The Reserve Bank of India: Function and Role in Business Facilitation

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Hence, it was the Reserve Bank of India Act of 1934 that led to the establishment of the Reserve Bank and set in motion various actions that led to the start of operations in 1935. Since then, RBI’s functions and role have gone through numerous changes as the nature of the Indian financial sectors and economy changed. Initiating as a private shareholders’ bank, it was in 1949 the RBI was nationalised, and then it assumed the responsibility to meet the aspirations of a newly independent nation and its people.

The official external reserves of the country consist of monetary gold and foreign assets of the Reserve Bank, besides SDR holdings. The Reserve Bank, as the custodian of the country’s foreign ex- change reserves, is vested with the duty of managing the investment and utilisation of the reserves in the , most advantageous manger. The RBI has the author­ity to enter into foreign exchange transactions both on its own account and on behalf of the Govern­ment. The RBI acts as the banker to the government of India and State Governments (except Jammu and Kashmir). Such research undertaken by RBI focuses on issues and problems arising at the national and international levels, having a critical impact on the Indian economy. RBI acts as an advisor to the government when called upon to do so on financial and banking-related matters.

Savings, current, and time savings all seem to be types of deposits. A commercial bank also provides money to its customers based on loans, cash credit, overdrafts, and bill discounting, among other things. The organization also aims to maintain macroeconomic stability, financial stability, and a modern monetary policy framework in order to address the challenges posed by an increasingly complex economy. RBI is the central body that works as the Monetary Authority and works for managing foreign exchange and issuing currency. Along with this, the RBI regulates and administers the country’s financial system.

Candidates preparing for the upcoming UPSC exam can download the Reserve Bank of India UPSC notes by downloading the PDF with the link provided here. The compiled notes contain all the details about the functions of RBI, its history, objectives, and role in the Indian economy. RBI supports the country’s sustainable economic growth and heads all types of banks in India. Below you will learn everything about the RBI, its structure and composition, functions of Reserve Bank of India, its powers, acts administered by the RBI, and its initiatives. The state governments along with the central government depend on the RBI for their monetary funds.

Essentially, the Reserve Bank of India (RBI) has displayed vitality and flexibility to meet the requirements of its evolving economy. By providing all the insights about RBI, we are sure it’ll be useful to you in gaining a better appreciation of the concerns and policies of the Reserve Bank. The RBI serves to protect the interests of depositors through an effective regulatory framework. Keeping a close check on how banking operations are being conducted and the bank’s solvency, as well as preserving overall financial stability through a variety of policy actions. The development and implementation of monetary policy and ensuring monetary stability in India are two of the RBI’s most crucial responsibilities.

  • The RBI is in charge of receiving and disbursing funds on behalf of the various government agencies.
  • RBI uses methods like On-site inspections, off-site surveillance, scrutiny & periodic meetings to supervise new bank licences, setting capital requirements and regulating interest rates in specific areas.
  • RBI is a common banker for the different banks that enables the settlement of interbank transfers of funds.

With the induction of technology, the RBI has also strengthened its infrastructure in enabling fast and efficient money transfers, secure foreign exchange systems and established the biggest monetary network of the nation. In a family, there are bound to be agreements and disagreements and the family head takes up the responsibility of sorting out their issues. Within banks, there would be various differences in terms of their financial operations and banking obligations.

Understanding Reserve Bank of India (RBI) and How It Works

Initially, the ownership of almost all the share capital was in the hands of non-government shareholders. So in order to prevent the centralisation of the shares in few hands, the RBI was nationalised on January 1, 1949. The RBI provides financial and banking-related advice to the government as and when requested. The RBI may specify one or more authorities or committees with such members as the RBI may appoint to advise any banking company or banking companies on resolution of stressed assets. After this act, the government of India entered into agreements with the Presidency Banks to work as authorized agents to promote circulations of the paper notes across length and breadth of British India.

  • To further this cause, the RBI created the Banking Ombudsman to address complaints of bank customers.
  • The Reserve Bank of India (RBI) was established as the central bank of India based on the recommendations of the Hilton Young Commission.
  • The RBI has been empowered by law to super­vise, regulate and control the activities of commer­cial and cooperative banks.
  • The RBI lays down the framework on which banking operations are carried out.
  • Since then, RBI’s functions and role have gone through numerous changes as the nature of the Indian financial sectors and economy changed.

BRBNM was established by RBI on 3 February 1995 for the purpose to enable RBI to bridge the gap between maintain, demand and supply of Indian rupee notes in the country. The Reserve Bank regulates the amount of money in circulation by loaning money to the banking sector and influencing the total demand for money from the private and public sectors. Domestic, fiscal and monetary policies have, therefore, an im­portant role in maintaining the external value of the currency. Reserve Bank of India has a very impor­tant role to play in this area. The legal provision regarding the management of foreign exchange reserves is mentioned in RBI Act 1934. The prime objective of the RBI is to maintain the interests and confidence of the public in the system.

Reserve Bank of India (RBI) – Timeline

RBI’s nationalisation strived to achieve coordination between the policies of the government and those of the central bank. In this blog, Fintra aims to demystify RBI by providing basic details regarding the Reserve Bank’s operations and the multifaceted nature of its functions. The blog highlights how the Reserve Bank’s decisions touch the daily lives of all Indians and help plan out India’s economic and financial course. The original choice for the seal of RBI was the East India Company Double Mohur, with the sketch of the Lion and Palm Tree. However, it was decided to replace the lion with the tiger, the national animal of India.

Important Questions on Role and Function of Reserve Bank of India

This is because the RBI Governor expressed concerns regarding the regulation of cryptocurrency and its rapidly growing demand in the country. The governor of RBI is appointed by the PMO (Prime Minister’s office) on the Union Finance Minister’s recommendation as per the Reserve Bank oF India Act of 1934 Section 8(1)(a). Sir Osborne Smith accounted for the first governor of the Reserve Bank of India, and the current governor is Shaktikanta Das. A) Nominated by the government- It includes 2 government officials and 10 directors of different fields. Currently, the Bank’s Central Office, located at Mumbai, has twenty-seven departments. (Box No.3) These departments frame policies in their respective work areas.

The RBI is in charge of looking after India’s foreign exchange reserves. The RBI Act of 1934 contains legal provisions relating to the administration of foreign exchange reserves. In terms of Sections 35AA & 35AB of the Banking Regulation Act, 1949, the RBI has been specifically authorized to issue directions to banking companies for resolution of stressed assets.

This department will also perform the duties of developing and monitoring the instruments of the money market and also monitoring the government securities and foreign money markets. Section 22 of the RBI Act, 1934 makes provided that RBI has the sole right to issue ‘bank notes’ of all denominations. Thus, RBI is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes. In consultation with the Government, the Reserve Bank routinely addresses security issues and targets ways to enhance security features to reduce the risk of counterfeiting or forgery of currency notes.

What is the RBI’s role in managing foreign exchange reserves?

In fact, the RBI performs the four basic functions of management, viz., planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks. In 1921, the Imperial Bank of India was established to perform as Central Bank of India by the British Government. But unfortunately Imperial Bank failed to show its performance up to the mark and didn’t achieve any success as the Central Bank. The board is constituted by co-opting four directors from the Central Board as members for a term of two years and is chaired by the governor. One deputy governor, usually the deputy governor in charge of banking regulation and supervision, is nominated as the vice-chairman of the board. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.

The government securities which are provided by banks as collateral can not come from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties). Whilst coins are minted by, and ₹1 notes are issued by the Government of India (GoI), the RBI works as an agent of GoI for the distribution and handling of coins. RBI also works to prevent counterfeiting of currency by regularly upgrading security features of currency. National Payments Corporation of India was established by RBI in Dec 2008 for the purpose of management of the payment and settlement systems in India. ICICI provides financial services and promotes economic development and growth. Learn about the industrial credit and investment corporation of India.

Reserve Bank of India

If the RBI increases SLR to 50% and CRR to 20% then bank will be left only with ₹600 million (US$7.5 million) for operations. Now it will be very difficult for the bank to maintain profitability with such a small amount of capital. The bank will be left with no choice but to raise its interest rate which will make borrowing by its customers more costly. This will in turn reduce the overall demand and hence prices will eventually come down.

RBI uses methods like On-site inspections, off-site surveillance, scrutiny & periodic meetings to supervise new bank licences, setting capital requirements and regulating interest rates in specific areas. On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange arising from trade and capital transactions. The RBI’s Financial Markets Department (FMD) participates in the foreign exchange market by undertaking sales/purchases of foreign currency to ease volatility in periods of excess demand for/supply of foreign currency. A commercial bank’s main functions are to receive deposits and lend money.

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