Introduction of Reserve Bank of India

Reserve Bank of India is also known as India's Central Bank. It was established on 1st April
1935. Although the bank was initially owned privately, it has been taken up the Government of
India ever since, it was nationalized. The bank has been vested with immense responsibility of
reviewing and reconstructing the economic stability of the country by formulating economic
policies and ensuring a proper exchange of currency. In this regard, the Reserve Bank of India is
also known as the banker of banks.

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are
formulated.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as:"...to regulate the issue of Bank Notes and keeping of reserves with aview to securing
monetary stability in India and generally to operate the currency and credit system of the country
to its advantage."The Preamble of the RBI speaks about the basic functions of the bank. It deals
with the issuing the bank notes and keeping reserves in order to secure monetary stability in the
country. It also aims at operating and boosting up the currency and credit infrastructure of India

History of Reserve Bank of India

The central bank was founded in 1935 to respond to economic troubles after the First World
War. The Reserve Bank of India was set up on the recommendations of the

Hilton Young Commission

. The commission submitted its report in the year 1926, though the bank was not set up for
another nine years. The Preamble of the Reserve Bank of India describes the basic functions of
the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system in the best
interests of the country. The Central Office of the Reserve Bank was initially established in
Kolkata, Bengal, but was permanently moved to Mumbai in 1937.The Reserve Bank continued
to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April
1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank
served as the central bank for Pakistan until June 1948when the State Bank of Pakistan
commenced operations. Though originally set up as a shareholders· bank, the RBI has been fully
owned by the government of India since its nationalization in 1949.Between 1950 and 1960, the
Indian government developed a centrally planned economic policy and focused on the
agricultural sector. The administration nationalized commercial banks and established, based on

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the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank
regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic
plan with loans. Between 1969 and 1980 the Indian government nationalized 20banks. The
regulation of the economy and especially the financial sector was reinforced by the Gandhi
administration and their successors in the 1970s and 1980s. The central bank became the central
player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.
The measures aimed at better economic development and had a huge effect on the company
policy of the institutes. The banks lent money in selected sectors, like agri-business and small
trade companies. The branch was forced to establish two new offices in the country for every
newly established office in a town. The oil crises in 1973resulted in increasing inflation, and the
RBI restricted monetary policy to reduce the effects. A lot of committees analyzed the Indian
economy between 1985 and1991. Their results had an effect on the RBI. The Board for
Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research
and the Security & Exchange Board of India investigated the national economy as a whole, and
the security and exchange board proposed better methods for more effective markets and the
protection of investor interest. The national economy came down in July 1991 and the Indian
rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimha
Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well
as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private
banking sector. This turning point should reinforce the market and was often called neo-liberal
The central bank deregulated bank interests and some sectors of the financial market like the
trust and property markets. This first phase was a success and the central government forced a
diversity liberalization to diversify owner structures in 1998.The National Stock Exchange of
India took the trade on in June 1994and the RBI allowed nationalized banks in July to interact
with the capital market to reinforce their capital base. The central bank founded a subsidiary
company the Bharatiya Reserve Bank Note Mudran Limited in February 1995 to produce
banknotes. The Foreign Exchange Management Act from 1999 came into force in June 2000. It
should improve the foreign exchange market, international investments in India and transactions.
The RBI promoted the development of the financial market in the last years, allowed online
banking in 2001 and established a new payment system in 2004 - 2005(National Electronic Fund
Transfer). The Security Printing &Minting Corporation of India Ltd., a merger of nine
institutions, was founded in 2006 and produces banknotes and coins.The national economy's
growth rate came down to 5.8% in the last quarter of 2008 - 2009 and the central bank promotes
the economic development. In year 2010 reserve bank of India announced the new symbol of
rupee and officially declared it.

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The role and functions of R.B.I inIndian Economy

The functions of R.B.I is divided into three parts

1. Traditional Functions of Reserve Bank of India RBI

2. Developmental or Promotional Functions of RBI.

3. Supervisory Functions of Reserve Bank of India.

 Traditional Functions:

Traditional functions are those functions which every central bank of each nation performs all
over the world. Basically these functions are in line with the objectives with which the bank is
setup. It includes fundamental functions of the Central Bank. They comprise the following tasks.

1. Issue of Currency Notes

: The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee
note and coins of smaller denomination. These currency notes are legal tender issued by the RBI.
Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers
not only to issue and withdraw but even to exchange these currency notes for other
denominations. It issues these notes against the security of gold bullion, foreign securities, rupee
coins, exchange bills and promissory notes and government of India bonds.

2. Banker to other Banks

: The RBI being an apex monitory institution has obligatory powers to guide, help and direct
other commercial banks in the country. The RBI can control the volumes of banks reserves and
allow other banks to create credit in that proportion. Every commercial bank has to maintain a
part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks
approach the RBI for fund. Thus it is called as the lender of the last resort.

3. Banker to the Government

: The RBI being the apex monitory body has to work as an agent of the central and state
governments. It performs various banking function such as to accept deposits, taxes and make
payments on behalf of the government. It works as are preventative of the government even at
the international level. I maintains government accounts, provides financial advice to the
government. It manages government public debts and maintains foreign exchange reserves on
behalf of the government. It provides over draft facility to the government when it faces financial
crunch.

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4. Exchange Rate Management

: It is an essential function of the RBI. In order to maintain stability in the external value of
rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and
implement the foreign exchange rate policy which will help in attaining the exchange rate
stability. In order to maintain the exchange rate stability it has to bring demand and supply of the
foreign currency (U.S Dollar) close to each other.5.

5. Credit Control Function

: Commercial bank in the country creates credit according to the demand in the economy. But if
this credit creation is unchecked or unregulated then it leads the economy into inflationary
cycles. On the other credit creation is below the required limit then it harms the growth of the
economy. As a central bank of the nation the RBI has to look for growth with price stability.
Thus it regulates the credit creation capacity of commercial banks by using various credit control
tools.

6. Supervisory Function

: The RBI has been endowed with vast powers for supervising the banking system in the country.
It has powers to issue license for setting up new banks, to open new branches, to decide
minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide
and direct the commercial banks in India. It can have periodical inspections an audit of the
commercial banks in India

 Developmental or Promotional Functions:

Along with the routine traditional functions, central banks especially in the developing country
like India have to perform numerous functions. These functions are country specific functions
and can change according to the requirements of that country. The RBI has been performing as a
promoter of the financial system since its inception. Some of the major development functions of
the RBI are maintained below.

1. Development of the Financial System

: The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid economic
development of the nation. The RBI has encouraged establishment of main banking and non-
banking institutions to cater to the credit requirements of diverse sectors of the economy.

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2. Development of Agriculture

: In an agrarian economy like ours, theRBI has to provide special attention for the credit need
of agriculture and allied activities. It has successfully rendered service in this direction by
increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and
Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks(RRBs).

3. Provision of Industrial Finance

: Rapid industrial growth is the keyto faster economic development. In this regard, the adequate
and timely availability of credit to small, medium and large industry is very significant. In this
regard the RBI has always been instrumental in setting up special financial institutions such as
ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

4. Pro visions of Training

: The RBI has always tried to provide essential training to the staff of the banking industry. The
RBI has set up the bankers' training colleges at several places. National

Institute of Bank Management i.e. NIBM, Bankers Staff College i.e. BSC and College of
Agriculture Banking i.e. CAB is few to mention.

5. Collection of Data

: Being the apex monetary authority of the country, the RBI collects process and disseminates
statistical data on several topics. It includes interest rate, inflation, savings and investments etc.
This data proves to be quite useful for researchers and policy makers.6.

6. Publication of the Reports

: The Reserve Bank has its separate publication division. This division collects and publishes
data on several sectors of the economy. The reports and bulletins are regularly published by the
RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of
Commercial Banks India., etc. This information is made available to the publical so at cheaper
rates.

7. Promotion of Banking Habits

: As an apex organization, the RBI always tries to promote the banking habits in the country. It
institutionalizes savings and takes measures for an expansion of the banking network. It has set
up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964,
NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits

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among the people. During economic reforms it has taken many initiatives for encouraging and
promoting banking in India.8.

8. Promotion of Export through Refinance

: The RBI always tries to encourage the facilities for providing finance for foreign trade
especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the
Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending
for export purpose.

 Supervisory Functions:

The reserve bank also performs many supervisory functions. It has authority to regulate and
administer the entire banking and financial system. Some of its supervisory functions are given
below.

1. Granting license to banks

: The RBI grants license to banks for carrying its business. License is also given for opening
extension counters, new branches, even to close down existing branches.

2. Bank Inspection:

The RBI grants license to banks working as perthe directives and in a prudent manner without
undue risk. Inaddition to this it can ask for periodical information from banks onvarious
components of assets and liabilities.

3. Control over NBFIs:

The Non-Bank Financial Institutions are not influenced by the working of a monitory policy.
However RBI has a right to issue directives to the NBFIs from time to time regarding their
functioning. Through periodic inspection, it can control the NBFIs.

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Implementation of the Deposit Insurance Scheme

: The RBI has setup the Deposit Insurance Guarantee Corporation in order to protect the deposits
of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The
RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

RBI weapons of control

(a) Bank Rate:

RBI (Reserve Bank of India) lends to the commercial banks through its discount window to help
the banks meet depositors demands and reserve requirements. The interest rate the RBI charges
the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and
money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity
and money supply in the system, it will increase the bank rate.

(b)Cash Reserve Requirements (CRR):

Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this
rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement
depending on whether it wants to affect a decrease or an increase in the money supply. An
increase in CRR will make it mandatory on the part of the banks to hold a large proportion of
their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and
they will lend less. This will in turn decrease the money supply.

(c) Statutory Liquidity Requirements (SLR):

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and
approved securities. RBI has stepped up liquidity requirements for two reasons: - Higher
liquidity ratio forces commercial banks to maintain a larger proportion of their resources in
liquid form and thus reduces their capacity to grant loans and advances thus it is an anti-
inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to
investment in government and approved securities.

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Conclusion:

Reserve Bank of India is apex bank of India it has wide powers to control the banking system in
India. It has great functions of controlling supervising etc. R.B.I has shown remarkable
achievements from its formation. It has made nations economy at good sound. R.B.I plays an
important role in stabilizing the Indian economy

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 Bibliography

 https://www.rbi.org.in/
 https://en.wikipedia.org/wiki/Reserve_Bank_of_India
 economictimes.indiatimes.com/topic/Reserve-Bank-of-India
 https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf

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