The Reserve Bank of India (RBI) is India's central bank, which was created under the Reserve Bank of India Act on April 1, 1935. The Reserve Bank of India is in charge of managing India's currency and credit systems and uses monetary policy to maintain financial stability.
1st Governor of RBI: Sir Osborne Smith.
2nd Governor of RBI: Sir James Braid Taylor.
3rd Governor of RBI: C. D. Deshmukh.
The Reserve Bank of India was founded on Dr. Ambedkar's strategies, which he outlined in his book "The Problem of the Rupee - Its Origin and Solution."
In 1926, the "Royal Commission on Indian Currency and Finance" recommended that this central banking organisation be founded. The Hilton Young Body was another name for this commission.
The Reserve Bank of India was nationalised in 1949 and joined the Asian Clearing Union as a member bank. It is also a member of the International Monetary Fund (IMF).
The RBI, which is based in Mumbai, provides a variety of services to the financial industry. The overnight interbank lending rate is set by the bank. The Mumbai Interbank Offer Rate (MIBOR) is an interest rate–related financial instrument benchmark in India.
The RBI's primary responsibility is to supervise India's financial sector, which includes commercial banks, financial institutions, and non-banking financing companies.
The RBI has taken steps to reform bank inspections, introduce off-site surveillance of banks and financial institutions, and strengthen the role of auditors.
The RBI is responsible for formulating, implementing, and monitoring India's monetary policy. The bank's management goal is to keep prices stable and ensure that credit reaches productive economic sectors.
Under the Foreign Exchange Management Act of 1999, the RBI also manages all foreign exchange. This legislation empowers the Reserve Bank of India (RBI) to facilitate external commerce and payments in order to foster the growth and health of India's foreign currency market.
The RBI regulates and supervises the financial sector as a whole. This boosts public confidence in the financial system, protects interest rates, and gives people more favourable banking options.
Finally, the RBI serves as the nation's currency issuer. This means that currency in India is either issued or destroyed based on its suitability for current circulation. This ensures that the Indian populace has access to currency in the form of reliable notes and coins, which is still a problem in the country.
The Reserve Bank of India (RBI) outlawed the usage of virtual currencies by the financial entities and banks it regulates in 2018.
RBI’s Important Publication (half yearly)
• Financial Stability Report
• Monetary Policy Report
• Report on Financial Review
TIMELINE OF RBI
1934 The British enacted the Reserve Bank of India Act
1935 Reserve Bank of India was established on 1st of April in Calcutta
1937 Reserve Bank of India was permanently moved to Mumbai
1949 Got nationalized after independence. The bank was held by private stakeholders before this.
The original RBI Act of 1934 was revised in 2016, providing the legal foundation for the flexible inflation-targeting framework to be implemented.
The RBI announced an expert group on primary urban cooperative banks on February 16, 2021. NS Vishwanathan is the committee's chairman.
RBI Monetary Policy (2021-22) was released on February 5, 2021. The central bank retained the repo rate at 4% while forecasting 10.5 percent GDP growth in Fiscal Year (FY) 2022.
FUNCTIONS OF RBI
Formulates, executes, and oversees monetary policy.
Maintaining price stability while keeping the growth goal in mind is the goal.
Regulator and supervisor of the financial system:
The banking and financial system of the country is governed by broad characteristics of banking operations.
Maintain public trust in the system, protect depositors' interests, and provide public banking services at a reasonable cost.
Manager of Foreign Exchange:
The Foreign Exchange Management Act of 1999 is administered by this office.
The goal is to make international trade and payments easier, as well as to encourage the orderly development and maintenance of India's foreign exchange market.
Issuer of currency:
Issues and trades cash and coins that are no longer fit for circulation, or destroys them.
The goal is to provide a sufficient supply of high-quality currency notes and coins to the general public.
To assist national objectives, performs a wide range of promotional functions.
Regulator and Supervisor of Payment and Settlement Systems:
Introduces and improves secure and efficient payment methods in the country to fulfil the needs of the general population.
The goal is to keep the public's faith in the payment and settlement system.
Government banker: performs merchant banking services for the federal and state governments, as well as acting as their banker.
Banker to Banks: maintains all scheduled banks' banking accounts.
STRUCTURE OF RBI
A central board of directors oversees the Reserve Bank of India. The government of India appoints the directors for a four-year term in accordance with the Reserve Bank of India Act.
The Central Board consists of:
• 4 Deputy Governors
• 2 Finance Ministry representatives
• 4 directors will be appointed to represent local boards in Mumbai, Kolkata, Chennai, and New Delhi.
Governor is the RBI's executive director.
Four deputy governors accompany the governor.
Sir Osborne Smith was the first Governor of the RBI, while C D Deshmukh was the first Indian Governor.
K J Udeshi was the RBI's first female deputy governor.
Manmohan Singh was the only Prime Minister to have served as Governor of the Reserve Bank of India.
Shaktikanta Das is the current governor of the Reserve Bank of India (RBI).
WHY IS THERE A NEED FOR THE INDEPENDENCE OF RBI?
Separation of powers, according to Montesquieu, ensures the efficient functioning of essential government institutions because no single organisation can gain a political monopoly and abuse power.
Acemolu and Robinson argue in their book “Why Nations Fail” that inclusive economic and political systems provide rule of law and infuse creativity through plurality of decision-making. Extractive institutions, on the other hand, will result in the concentration of resources in the hands of ruling elites, suffocating change and innovation.
• The RBI is not constitutionally autonomous because the 1934 Act that governs its operations grants the government the authority to direct it. The governor of the central bank and four deputies are appointed by the government.
• According to the RBI Act of 1934, the Central Government may provide the Bank such orders as it deems necessary in the public interest after consulting with the Governor of the Bank.
• Technically, the Act allows the government to take over the central bank if it deems the RBI has failed to meet its commitments.
• In practise, however, the RBI is given complete power to do anything it wants.
• Since the 1990s, the government has been disciplined by the expanding presence of market and market participants, which has forced Central Banks to remain independent despite political pressure.
• RBI's autonomy in its operations is a must for it to play its job successfully.
• However, the RBI's independence has been questioned numerous times as a result of a never-ending tug of war between the bank and the government for additional power.
• The primary aim of central banks is long-term financial stability and growth. While the government/party in power is primarily concerned with short-term growth, they will be facing elections during the year, whether at the federal or state level.
• Central banks attempt to establish credibility by making difficult decisions that represent renouncing short-term profits in favour of long-term goals such as financial or price stability, which may not be popular with the government.
• The majority of the domains handled by RBI offer potential front-loaded economic gains, but there is a tail risk in the form of financial instability.
• Reducing the repo/policy rate lowers the interest rate in the economy, allowing the money supply to expand. It may, however, result in inflationary pressures in the economy.
• In the short run, excessive interest rate cuts can lead to more credit creation and an appearance of growth. However, it has the potential to cause an asset price bubble, low-quality bank lending, and other issues that would jeopardise long-term financial stability.
• Allowing limitless foreign capital into the economy has the potential to boost FPIs in G-Sec and corporate bonds. When these FPIs reverse, however, it might result in rupee depreciation and market turbulence. Consider the 2013 taper tantrum.
• Bank balance sheets can be made to seem decent through regulatory forbearance, but this will lead to banking crises like the current NPAs.
• Because it regulates both private and public sector banks, the RBI should be considered independent of the government. Otherwise, a conflict of interest in the banking system might stymie private players.
• RBI’s indepndance is also important as governments instead of focusing on costly and complex structural reforms, will take the easy road of manipulating the RBI.