Reserve Bank of India (RBI)
The RBI is the central bank of the country. It was established in early twentieth century, as most of other central banks in other parts of the world.
- It was set up on the recommendations of the Hilton Young Commission.
- The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.
- The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.
- The Bank, which was originally set up as a shareholder’s bank, was nationalized in 1949.
- The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.
- With liberalisation, the Bank’s focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.
Functions:can be briefly described quoting the preamble of RBI, “…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.”Below is in details, all the functions performed by RBI:
- Monetary Policy
The agreement on Monetary Policy Framework between the Government and the Reserve Bank of India dated February 20, 2015 defines the price stability objective explicitly in terms of the target for inflation – as measured by the consumer price index-combined (CPI-C) – in the near to medium-term, i.e., (a) below 6 per cent by January 2016, and (b) 4 per cent (+/-) 2 per cent for the financial year 2016-17 and all subsequent years.
- It followed as a recommendation of Urijit Patel Committee and its consequent adoption by RBI
- With the agreement on Monetary Policy Framework between the Government and the Reserve Bank of India dated February 20, 2015, the Reserve Bank has formally adopted a flexible inflation targeting (FIT) framework. As announced in the Union Budget for 2015-16, decision making by an empowered monetary policy committee (MPC) would require amendment of the Reserve Bank of India Act, which the Government intends to do in 2015-16.
Instruments of Monetary Policy
- Cash Reserve Ratio (CRR): The share of net demand and time liabilities (deposits) that banks must maintain as cash balance with the Reserve Bank.
- Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities (deposits) that banks must maintain in safe and liquid assets, such as, government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
- Refinance facilities: Sector-specific refinance facilities aim at achieving sector specific objectives through provision of liquidity at a cost linked to the policy repo rate. The Reserve Bank has, however, been progressively de-emphasising sector specific policies as they interfere with the transmission mechanism.
- Liquidity Adjustment Facility (LAF): Consists of overnight and term repo/reverse repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected in the LAF through term-repos.
- Term Repos: Since October 2013, the Reserve Bank has introduced term repos (of different tenors, such as, 7/14/28 days), to inject liquidity over a period that is longer than overnight. The aim of term repo is to help develop inter-bank money market, which in turn can set market based benchmarks for pricing of loans and deposits, and through that improve transmission of monetary policy.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their SLR portfolio up to a limit (currently two per cent of their net demand and time liabilities deposits) at a penal rate of interest (currently 100 basis points above the repo rate). This provides a safety valve against unanticipated liquidity shocks to the banking system. MSF rate and reverse repo rate determine the corridor for the daily movement in short term money market interest rates.
- Open Market Operations (OMOs): These include both, outright purchase/sale of government securities (for injection/absorption of liquidity)
- Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
- Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The mobilised cash is held in a separate government account with the Reserve Bank. The instrument thus has features of both, SLR and CRR.
2.Issuer of Currency
- Regulation: RBI has a critical role in maintaining the soundness of banking system, financial stability and public confidence in the system. It regulates
- Commercial banks
- C-operative banks
- Non-Banking Financial Institutes/Companies
- Financial Market : Major market segments under the regulatory ambit of the Reserve Bank are interest rate markets, including Government Securities market and money markets; foreign exchange markets; derivatives on interest rates/prices, repo, foreign exchange rates as well as credit derivatives.
- Financial Inclusion
- Priority Sector Lending
- Banking extension to remote areas – increase of penetration
- Consumer Education and Protection
- Banker and Debt Manager to Government: The Reserve Bank of India Act, 1934 requires the Central Government to entrust the Reserve Bank with all its money, remittance, exchange and banking transactions in India and the management of its public debt. The Government also deposits its cash balances with the Reserve Bank. The Reserve Bank may also, by agreement, act as the banker and debt manager to State Governments. Currently, the Reserve Bank acts as banker to all the State Governments in India (including Union Territory of Puducherry), except Sikkim. For Sikkim, it has limited agreement for management of its public debt.
Under a scheme introduced in 1976, every ministry and department of the Central Government has been allotted a specific public sector bank for handling its transactions. Hence, the Reserve Bank does not handle government’s day-to-day transactions as before, except where it has been nominated as banker to a particular ministry or department.
- Management of Public Debt: There is ongoing reform program initiated to separate this function from RBI role.
- Banker to Banks
- Foreign Exchange Management: The Reserve Bank’s exchange rate policy focusses on ensuring orderly conditions in the foreign exchange market. For the purpose, it closely monitors the developments in the financial markets at home and abroad. When necessary, it intervenes in the market by buying or selling foreign currencies. The market operations are undertaken either directly or through public sector banks.
- Payment and Settlement Systems: like ECS, NEFT, RTGS et.
- Research and Data
- Provide reliable, data-driven information for policy and decision-making
- Supply accurate and timely data for academic research as well as to the general public
- Provide support for collaborative research to research institutions/universities
- To develop and maintain statistical data reporting systems
- To conduct forward-looking surveys for monetary policy
- Educate the public
- Annual Report
- Report on Trend and Progress of Banking in India
- Half Yearly
- Financial Stability Report
- Monetary Policy Report
- Report on Foreign Exchange Reserves
- Quarterly Industrial Outlook Survey
- Consumer Confidence Survey
- Inflation Expectation Survey of Households
- RBI Bulletin
- Central Board
The Reserve Bank’s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
- Appointed/nominated for a period of four years
- Official Directors
- Full-time : Governor and not more than four Deputy Governors
- Non-Official Directors
- Nominated by Government: ten Directors from various fields and two government Official
- Others: four Directors – one each from four local boards
- Local Boards: one each for four regions of the country
RBI has proven to be one of the best central bank of a country, and its efficiency in policy decisions has been proven time and again, where Indian economy has proven to be robust and stable even in times of global downturns.