RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crore on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs.2,20,000. Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following:

To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than

two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crore in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crore, of which at least Rs. 115 crore should be in gold. The system as it exists today is known as the minimum reserve system. =============================================================================

AT A GLANCE
RBI HISTORY
INAGURATED IN 1935 WITH A SHARE CAPITAL OF RS. 5 CR. THE GOVERNMENT OF INDIA HELD SHARES OF NOMINAL VALUE OF RS. 2,22,000. RBI WAS NATIONALISED IN 1949.

CONSTITUTION
GOVERNOR & 4 DY. GOVERNORS.

OF

RBI:

CENTRAL BOARD OF DIRECTORS OF 20 MEMBERS

1 GOVERNMENT OFFICIAL FROM MINISTRY OF FINANCE. 10 DIRECTORS BY GOVT. OF INDIA 4 DIRECTORS BY CENTRAL GOVT. (represent Local Board)

FUNCTIONS OF THE RESERVE BANK OF INDIA

GENERAL FUNCTIONS:

BANK OF ISSUE. BANKER TO GOVERNMENT. BANKERS BANK. CONTROLLER OF CREDIT. CUSTODIAN OF FOREIGN EXCHANGE RESERVES. SUPERVISORY FUNCTIONS PROMOTIONAL FUNCTIONS

BANK OF ISSUE:
SOLE RIGHT TO ISSUE BANK NOTES OF ALL DENOMINATIONS. SEPARATE ISSUE DEPARTMENT FOR ISSUE OF CURRENCY NOTES. ORIGINAL ASSETS: 2/5TH OF GOLD COINS, GOLD BULLION OR STERLING SECURITIES FOR AMOUNT OF GOLD NOT LESS THAN RS. 40 CR. 3/5TH HELD IN RUPEE COINS, GOI RUPEE SECURITIES, PROMISSIONARY NOTES PAYABLE IN INDIA. MODIFIED PROVISIONS SINCE 1957 (POST-WAR PERIOD) MAINTAIN GOLD & FOREIGN EXCHANGE RESERVES OF RS. 200 CR, OF WHICH RS. 115 CR. SHOULD BE IN GOLD. THIS SYSTEM IS CALLED AS MINIMUM RESERVE SYSTEM.

BANKER TO GOVERNMENT:
ACT AS GOVERNMENT BANKER, AGENT AND ADVISER. OBLIGATION TO TRANSACT GOVT. BUSINESS i.e. RECEIVE & MAKE PAYMENTS ON BEHALF OF GOVT. HELPS GOVT. TO FLOAT NEW LOANS & TO MANAGE PUBLIC DEBT. ACTS AS ADVISER TO THE GOVT. ON ALL MONETARY & BANKING MATTERS.

BANKERS BANK:
EVERY SCHEDULED BANK WAS REQUIRED TO MAINTAIN A CASH BALANCE EQUIVALENT TO 5% OF ITS DEMAND LIABILITES & 2% OF ITS TIME LIABILITES WITH RBI. AT PRESENT BANKS KEEP CASH RESERVES EQUAL TO 3%OF THEIR AGGREGATE DEPOSIT LIABILITIES. SCHEDULED BANKS CAN BORROW OR GET FINANCIAL ACCOMODATION IN TIMES OF NEED. SINCE COMMERCIAL BANKS ALWAYS EXPECT RBI TO COME TO THEIR HELP IN TIME OF CRISIS, RBI ALSO BECOMES LENDER OF THE LAST RESORT.

CONTROLLER OF CREDIT:
RBI HOLDS THE CASH RESERVES OF ALL THE SCHEDULED BANKS. IT CONTROLS THE CREDIT OPERATIONS OF BANKS THRO QUANTITATIVE & QUALITATIVE CONTROLS. IT CONTROLS THE BANKING SYSTEM THRO THE SYSTEM OF LICENSING, INSPECTION AND CALLING FOR INFORMATION. IT ACTS AS THE LENDER OF THE LAST RESORT BY PROVIDING REDISCOUNT FACILITIES TO SCHEDULED BANKS.

CUSTODIAN OF FOREIGN EXCHANGE RESERVES:

MAINTAINS THE OFFICIAL RATE OF EXCHANGE. ACC. TO RBI ACT OF 1934, BANK WAS REQUIRED TO BUY AND SELL AT FIXED RATES(AMOUNT NOT > 10,000) AFTER BECOMING A MEMBER OF THE I.M.F i.e. INTERNATIONAL MONETARY FUND IN 1946, RBI MAINTAINS FIX EXCHANGE RATE WITH ALL OTHER MEMBER COUNTRIES OF THE I.M.F. RBI ACTS AS THE CUSTODIAN OF INDIAS RESERVE OF INTERNATIONAL CURRENCIES.

SUPERVISORY FUNCTIONS:
RBI HAS CERAIN NON-MONETARY FUNCTIONS SUPERVISION OF BANKS PROMOTION OF SOUND BANKING IN INDIA RBI IS AUTHORISED TO CARRY OUT PERIODICAL

INSPECTION OF BANKS. NATIONALISATION OF MAJOR INDIAN SCHEDULED BANKS IMPOSED NEW RESPONSIBILITIES ON RBI FOR DIRECTING THE GROWTH OF BANKING AND CREDIT POLICIES TOWARDS RAPID ECONOMIC GROWTH. PROMOTIONAL FUNCTIONS: PROMOTE BANKING HABIT. EXTEND BANKING FACILITIES TO RURAL & SEMI-URBAN AREAS. ESTABLISH & PROMOTE NEW SPECIALISED FINANCING AGENCIES.

ACCORDINGLY RBI SET UP :

DEPOSIT INSURANCE CORPORATION (1962) UNIT TRUST OF INDIA (1964) INDUSTRIAL DEV. BANK OF INDIA (1964) AGRICULTURAL REFINANCE CORPORATION OF INDIA (1963) INDUSTRIAL RECONSTRUCTION CORPORATION OF INDIA (1972) THE BANK HAS DEVELOPED CO-OPERATIVE CREDIT MOVEMENT TO: ENCOURAGE SAVING

ELIMINATE MONEY-LENDERS FROM VILLAGE RBI WITH HELP OF ARDC PROVIDED LONG-TERM FINANCE TO FARMERS.

==========================================================================================================

SO SPECIFICALLY SPEAKING THE RBIs MULTI DIMENSIONAL ROLE HAS BEEN ON THE RISE
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. Major Functions and Responsibilities of RBI 1. Issuer of currency 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 governments 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. 2. Banker to the Government 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 governments securities. RBI advises the government on banking and financial subjects, international finance, financing of five-year plans, mobilizing resources, and banking legislation. 3. Managing Government Securities 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 Smooth functioning of the market Readily available to potential buyers Easily available in large numbers Undisturbed maturity-structure of interest rates because of excess or deficit supply o Not subject to quick and huge fluctuations o Reasonable liquidity of investments o Good reception of the new issues of government loans 4. Banker to Other Banks o o o o

The role of RBI as a banker to other banks is as follows:

o o o

Holds some of the cash reserves of banks Lends funds for short period Provides centralized clearing and quick remittance facilities

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. 5. Controller of Money Supply and Credit 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 Open Market Operations Changes in statutory reserve requirements for banks Lending policies towards banks Control over interest rate structure Statutory liquidity ration of banks 6. Exchange Manager and Controller o o o o o

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. 7. Publisher of Monetary Data and Other Data 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.

8. Promotional Role of RBI 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