Reserve Bank of India
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. This commission submitted its report in the year 1926, though the bank was not set up for nine years.
The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning.
Office of RBI :
The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. It has 22 regional offices.
Nationalization of RBI:
With a view to have a cordinated regulation of Indian banking Indian Banking Act was passed in march 1949. To make RBI more powerful the Govt. of India nationalised RBI on January 1, 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.
Functions of RBI
1. Issue of Notes: Under Section 22 of the Reserve Bank of India Act, RBI has sole right to issue currency notes of various denominations except one rupee notes.
The One Rupee note is issued by Ministry of Finance and It bears the signatures of Finance Secretary, while other notes bear the signature of Governor RBI.
However RBI is the only source of legal tender money because 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.
Issue Department: RBI has a separate Issue Department which is responsible for the issue of currency notes.
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 crores 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.
Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
How Currency is issued in India?
2. Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The RBI performs all the banking functions of the State & Central Government and tenders advice related to economic and monetary policy. The Reserve Bank of India helps the Government – both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.
3. Bankers’ Bank:
The Reserve Bank of India acts as the bankers’ bank. As per the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. However , by an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India.
4. Controller of Credit
The Reserve Bank of India has the responsibility of the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. For this purpose RBI makes extensive use of qualitative and quantitative use of techniques such as changing the Bank rate or through open market operations.
As per Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.
5. Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
As per the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000.
After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India’s reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.
6. Supervisory Functions
In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.
7. Promotional functions
RBI performs a variety of developmental and promotional functions also such as helping in the
1. Set up of the IFCI and the SFC (State Financial Corporations)
2. Set up the Deposit Insurance Corporation in 1962
3. the Unit Trust of India in 1964,
4. The Industrial Development Bank of India also in 1964,
5. The Agricultural Refinance Corporation of India in 1963
6. Industrial Reconstruction Corporation of India in 1972.
Legal Framework of RBI
1. Umbrella Acts
- Reserve Bank of India Act, 1934: governs the Reserve Bank functions
- Banking Regulation Act, 1949: governs the financial sector
Acts governing specific functions
- Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market
- Securities Contract (Regulation) Act, 1956: Regulates government securities market
- Indian Coinage Act, 1906:Governs currency and coins
- Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999:Governs trade and foreign exchange market
Acts governing Banking Operations
- Companies Act, 1956:Governs banks as companies
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks
- Bankers’ Books Evidence Act
- Banking Secrecy Act
- Negotiable Instruments Act, 1881
Acts governing Individual Institutions
- State Bank of India Act, 1954
- The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
- The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
- National Bank for Agriculture and Rural Development Act
- National Housing Bank Act
- Deposit Insurance and Credit Guarantee Corporation Act
Training Establishments of RBI
RBI sas six training establishments
College of Agricultural Banking
Bankers Training College
Reserve Bank of India Staff College
The above three are part of the Reserve Bank of India
National Institute for Bank Management
Indira Gandhi Institute for Development Research (IGIDR)
Institute for Development and Research in Banking Technology (IDRBT)
The above three are autonomous Institutions
Subsidiaries of RBI
National Housing Bank(NHB)
Deposit Insurance and Credit Guarantee Corporation of India(DICGC)
Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
National Bank for Agriculture and Rural Development (NABARD)
The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India.
Monetary Policy : It is called as money and credit policy. It refers to a regulatory policy by which the RBI maintaines control over the money supply and demand for the realization of economic goals.
Annual Policy Statement:
Since 1999-2000 , with the decline in agricultural credit and rise in its Industrial credit RBi has started making its annual policy statement in April every year and quarterly review of the same.
Instruments of Control:
- Bank Rate: The rate at which RBI lends to its clients on long term borrowings.It is a direct quantitative method of RBI to control the economy.
- Open market Operations: Bying and selling of Government securities, treasury bills and other approved securities, short term commercial Bills, Switch Operations (purchansing one loans against the sale of another operations) .
- Cash Reserve Ratio: The banks keep a proportion of their assets in the form of cash -partly as cash on hand and partly as balance (reserve) with RBI . This is cash reserve ratio. RBI has power to fix CRR n commercial banks . Earlier this range was from 6% to 15 % . By an Amendment Act in 2006, this limit has been removed and so RBI is free to fix any CRR. On April 21, 2009 RBI in its latest Annual Monetary Policy kept CRR unchanged at 5 % .
- Statutory Liquidity Ratio: It is the ratio of the total deposits of of a bank that it has to maintain with itself in non cash form. This means that it is against net demand and time liabilities. The Banking Regulation (Amendment) Act of 1962 provides for maintaining a minimum SLR of 25% by the bank against their net demand and time liabilities, however RBI is powered by this act to raise the SLR up to 40%. The Reserve bank of India ( Amendment) Act 2005 which was approved by Lok Sabha on may 17, 2006 amends the Reserve Bank Act for providing flexibility to the Central Bank in Fixing the CRR.
- REPO rate and Reverse REPO Rate: Repo is “Repurchase Agreement. An agreement to sell a security for a specified price and to buy it back later at another specified price. A repo is essentially a secured loan. Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. On March 4, 2009 it was 5% in India.
Some latest Current Affairs Related to RBI
Annual Policy Statement:
RBI declared it Annual Policy Statement for the Year 2009-10 on 21st April 2009 in consistance with the current assessment of macroeconomic and monetary conditions, the Reserve Bank has decided to
- reduce the repo rate under the LAF by 25 basis points from 5.0% to 4.75% with immediate effect.
- reduce the reverse repo rate under the LAF by 25 basis points from 3.5% to 3.25% with immediate effect.
- keep the CRR unchanged at 5.0% of net demand and time liabilities (NDTL).
Note issue of Rs. 1000 Note:
Rs. 1000 note was released by RBI on October 9, 2000. The Rs. 1000 notes which were discontinued 22 years ago in 1978 to discourage hoarding by black marketers were be re circulated with additional security features like optically variable ink and micro letters.
Issue of 10 Rupee Coin:
On April 11, 2009, The Reserve Bank of India (RBI) has launched 10 Rupee coins. They are bimetallic coins comprising of Nickel-Bronze and Ferrous Steel. The weight of the coin is 8 grams and the diameter is 28 mm. The 10 Rupee coins were supposed to be released three years ago, but were delayed due to some technical issues. The new 10 Rupee coin has the lion capitol, the numeric 10 and the year of manufacturing on one side. On the reverse side, there is a double line cross with a dot in each pellet of cross. The value of the coin is indicated on both Hindi and English. The 10 Rupee coin was designed by National Institute of Design (NID), Ahmedabad with the theme of Unity in Diversity. The coins are being prepared at Noida and Mumbai mints.
Reconstitution of Technical Advisory Committee (TAC) : June 24, 2009
The Technical Advisory Committee (TAC) on Monetary Policy, Reserve Bank of India’s arm to advise it on its monetary policy stance, has been reconstituted effective July 1, 2009.
The committee under the chairmanship of Governor Duvvuri Subbarao will have deputy governors Shyamala Gopinath, Usha Thorat and K.C. Chakrabarty as members.The tenure of the committee will be up to June 30, 2011.
K C Chakrabarty has been appointmented as RBI Deputy Governor: June 15, 2009
Punjab National Bank CMD K C Chakrabarty has been appointmented as RBI Deputy Governor. K C Chakrabarty has demitted office on 14 June 2009 on his appointment as Deputy Governor, Reserve Bank of India, Chakrabarty’s appointment to RBI came in place of V Leeladhar who had retired in December. RBI has four deputy governors, of whom Rakesh Mohan has resigned to take a teaching profession in Stanford University in the US.