The Reserve Bank of India (RBI) | Functions, Definition, and Role | Fintra (2024)

Posted by Fintra , updated 2022-04-03

The Reserve Bank of India (RBI) is the nation's central bank and is also known as the banker’s bank. It began its operations on April 1, 1935, under the Reserve Bank of India Act. RBI was established to ensure monetary stability by enforcing monetary policies to create financial stability in India. Its functions include regulating India's currency and credit systems, monetary management, government debt management, foreign exchange and reserves management, financial regulation and supervision, and it also acts as a banker to the banks and the Government. Right from the start, RBI has played an active role in developing various sectors, especially the rural and agriculture sectors. Over the years, these functions have evolved in duo with global and national developments.

In this blog, Fintra aims to demystify RBI by providing basic details regarding the Reserve Bank’s operations and the multifaceted nature of its functions. In today's time, the RBI focuses on various other things, which include maintaining price and financial stability, managing the supply of good currency notes within India, ensuring credit flow to productive sectors of the economy, and supervising and taking the lead role in the development of financial markets and institutions. The blog highlights how the Reserve Bank’s decisions touch the daily lives of all Indians and help plan out India's economic and financial course.

The topics we will highlight are:

1. What Is the Reserve Bank of India (RBI)?
2. The Organization Structure of The Reserve Bank of India (RBI)
3. The Main Functions and Objectives of The Reserve Bank of India (RBI)
4. The Legal Framework of The Reserve Bank of India (RBI)
5. The Reserve Bank of India (RBI) Annual Publications
6. The Reserve Bank of India (RBI) Policies
7. The Reserve Bank of India (RBI) Paper-based and Electronic Payments Initiatives

What Is the Reserve Bank of India (RBI)?

Headquarteredin Mumbai, the Reserve Bank of India (RBI) serves the financial market in various ways. For example, the bank sets the overnight interbank lending rate, known as Mumbai Interbank Offer Rate (MIBOR) and this acts as a benchmark for interest rate–related financial instruments in India. The Reserve Bank of India (RBI) origins can be traced to 1926, when the Hilton-Young Commission, known as Royal Commission on Indian Currency and Finance, urged to create a central bank for India to separate the control of currency and credit from the Government and to extend the banking facilities throughout the nation. Hence, it was the Reserve Bank of India Act of 1934 that led to the establishment of the Reserve Bank and set in motion various actions that led to the start of operations in 1935. Since then, RBI's functions and role have gone through numerous changes as the nature of the Indian financial sectors and economy changed. Initiating as a private shareholders’ bank, it was in 1949 the RBI was nationalised, and then it assumed the responsibility to meet the aspirations of a newly independent nation and its people. RBI's nationalisation strived to achieve coordination between the policies of the government and those of the central bank.

RBI is entirely operated and owned by the Government of India, and the Preamble of RBI, describes the basic objectives of the Reserve Bank which are as follows:

• To regulate the issue of Banknotes
• Securing monetary stability in India
• To operate the currency and credit system of India to its advantage

Summing up, the RBI's main objective is to conduct consolidated supervision of India's financial sector, which consists of financial institutions, commercial banks, and non-banking finance firms. The various initiatives that RBI has adopted include introducing off-site surveillance of banks, restructuring bank inspections, and financial institutions, along with strengthening the role of auditors.

The RBI implements, formulates, and monitors India’s monetary policy. The goal of the bank’s management is to maintain price stability and ensure credit is reaching the productive economic sectors. Along with these tasks, the RBI even manages foreign exchange under the Foreign Exchange Management Act of 1999. This act permits the RBI to facilitate external trade and payments to boost the health and development of India's foreign exchange market.

The RBI functions as a supervisor and regulator of the overall financial system. Due to this, it brings more confidence in the public toward the national financial system as it protects interest rates, and provides positive banking alternatives to the public at large. Finally, the RBI also acts as the issuer of the national currency, which means the currency is issued or destroyed depending on its fit for current circulation. This provides the Indian public with the supply of currency in the form of dependable notes and coins.

During the last few decades and in today’s time, we have noticed the growing integration of the national economy and financial system with the globalising world. Although rising global integration does benefit India as it enables the nation to expand the scope and scale of growth of its economy, at the same time, it also exposes India to global shocks. Therefore, maintaining financial stability has become a vital mandate for RBI. In turn, this has arisen the requirement for effective coordination and consultation with other regulators within India and abroad.

The Organization Structure of The Reserve Bank of India (RBI)

The Central Board of Directors retains the topmost position in the Reserve Bank’s organizational structure. Under the provisions of the Reserve Bank of India Act, 1934, the Central Board of Directors gets appointed by the Government, and it has the primary authority and responsibility for the oversight of the Reserve Bank. It also delegates some vital functions to the Local Boards and various committees.The Reserve Bank’s chief executive is the Governor, who directs and supervises the affairs and business of the RBI. The management team includes the Deputy Governors and Executive Directors.

Furthermore, the Central Government appoints fourteen Directors on the Central Board, which consists of one Director each from the four Local Boards. The other ten Directors represent various sectors of the economy, such as industry, trade, agriculture, and professions. Do note that all these appointments are made for a period of four years. The Government even nominates one Government official as a Director to represent the Government, and he/she is usually the Finance Secretary to the Government of India and remains on the Board ‘during the pleasure of the Central Government’. Moreover, the Reserve Bank Governor and a max of four Deputy Governors are ex officio Directors on the Central Board as well.

The Main Functions and Objectives of The Reserve Bank of India (RBI)

The main functions and objectives of RBI are as follows:

Monetary Authority

• Develops, monitors, and implements the monetary policy
• Objective: While keeping in mind the objective of growth, RBI strives to maintain the price stability

Supervisor and Regulator of the financial system

• Stipulates comprehensive parameters of banking operations in which India's banking and financial system functions
• Objective: To maintain public confidence in the system, provide cost-effective banking services to the public, and protect depositors' interest

Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999
• Objective: To boost external trade and payment and promote steady and clear development and maintenance of the foreign exchange market in India

Issuer of Currency

• Issues, exchanges, and/or destroys currency and coins that are not fit for circulation
• Objective: To provide the public with an adequate quantity of supplies of currency notes and coins in good quality

Developmental Role

• Perform a wide range of promotional functions to support and sustain national objectives

Supervisor and Regulator of Payment and Settlement Systems

• Introduces and upgrades efficient and secure modes of payment systems in India to meet the needs of the entire public. Currently, the payment methods include paper-based instruments, electronic instruments, and other instruments, such as pre-paid systems (e-wallets), mobile internet banking, ATM-based transactions, Point-of-sale terminals and online transactions
• Objective: To strengthen the confidence of the public in the payment and settlement system

Related Functions

• Banker to the Government: It performs merchant banking functions for the state and central governments and also acts as their banker
• Banker to Banks: For all scheduled banks, it maintains banking accounts

The Legal Framework of The Reserve Bank of India (RBI)

• Reserve Bank of India Act, 1934
• Public Debt Act, 1944/Government Securities Act, 2006
• Government Securities Regulations, 2007
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II)
• Credit Information Companies(Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007
• Payment and Settlement Systems Regulations, 2008 As Amended up to 2022
• The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of 2015
• Factoring Regulation Act, 2011

The Reserve Bank of India (RBI) Annual Publications

Annual Report:Every year RBI releases its annual report which is a statutory report that consists of the valuation and progress of the Indian economy. It provides an overview of the economy, the works and results of the RBI during that year, the Bank's future vision and agenda for the following year, and the annual accounts of the Reserve Bank.

Report on Trend and Progress of Banking in India: This report displays the assessment of the progress and policies of the financial sector for the preceding year.

Lectures: The RBI has formed three annual lectures- Two of them are conducted by past Governors of the Reserve Bank and the other one is done by a noted economist.

Report on Currency and Finance: This report is written and presented by the staff of the Reserve Bank of India. It highlights a particular theme and presents a thorough economic analysis of the issues related to the theme.

Handbook of Statistics on the Indian Economy:This report is a vital initiative taken by the Reserve Bank in an attempt to improve data distribution. It acts as a resourceful storehouse of all major statistical information.

State Finances: A Study of Budgets:This report is a vital source of segregated state-wise financial data as it provides an analytical data-driven conception of the financial position of state governments across India. These data inputs get used when analysing specific issues of relevance.

Statistical Tables Relating to Banks in India:This annual publication includes a holistic timeline of data about the Scheduled Commercial Banks (SCBs) of India. The report even bears the information of balance sheets and performance indicators for every SCB in India. Besides this, it also contains segregated data sources on a few vital factors related to bank-wise, bank group-wise, and state-wise levels of information.

Basic Statistical Returns: This is another yearly data-focused journal representing complex information on the number of offices, employees, deposits, and credit of Scheduled Commercial Banks in minute levels of detail like region-wise, state-wise, and district-wise information. This info also reveals the population and credit needs in each bank.

The Reserve Bank of India (RBI) Policies

Repo Rate

Repo or repurchase rate acts as the benchmark interest rate at which the RBI lends funds to all other banks for a short term. As the repo rate increases, borrowing from RBI tends to become more expensive; hence, customers or the public bears the outcome of high-interest rates.

Reverse Repo Rate (RRR)

The Reverse Repo Rate refers to the short-term borrowing rate at which RBI borrows funds from other banks. The RBI uses this method to decrease inflation whenever there is an excess of money in the banking system.

Cash Reserve Ratio (CRR)

Cash Reserve Ratio refers to the particular share of a bank’s total deposit, which is compulsory and it has to be maintained with the RBI in the form of liquid cash.

Statutory Liquidity Ratio (SLR)

Leaving aside the cash reserve ratio, banks are also required to maintain liquid assets in the form of gold and approved securities. If the SLR gets higher it disables the banks to grant more loans.

The Reserve Bank of India (RBI) Paper-based and Electronic Payments Initiatives

The Paper-Based Payments:

• The usage of paper-based instruments such as demand drafts and cheques accounts for nearly 60% of the volume of total non-cash transactions. However, these forms of payments have now been steadily decreasing due to the inventions of electronic modes of payments that are gaining popularity because they provide comparative convenience, safety, and overall efficiency.
• The Magnetic Ink Character Recognition (MICR) technology in the paper-based payment method was introduced by RBI for speeding up the processing of cheques and obtaining efficiency in it.
• Later on, there was a separate clearing system for paper-based payment methods, which was introduced for clearing cheques having high values that range from Rupees one lakh and above. Also, the introduction of the cheque truncation (CTS) system limits the physical movement of cheques and uses images for enhanced secure payment processing.

The Electronic Payments:

RBI's initiatives in the domain of electronic payment systems are vast and immense. The various types of electronic forms of payment are as follows:

• Electronic Clearing Service (ECS): This form of payment enables a customer's bank account to be credited with a specified value and payment on a set date. This feature makes EMIs, and/or other monthly bills hassle-free.
• National Electronic Clearing Service (NECS): This feature offers multiple advantages to beneficiary accounts with destination branches against a single debit of the account of the sponsor bank.
• Electronic Funds Transfer (EFT): This retail funds transfer system enables an account holder of a bank to transfer funds electronically to another account holder with any other intermediate or participating bank.
• National Electronic Funds Transfer (NEFT): NEFT is a secure system to make real-time fund transfer between individuals/corporates.
• Real-Time Gross Settlement (RTGS): RTGS is a fund transfer function where transfers of funds occur from one bank to another on a real-time basis without any delays or netting with any other transaction.
• Clearing Corporation of India Limited (CCIL): The CCIL system was invented for financial institutions, banks, non-banking financial companies, and primary dealers to function as an industry service mechanism for clearing settlement of trades in the government securities, money market, and foreign exchange markets.
• The RBI has also made changes to the Prepaid Payment Instruments (PPI), known as e-wallets. Some of these changes include KYC (know your customer). KYC is the procedure of collecting an individual’s details by their service provider and verifying the same with the respective government bodies.

Conclusion

Although many years have passed by, the objectives which were outlined in the Preamble for RBI still hold good. Moreover, over these years, it's evident from the multifaceted functions that the Reserve Bank performs today, its role and priorities have altered in tandem with the ongoing changes in national priorities and global developments. Essentially, the Reserve Bank of India (RBI) has displayed vitality and flexibility to meet the requirements of its evolving economy. By providing all the insights about RBI, we are sure it'll be useful to you in gaining a better appreciation of the concerns and policies of the Reserve Bank.