ecosystem that prioritizes promoting access to financial services and products for the nation's low-income population, it has been established as a Section 8 company under the Companies Act of 2013.
    • It is an RBI subsidiary that the RBI owns in its entirety.
  • A mechanism to facilitate international trade in rupees (INR) was most recently established by the RBI and is now in place.
    • All exports and imports under this arrangement may be denominated and invoiced in rupees (INR), and the exchange rate between the currencies of the two trading partner countries may be market-determined in accordance with the general framework for cross-border trade transactions in INR under the Foreign Exchange Management Act, 1999 (FEMA).

How independently does the RBI operate?

  • The central government may occasionally give the RBI the directions it deems necessary in the public interest under section 7 of the RBI Act after consulting with the GovernorGovernor of the bank. Furthermore, no law demands the independence of the RBI.
  • Although all commercial banks, including PSBs, private banks, and foreign banks, are considered part of the RBI, it has always been considered independent.
  • It has the authority to oversee not only the creation of monetary policy but also the operation of all banks.
  • RBI must have autonomy in its operation to perform its function effectively.
  • The ongoing struggle between the bank and the government to gain more power has, however, led to numerous instances where the independence of the RBI has been questioned.
  • The following have been the primary causes:
    • Lack of action by the RBI to slow the growth of non-performing assets
    • Due to the RBI's strict monetary policy, there is less financial liquidity.
    • The government does not view the RBI's corrective actions to clean up the banking system very favorably.
    • The opposition between the government's short-term populist agenda and the RBI's long-term approach to price stability.
    • Regulation of Public Sector Banks: One significant restriction is that the Reserve Bank is legally barred from taking the full range of actions against Public Sector Banks (PSBs), including asset sales, management, and board replacements, license revocations, and resolution actions like mergers and sales, all of which it can and does use successfully in the case of private banks.
    • Through piecemeal legislative changes that either directly or indirectly erode the separation of the central bank from the government, the statutory authority of the central bank is being eroded.

What are some of RBI's key publications?

  • Monetary Policy Report
  • Report on Financial Review
  • Financial Stability Report