The Reserve Bank of India – Origin, Evolution And It's Functioning
The Reserve Bank of India (RBI) is India's central banking institution, which controls the issuance and supply of the Indian rupee. Until the Monetary Policy Committee was established in 2016, it also controlled monetary policy in India. It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934. The original share capital was divided into shares of 100 each fully paid, which were initially owned entirely by private shareholders. Following India's independence on 15 August 1947, the RBI was nationalized on 1 January 1949.
The RBI plays an important part in the Development Strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI are entrusted with the 21-member central board of directors: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors to represent important elements of India's economy; and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local boards consists of five members who represent regional interests, the interests of co-operative and indigenous banks.
The central bank was an independent apex monetary authority that regulates banks and provides important financial services like storing of foreign exchange reserves, control of inflation, monetary policy report till August 2016. A central bank is known by different names in different countries. The functions of a central bank vary from country to country and are autonomous or quasi-autonomous bodies and perform or through another agency vital monetary functions in the country. A central bank is a vital financial apex institution of an economy and the key objects of central banks may differ from country to country still they perform activities and functions with the goal of maintaining economic stability and growth of an economy.
The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the name Mint Street.RBI is also known as a banker's bank.
The Reserve Bank of India was established following the Reserve Bank of India Act of 1934. Though privately owned initially, it was nationalized in 1949 and since then fully owned by the Government of India (GoI).
Reserve Bank of India-10 Rupees (1938), the first year of banknote issue.
The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after the First World War. The Reserve Bank of India was conceptualized based on the guidelines presented by the Central Legislative Assembly which passed these guidelines as the RBI Act 1934.RBI was conceptualized as per the guidelines, working style, and outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee – Its origin and its solution” and presented to the Hilton Young Commission. The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the Hilton–Young Commission. 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. The Preamble of the RBI describes its basic functions to regulate the issue of banknotes, keep reserves to secure 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 RBI was established in Calcutta (now Kolkata) but was moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's (now Myanmar) central bank until April 1947 (except during the years of Japanese occupation (1942–45)), even though Burma seceded from the Indian Union in 1937. After the Partition of India in August 1947, the bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI has been fully owned by the Government of India since its nationalization in 1949. RBI has a monopoly of note issues.
In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru, developed a centrally planned economic policy that focused on the agricultural sector. The administration nationalized commercial banks and established, based on the Banking Companies Act, 1949 (later called the 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.
As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system. Meant to restore the trust in the national bank system, it was initialized on 7 December 1961. The Indian government founded funds to promote the economy, and used the slogan "Developing Banking". The government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play a central part in controlling and supporting this public banking sector.
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon Indira Gandhi's return to power in 1980, a further six banks were nationalized. The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s. The central bank became the central player and increased its policies a lot for various tasks like interests, reserve ratio, and visible deposits. These 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 agricultural businesses and small trade companies. The Banking Commission was established on Wednesday, 29 January 1969, to analyze banking costs, effects of legislations, and banking procedures, including non-banking financial intermediaries and indigenous banking on the Government of India economy; with Mr. R.G. Saraiya as the chairman.
The branch was forced to establish two new offices in the country for every newly established office in a town. The oil crisis in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects.
A lot of committees analyzed the Indian economy between 1985 and 1991. 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 interests. The Indian financial market was a leading example of so-called "financial repression" (Mckinnon and Shaw). The Discount and Finance House of India began its operations in the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalization.
The national economy contracted in July 1991 as the Indian rupee was devalued. The currency lost 18% of its value relative to the US dollar, and the Narsimham 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 was meant to 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 1994 and 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 Private Limited—on 3 February 1995 to produce banknotes.
The Foreign Exchange Management Act, 1999 came into force in June 2000. It should improve the item 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 economic development.
In 2016, the Government of India amended the RBI Act to establish the Monetary Policy Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the MPC membership is evenly divided between members of the RBI (including the RBI governor) and independent members appointed by the government. However, in the event of a tie, the vote of the RBI governor is decisive.
The central board of directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, and not more than four deputy governors; four directors to represent the regional boards; 2 — usually the Economic Affairs Secretary and the Financial Services Secretary — from the Ministry of Finance and 10 other directors from various fields. The Reserve Bank — under Raghuram Rajan's governorship — wanted to create a post of a chief operating officer (COO), in the rank of deputy governor and wanted to re-allocate work between the five of them (four deputy governor and COO).
The bank is headed by the governor, currently Shaktikanta Das. There are three deputy governors BP Kanungo, Dr. M. D. Patra, and Mahesh Kumar Jain.
Two of the four deputy governors are traditionally from RBI ranks and are selected from the Bank's Executive Directors. One is nominated from among the Chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as deputy governor of RBI and later as the governor of RBI as with the case of Y. Venugopal Reddy and Duvvuri Subbarao.
Sudha Balakrishnan, a former vice president at National Securities Depository Limited, assumed charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May 2018; she was given the rank of an executive director.
The central bank of any country executes many functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank for the government, and as a banker of scheduled commercial banks. It also works for the overall economic growth of the country. The preamble of the Reserve Bank of India describes its main functions as:
..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.
The primary objective of RBI is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions, and non-banking finance companies.
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. The deputy governors of the reserve bank are ex-officio members. One deputy governor, usually, the deputy governor in charge of banking regulation and supervision, is nominated as the vice-chairman of the board. The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes the deputy governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of the Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS), and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.
Regulator and supervisor of the financial system
The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Its objectives are to maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product, and has to decide the design of the rupee banknotes as well as coins.
Regulator and Supervisor of the Payment and Settlement Systems
Payment and settlement systems play an important role in improving overall economic efficiency. The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, the RBI focuses on the development and functioning of safe, secure, and efficient payment and settlement mechanisms. Two payment systems National Electronic Fund Transfer (NEFT) and Real-Time Gross Settlement (RTGS) allow individuals, companies, and firms to transfer funds from one bank to another. These facilities can only be used for transferring money within the country.
NEFT operates on a deferred net settlement (DNS) basis and settles transactions in batches. The settlement takes place for all transactions received until a particular cut-off time. It operates in hourly batches — there are 12 settlements from 8 am to 7 pm on weekdays and SIX between 8 am and 1 pm on Saturdays. Any transaction initiated after the designated time would have to wait until the next settlement time. In RTGS, transactions are processed continuously, all through the business hours. RBI's settlement time is 9 am to 4:30 pm on weekdays and 9 am to 2:00 pm on Saturdays.
Banker and Debt Manager to Government
Just like individuals need a bank to carry out their financial transactions effectively & efficiently, Governments also need a bank to carry out their financial transactions. RBI serves this purpose for the Government of India (GoI). As a banker to the GoI, RBI maintains its accounts, receive payments into & make payments out of these accounts. RBI also helps GoI to raise money from the public via issuing bonds and government approved securities.
Managing foreign exchange
The central bank manages to reach different goals of the Foreign Exchange Management Act, 1999. Their objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
With the increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market, and RBI has an important role to play in regulating & managing this segment. RBI manages the forex and gold reserves of the nation.
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.
Issue of currency
The Reserve bank of India is the sole body that is authorized to issue currency in India. The bank also destroys the same when they are not fit for circulation. All the money issued by the central bank is its monetary liability, i.e., the central bank is obliged to back the currency with assets of equal value, to enhance public confidence in paper currency. The objectives are to issue banknotes and give public adequate supply of the same, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development because both objectives are diverse in themselves. For printing of notes, the Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly-owned company of the Government of India, has set up printing presses at Nashik, Maharashtra, and Dewas, Madhya Pradesh. The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), also has set up printing presses in Mysore in Karnataka and Salboni in West Bengal. In all, there are four printing presses. And for the minting of coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata, and Hyderabad for coin production.
While coins and one rupee notes are minted by the Government of India (GoI), the RBI works as an agent of GoI for distributing and handling coins. RBI also works to prevent counterfeiting of currency by regularly upgrading the security features of a currency. For printing currency, RBI has four facilities at Dewas, Nasik, Mysore, and Salboni. The RBI is authorized to issue notes up to the value of Rupees ten thousand and coin up to one thousand. New notes of Rupees 500 and 2000 have been issued on 8 November 2016. The old series note of Rupees 1000 and 500 are considered illegal and just paper from midnight on 8 November 2016. Earlier 1000 notes have been discarded by RBI.
Nagpur branch holds most of India's gold deposits.
Reserve Bank of India also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate, and open market operations. As a banker's bank, the RBI facilitates the clearing of cheques between the commercial banks and helps the inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and takes action against it if the need arises. The RBI also advises the banks on various matters for example Corporate Social Responsibility.
Regulator of the Banking System
RBI has the responsibility of regulating the nation's financial system. As a regulator and supervisor of the Indian banking system, it ensures financial stability & public confidence in the banking system. RBI uses methods like On-site inspections, off-site surveillance, scrutiny & periodic meetings to supervise new bank licenses, setting capital requirements, and regulating interest rates in specific areas. RBI is currently focused on implementing Basel III norms.
Detection of fake currency
In order to curb the fake currency problem, RBI has launched a website to raise awareness among masses about fake notes in the market. www.paisaboltahai.rbi.org.in provides information about identifying fake currency.
On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will completely withdraw from the circulation of all banknotes issued prior to 2005. From 1 April 2014, the public will be required to approach banks for exchanging these notes. Banks will provide an exchange facility for these notes until further communication. The reserve bank has also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers. From 1 July 2014, however, to exchange more than 15 pieces of `500 and `1000 notes, non-customers will have to furnish proof of identity and residence as well as show aadhar to the bank branch in which she/he wants to exchange the notes.
This move from the reserve bank is expected to unearth black money held in cash. As the new currency notes have added security features, they would help in curbing the menace of fake currency.
The central bank has to perform a wide range of promotional functions to support national objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of these problems are the results of the dominant part of the public sector.
Key tools in this effort include Priority Sector Lending such as agriculture, micro, and small enterprises (MSE), housing, and education. RBI work towards strengthening and supporting small local banks and encourage banks to open branches in rural areas to include a large section of society in the banking net.
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