RBI: Functions & Role

Notes

The Reserve Bank of India (RBI) is India's central bank. It was established on 1 April 1935 under the RBI Act, 1934, following the Hilton Young Commission (1926) (Dr. B.R. Ambedkar's The Problem of the Rupee influenced it). It was nationalised on 1 January 1949. It was first in Kolkata and moved to Mumbai in 1937. The first Governor was Sir Osborne Smith; C.D. Deshmukh was the first Indian Governor (1943).

Functions

Monetary authority: formulates and implements monetary policy for price stability (the MPC).
Issuer of currency: has the sole right to issue banknotes (the one-rupee note and coins are issued by the Government of India). The Minimum Reserve System (since 1957) requires gold and foreign securities of at least ₹200 crore, of which ₹115 crore must be gold.
Banker to the Government: manages accounts, public debt and borrowing of the Centre and States.
Banker's bank and lender of last resort: holds the cash reserves of banks.
Regulator and supervisor of banks and NBFCs: under the Banking Regulation Act, 1949; the Board for Financial Supervision (1994).
Manager of foreign exchange: under the FEMA, 1999; manages forex reserves.
Regulator of payment systems: under the Payment and Settlement Systems Act, 2007.
Developmental role: financial inclusion, financial literacy, support for agriculture and MSME credit.

Organisation

Governor and up to four Deputy Governors, appointed by the Central Government. The Central Board (the Governor, Deputy Governors, and nominated directors) directs affairs; four Local Boards (Mumbai, Delhi, Kolkata and Chennai).
The Deposit Insurance and Credit Guarantee Corporation (DICGC) (a subsidiary) insures deposits up to ₹5 lakh per depositor per bank.
Surplus transfer to the Government; the Bimal Jalan Committee (2019) reviewed the economic capital framework.

Recent developments: the Central Bank Digital Currency (e₹) pilots, the Integrated Ombudsman Scheme (2021), and RBI Retail Direct for G-secs.

Key Points

RBI: established 1 April 1935; nationalised 1 January 1949.
Functions: monetary authority, currency issuer, banker to the Government, banker's bank, regulator, forex manager.
Governor and four Deputy Governors; Central Board of Directors.
DICGC insures deposits up to ₹5 lakh.
Minimum Reserve System: ₹200 crore (gold ₹115 crore).

MCQs

Q2. The currency note issued by the Government of India (not the RBI) is the: (a) ₹10 note (b) ₹1 note (c) ₹100 note (d) ₹2,000 note Ans: (b).

Q3. The RBI acts as the "lender of last resort" to: (a) The Government (b) Commercial banks (c) Households (d) Foreign banks only Ans: (b).