Role of Reserve Bank of India

In government exams like SSC, Banking, Railways, etc. we find many questions from the Economy general awareness section. This is a very broad section and sometimes questions are very factual. we will cover the General awareness section comprehensively so that students can learn and get most of the questions correct in this section. In this article, we will discuss the role of the Reserve Bank of India

Reserve Bank of India: An Introduction

• The Reserve Bank of India was incorporated on 1 April 1935 under the provisions of the Reserve Bank of India Act 1934.
  
• The  Reserve Bank’s headquarters were originally established in Calcutta but in 1937 the office was permanently moved to Mumbai, where the Governor sits and where guidelines are formulated.    
  
• Although originally privately owned,  the Reserve Bank has been wholly owned by the Government of India since its nationalization in 1949. 

The Preamble of RBI:

• Regulating the issuance of banknotes and the holding of reserves to ensure currency stability in India and generally operate the country’s money and credit system to their favour.   
  
• A modern monetary policy framework to meet the challenges of an increasingly complex economy. 
  
• Maintenance of price stability, taking into account the growth target. 

Structure of RBI:

• The working of the Reserve Bank is governed by a central board of directors. The Board of Directors is appointed by the Government of India under the Reserve Bank of India Act. 
  
• Directors are appointed/nominated for four-year terms. Official Directors (Central Board) 
  
• Full-time: Governor and no more than four Deputy Governors 
  Shri Shaktikanta Das: The current governor of the RBI 
  
• Unofficial Directors : Appointed by the Government: Ten Directors from different areas and two government officials 
  Other: Four Directors – one in each of four local  (regional) governing bodies 

Main Functions of RBI:

Monetary Authority: 

• Executes and oversees monetary policy and ensures price stability, taking into account the growth objective. 
  
• In May 2016, the RBI Act 1934 was amended, providing the legal basis for the implementation of the flexible inflation targeting framework. 
  
• Section 45ZB of the  RBI Amended Act 1934 also provides that a six-member Plenipotentiary Monetary Policy Committee (MPC) shall be established by the central government by notice in the Official Gazette 

Monetary Policy Committee 

• It was founded in 2016.    
  
• It was created to ensure transparency and accountability when making monetary policy decisions. 
  
• MPC determines the policy rate required to achieve the inflation target.
  
• The Committee consists of six members, with the RBI Governor as ex officio Chair. 3 members are from RBI and 3 are selected by the government. 
  
• The inflation target is set once every five years. It is set up by the Government of India in consultation with the Reserve Bank. 

To Regulate and Supervise the banking operations in the country:

• It prescribes broad parameters for banking operations within which the country’s banking and the financial system operates, such as bank licensing, branch expansion, asset liquidity, bank mergers, etc. 
  
• The objective is to maintain public confidence in the system, protect depositors’ interests and provide profitable banking services, such as B. commercial banks, and cooperative banks to offer. 

Foreign Exchange Manager: 

• Manages the foreign exchange reserves of India. 
  
• It facilitates foreign trade and payment and promotes the orderly development and maintenance of the foreign exchange market in India. 
  
• It also gets the external value of the rupee. 
  

Currency issuing office: 

• It has the authority of issuing, exchanging, and destroying unfit currencies and coins. 
  
• Objective: Supply the population with banknotes and coins in sufficient quantities and of good quality. 

Development Role: 

• Performs a wide range of advocacy roles to support national goals such as B. Managing institutional arrangements for rural or agricultural finance. 
  
• Commercial banks lend to small industrial units under the guidelines (Priority Sector Lending) issued by the Reserve Bank of India from time to time. 
  

Financial Inclusion: 

• The Reserve Bank is responsible for a bank-led model for financial inclusion in India. The RBI has taken a number of policy measures. Some of the most important  are: 
  No-Frills Accounts: Accounts with zero or very low minimum balances and fees that would make these accounts accessible to large sections of the population. 
  
• Use of technology: Devices such as ATMs, wearable devices to identify user accounts with a card and biometric identifier, automatic deposit machines, Internet banking, and mobile banking services to more easily provide banking services to all sectors of society.    

  Other Functions:

•  Government Banker: Performs commercial banking functions for central and state governments. It is in charge of central government money, remittances, and foreign exchange, and also manages its national debt. 
  
• Banker to Banks: Maintains bank accounts at all registered banks. It also acts as a lender of last resort by providing funds to banks.

Recent Developments:

• Recently, the Reserve Bank of India (RBI) Governor opened the Reserve Bank Innovation Hub (RBIH) in Bangalore. 
  
• It was incorporated as a Section 8 company under the Companies Act 2013 to create an ecosystem with an aim of promoting access to financial services and products for the country’s low-income groups.   
  
• It is a wholly-owned subsidiary of  RBI. 
  
• Recently, the RBI introduced a mechanism to facilitate international trade in Rupees (INR), effective immediately. 
  In accordance with the comprehensive framework for cross-border business transactions in INR under the Foreign Exchange Management Act 1999 (FEMA), all exports and imports under this arrangement may be denominated and invoiced in Rupees (INR) and the exchange rate between the currencies of the two trading partner countries be determined.

Independence of RBI:

• Under the RBI Act, the Central Government may from time to time issue instructions to  RBI as it deems necessary in the public interest, after consultation with the Governor of the Bank.   Furthermore, there is no legal act that prescribes the autonomy of the RBI. 
  
• However, the RBI has always been regarded as an autonomous body that has all commercial banks under its umbrella, be they public banks,  private banks, or foreign banks.   
  
• It not only has the power to formulate monetary policy but also to oversee the operations of all banks. Autonomy in its operations is a sine qua non for RBI to effectively fulfil its role. 
  
• However, RBI’s independence has been questioned many times as attempts have been made to wrest more power between the bank and the government. The main reasons for this were: 
  
• RBI’s failure to control the growth of distressed assets. 
  
• Reduced liquidity in the economy due to the RBI’s restrictive monetary policy. 
  
• Corrective measures are taken by RBI to clean up the banking system, which is not viewed very positively by the government. 
  
• The conflict between the government’s short-term populist agenda and the RBI’s long-term vision of price stability. Regulating Public Sector Banks: A key caveat is that the Reserve Bank is barred by law from taking the full range of actions against public sector banks (PSBs), such as mergers or sales, which they effectively do at private banks can and do implement.   
  
• Erosion of central bank statutory powers through partial legislative changes that directly or indirectly reduce the central bank’s separation from government. 

Important Reports Published By The RBI:

• Financial Stability Report 
  
• Monetary Policy Report 
  
• Financial Report