CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)
22 August 2010
The Reserve Bank of India (RBI) was established on April 1, 1935 as per the provision of RBI Act 1934. At first, the Central Office of RBI was in Calcutta, that was later shifted to Mumbai in year 1937. The governor at the Central is responsible for formulating the policies of RBI. RBI was nationalized in the year 1949.
Central Board
The RBI is monitored by a central board of directors. The board is appointed by the Government of India in accordance with the RBI act.
CA Manish K Dhoot
(CA, B. Com, NCFM, CPCM)
(5015 Points)
Replied 22 August 2010
Functions of RBI
Except for issuing one rupee notes and coins, RBI is the sole authority for the issue of currency in India. The Indian government issues one rupee notes and coins. Major currency is in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand. Earlier, notes of higher denominations were also issued. But, these notes were demonetized to discourage users from indulging in black-market operations.
RBI has two departments - the Issue department and Banking department. The issue department is dedicated to issuing currency. All the currency issued is the monetary liability of RBI that is backed by assets of equal value held by this department. Assets consist of gold, coin, bullion, foreign securities, rupee coins, and the government’s rupee securities. The department acquires these assets whenever required by issuing currency. The conditions governing the composition of these assets determine the nature of the currency standard that prevails in India.
The Banking department of RBI looks after the banking operations. It takes care of the currency in circulation and its withdrawal from circulation. Issuing new currency is known as expansion of currency and withdrawal of currency is known as contraction of currency.
RBI acts as banker, both to the central government and state governments. It manages all the banking transactions of the government involving the receipt and payment of money. In addition, RBI remits exchange and performs other banking operations.
RBI provides short-term credit to the central government. Such credit helps the government to meet any shortfalls in its receipts over its disbursements. RBI also provides short term credit to state governments as advances.
RBI also manages all new issues of government loans, servicing the government debt outstanding, and nurturing the market for government’s securities. RBI advises the government on banking and financial subjects, international finance, financing of five-year plans, mobilizing resources, and banking legislation.
Various financial institutions such as commercial banks are required by law to invest specified minimum proportions of their total assets/liabilities in government securities. RBI administers these investments of institutions.
The other responsibilities of RBI regarding these securities are to ensure -
The role of RBI as a banker to other banks is as follows:
RBI has the authority to statutorily ensure that the scheduled commercial banks deposit a stipulated ratio of their total net liabilities. This ratio is known as cash reserve ratio [CRR]. However, banks can use these deposits to meet their temporary requirements for interbank clearing as the maintenance of CRR is calculated based on the average balance over a period.
In a planned economy, the central bank plays an important role in controlling the paper currency system and inflationary tendency. RBI has to regulate the claims of competing banks on money supply and credit. RBI also needs to meet the credit requirements of the rest of the banking system.
RBI needs to ensure promotion of maximum output, and maintain price stability and a high rate of economic growth. To perform these functions effectively, RBI uses several control instruments such as -
RBI manages exchange control, and represents India as a member of the international Monetary Fund [IMF]. Exchange control was first imposed on India in September 1939 when World War II started and continues till date. Exchange control was imposed on both receipts and payments of foreign exchange.
According to foreign exchange regulations, all foreign exchange receipts, whether on account of export earnings, investment earnings, or capital receipts, whether of private or government accounts, must be sold to RBI either directly or through authorized dealers. Most commercial banks are authorized dealers of RBI.
RBI maintains and provides all essential banking and other economic data, formulating and critically evaluating the economic policies in India. In order to perform this function, RBI collects, collates and publishes data regularly. Users can avail this data in the weekly statements, the RBI monthly bulletin, annual report on currency and finance, and other periodic publications.
Promotion of commercial banking
Promotion of cooperative banking
Promotion of industrial finance
Promotion of export finance
Promotion of credit to weaker sections
Promotion of credit guarantees
Promotion of differential rate of interest scheme
Promotion of credit to priority sections including rural & agricultural sector
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