BANKING AWARENESS: RESERVE BANK OF INDIA

Reserve Bank of India

The Reserve Bank of India is India's central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of 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 nationalised 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 is entrusted with the 21-member Central Board of Directors: the Governor, 4 Deputy Governors, 2 Finance Ministry representatives, 10 government-nominated directors to represent important elements from India's economy, and 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of 5 members who represent regional interests, and the interests of co-operative and indigenous banks.

The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI)

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 Dr. Ambedkar to the "Royal Commission on Indian Currency & Finance” in 1925; Commission members found DrB. R. Ambedkar’s book "The Problem of the Rupee- Its origin and Its Solution” an invaluable reference tool and the Central Legislative Assembly eventually passed these guidelines as the RBI Act 1934. 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 bank notes, 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 central bank, except during the years of the Japanese occupation of Burma (1942–45), until April 1947, even though Burma seceded from the Indian Union in 1937. After the Partition of India in 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.

Structure of RBI

The Central Board of Directors is the main committee of the Central Bank. The Government of India appoints the directors for a 4-year term. The Board consists of a Governor, and not more than 4 Deputy Governors, 4  Directors to represent the regional boards, 2 from the Ministry of Finance and 10 other directors from various fields. RBI wants to create a post of Chief Operating Officer (COO) and re-allocate work between the five of them(4 Deputy Governor and COO).

The bank is headed by the Governor and the post is currently held by economist Raghuram Rajan. There are 4 Deputy Governors H R Khan, Dr. Urjit Patel, R Gandhi and S S Mundra. 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.

Functions

• Financial Supervision
• Regulator and supervisor of the financial system
• Managerial of exchange control
• Issue of currency
• Banker's bank
• Detection of fake currency
• Developmental role

Policy rates and reserve ratios

Bank rate

• RBI lends to the commercial banks through its discount window to help the banks meet depositors' demands and reserve requirements for long term. The interest rate the RBI charges the banks for this purpose is called bank rate.

Cash Reserve Ratio (CRR)

• Every commercial bank has to keep certain minimum cash reserves with Reserve Bank of India. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate.

Statutory liquidity ratio (SLR)

• Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact.

Repo Rate

• Rate at which banks borrow money from RBI is called Repo Rate.

Reverse Repo Rate

• Rate at which RBI borrow money from banks is called Repo Rate.