RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India is now the

apex financial institution of the country
which is entrusted with the task of
controlling, supervising, promoting,
developing and planning the financial
system. RBI is the queen bee of the
Indian financial system which influences
the commercial banks’ management in
more than one way. The RBI influences
the management of commercial banks
through its various policies, directions
and regulations. Its role in banking is
quite unique. In fact, the RBI performs
the four basic functions of management,
viz., planning, organizing, directing and
controlling in laying a strong foundation
for the functioning of commercial banks.
RBI possesses special status in our
country. It is the authority to regulate and
control monetary system of our country.
It controls money market and the entire
banking system of our country.
Management
The Reserve Bank's affairs are
governed by a central board of directors.
The board is appointed by the
Government of India in keeping with the
Reserve Bank of India Act.
The organization structure of RBI
consists of a Central Board and Local
Board.
Central Board: The general supervision
and control of the bank’s affairs is vested
in the Central Board of Directors which
consists of 20 member team including a
Governor, 4 Deputy Governors and 15
Directors (of which 4 are from local
boards, and one is a finance secretary of
Central Government). All these persons
are appointed or nominated by Central
Govt. The chairman of the Board and its
Chief Executive authority is the
Governor. Governors and Deputy
Governors hold office for such a period as
fixed by Central Government not
exceeding 5 years and are eligible for
reappointment. Directors hold office for 4
years and their retirement is by rotation.
As a matter of practical convenience, the
Board has delegated some of its functions
to a committee called the Committee of
the Central Board. It meets once in a
week, generally Wednesdays. There are
sub committees to assist committees such
as building committee and staff sub-
committee.
Local Board: For each regional areas of
the country viz., Western, Eastern,
Northern and Southern, there is a Local
Board with head quarters at Bombay,
Calcutta, New Delhi and Madras. Local
boards consist of 5 members each
appointed by the Central Government.
The functions of the local boards are
to advise the central board on local
matters and to represent territorial and
economic interests of local cooperative
and indigenous banks; advice on such
matters that may generally be referred to
them and perform such duties as the
Central Board may delegate to them.
The Central office of the RBI, located
at Mumbai is divided into several
specialized departments. The main
departments are:
1. Issue Department: - It arranges for the
issue and distribution of currency
notes among the different centers of
the country.
2. Banking Department: - It deals with
Government transactions and
maintains the cash reserves of the
commercial banks.
3. Department of Banking
development:- It is concerned with
the development of banking facilities
in the unbanked and rural areas in the
country.
4. Department of Banking operations: -
This department supervises and
controls the working of the banking
institutions in the country.
5. Non-Banking Companies
Department: - It regulates the
activities of non-banking financial
companies existing in the country.
6. Agricultural credit Department: - This
department studies the problems
connected with the agricultural credit
in the country.
 7. Industrial finance Department: It is
concerned with the provision of
finance to the industrial units in the
country.
8. Exchange control Department: - The
entire business of sale and purchase of
foreign exchange is conducted by this
department.
9. Legal Department: - The main
function of this department is to give
legal advices to the other departments
of RBI.
10. Department of Research and
Statistics: - This department is
concerned with conducting research
on problems relating to money, credit,
finance, production etc.
Objectives of RBI
Prior to the establishment of the
Reserve Bank, the Indian financial
system was totally inadequate on account
of the inherent weakness of the dual
control of currency by the Central
Government and of credit by the Imperial
Bank of India.
The Preamble to the Reserve Bank of
India Act, 1934 spells out the objectives
of the Reserve Bank as: “to regulate the
issue of Bank notes and the keeping of
reserves with a view to securing
monetary stability in India and
generally to operate the currency and
credit system of the country to its
advantage.”
The important objectives are:
1. To act as Monetary Authority:
Formulates implements and monitors the
monetary policy to maintain price
stability
and ensuring adequate flow of credit to
productive sectors.
2. To Regulate and supervise the
financial system of the country: It
prescribes broad parameters of banking
operations within which the country's
banking and financial system functions. It
helps to maintain public confidence in the
system, protect depositors' interest and
provide cost-effective banking services to
the public.
3. To Manage the Exchange Control:
Manages the Foreign Exchange
Management Act, 1999 to facilitate
external trade and payment and promote
orderly development and maintenance of
foreign exchange market in India.
4. To issue currency: Issues and
exchanges or destroys currency and coins
not fit for circulation to give the public
adequate quantity of supplies of currency
notes and coins and in good quality.
5. To undertake developmental role:
RBI performs a wide range of
promotional functions to support national
objectives.
6. To undertake related Functions by
acting as:
• Banker to the Government: performs
merchant banking function for the
central and the state governments;
also acts as their banker.
• Banker to banks: maintains banking
accounts of all scheduled banks.
• Owner and operator of the depository
(SGL-Subsidiary General Ledger
account) and exchange (NDS)
Negotiated Dealing System is an
electronic platform for
facilitating dealing in Government
Securities and Money Market Instruments
that will facilitate electronic submission
of bids/application for government bonds.
To sum up the objectives include:
1. To manage the monetary and credit
system of the country.
2. To stabilizes internal and external value
of rupee.
3. For balanced and systematic
development of banking in the
country.
4. For the development of organized
money market in the country.
5. For facilitating proper arrangement of
agriculture finance and be in
successful for maintaining financial
stability and credit in agricultural
sector.
6. For proper arrangement of industrial
finance.
7. For proper management of public debts.
8. To establish monetary relations with
other countries of the world and
international financial institutions.
9. For centralization of cash reserves of
commercial banks.
10. To maintain balance between the
demand and supply of currency.
11. To regulate the financial policy and
develop banking facilities throughout
the country.
12. T o remain free from political
influence while making financial
decisions
 13. To assist the planned process of
development of the Indian economy.
Besides the traditional central banking
functions, with the launching of the five-
year plans in the country, the Reserve
Bank of India has been moving ahead in
performing a host of developmental and
promotional functions, which are
normally beyond the purview of a
traditional Central Bank.
Functions of RBI
RBI performs various traditional
banking function as well as promotional
and developmental measures to meet the
dynamic requirements of the country.
Main functions of RBI can be broadly
classified into three. These are
I. Monetary functions or Central banking
functions
II. Supervisory functions
III. Promotional and Developmental
functions.
I. Monetary functions include
A. Issue of currency notes
B. Acting as banker to the Government
C. Serving as banker of other banks
D. Controlling credit
E. Controlling foreign exchange operations
A. Issue of currency notes: -
Under Section 22 of the Reserve Bank
of India Act of 1934, the Reserve Bank of
India is given the monopoly of note issue.
Now RBI is the sole authority for the
issue of currency notes of all
denominations except one rupee notes
and coins in
the country. One rupee notes and coins
are issued by Ministry of Finance of GOI.
The RBI has a separate department called
the Issue Department for the issue of
currency notes.
Since 1956 system of Note Issue
changed from Proportional Reserve
System to minimum reserve system.
Under Proportional reserve system of
note issue, not less than 409c of the total
volume of notes issue by the RBI was to
be covered by gold coins, bullion and
foreign securities. But under the
Minimum reserve system of note issue,
RBI is required to maintain a minimum
reserve of gold or foreign securities or
both against the notes issued. No
maximum limit is fixed on the volume of
notes. RBI maintains gold and foreign
exchange reserves of Rs.200 crores of
which 115 crores is in gold & balance in
foreign securities, Govt. of India
securities, eligible commercial bills, Pro-
notes of NABARD for any loans etc.
This change from Proportional
Reserve system to Minimum Reserve
system is made because of two major
reasons. Firstly, the planned economic
development of the country called for an
increased supply of money, which could
not be had under the proportional reserve
system. Secondly, the foreign exchange
held as reserve by the Reserve bank had
to be released for financing the five year
plans. In short, this was to enable the
expanding currency requirements of the
economy.
B. Acting as Banker to government: -
The Reserve bank act as a banker to the
Central and State
 Governments. As a banker to the
Government RBI acts in three capacities,
viz., (a) as a banker,(b) as a financial
agent, and (c) as a financial advisor
(a) As a banker: - RBI renders the
following services
1. Accepts deposits from the Central and
State Governments.
2. Collects money on behalf of
Government.
3. Makes payments on behalf of the
Government, in accordance with their
instructions.
4. Arranges for the transfer of funds
from one place to another on behalf
of the Governments
5. Makes arrangements for the supply
of foreign exchange to the Central
and State Governments.
6. It maintains currency chests with
treasuries and other agencies in places
prescribed by the Government of
India. These chests are supplied with
sufficient currency notes to meet the
requirements for the transactions of
the Government.
7. Short term advances are granted to
Central and State Governments for a
period not exceeding three months.
These advances are granted up to a
certain limit without any collateral
securities.
8. In times of emergencies like war,
extraordinary loans are also granted to
the Governments by the RBI. (b) As a
financial agent: - The services given
are
1. Acts as an agent of the Central and
State Governments in the matter of
floatation of loans. On account of
Reserve Bank’s
intimate knowledge of the financial
markets, it is able to obtain the best
possible terms for the Government in this
matter. Further by coordinating the
borrowing programmers of the various
Governments, it is able to minimize the
adverse effects of Government
borrowings on the money and securities
market.
2. On behalf of Central Government
RBI sells treasury bills of 90 days
maturity at weekly auctions and secures
short- term finance for the Central
Government. Apart from that RBI also
sells adhoc treasury bills of 90 day’s
maturity to the State Governments, Semi-
Government Departments and foreign
central banks on behalf of the Central
Government.
3. RBI manages and keeps the accounts
of the public debts of the Central and
State Governments. It arranges for the
payment of interest and principal amount
on the public debt on the due dates.
4. As an agent RBI also represents
Government of India in the
International institutions like the IMF,
the IBRD etc.
The Reserve Bank is agent of Central
Government and of all State
Governments in India except for that of
Jammu and Kashmir and Sikkim.
(a) As a Financial Adviser: - renders
following services
1. It advices the Central and State
Government on all financial and
economic matters such as the floating of
loans, agricultural and industrial
finance etc.
2. Advice on matters of International
finance is also given to Central
Government.
3. It collects the recent information on
current economic and financial
developments in India and abroad, with
the help of its Research and Statistics
Department and keeps Government
informed periodically.
C. Banker’s bank: -
RBI acts as banker to Scheduled
banks. Scheduled Banks include
commercial banks, foreign exchange
banks, public sector banks, state co-
operative banks and the regional rural
banks. As a bankers’ bank it renders the
following services:
1. It holds a part of the cash balances
of the commercial banks:- Every
commercial bank in India is required
to keep with the Reserve Bank a cash
balance of not less than 6% of its
 demand and time liabilities. This rate
can be increased up to 20%. The two
main purposes of maintaining cash
reserve by commercial banks are as
follows. Firstly to protect the interest
of the depositors, secondly to enable
the Reserve Bank to accommodate the
commercial banks on times of
difficulties and thirdly the Reserve
Bank can control the credit created by
the commercial banks by varying the
statutory cash reserve requirements.
2. It acts as the clearing house: - By
acting as clearing house the Reserve
bank helps the member banks in the
settlement of the mutual indebtedness
without physical transfer of cash.
3. It provides cheap remittance
facilities to the commercial banks
4. It provides financial accommodation
to the commercial banks: - At times
of financial crisis the RBI is the
lender of last resort for the
commercial banks. Financial
assistance is given by The Reserve
bank either by rediscounting eligible
bills or by granting loans against
approved securities.
D. Control of Credit: -
RBI undertakes the responsibility of
controlling credit in order to ensure
internal price stability and promote
sufficient credit for the economic growth
of the country. Price stability is essential
for economic development. To control
credit, RBI makes use of both
quantitative and qualitative weapons by
virtue of the powers given to it by
Reserve Bank of India Act of 1934 and
the Indian Banking Regulation Act of
1949. These weapons are listed below.
(a) Quantitative weapons
1. Bank rate policy:
Bank rate is the lending rate of central
bank. It is the official minimum rate at
which central bank of a country
rediscounts the eligible bills of exchange
of the commercial banks and other
financial institutions or grants short term
loans to them. By increasing bank rate,
RBI can make bank credit costlier.
2. Open Market Operations:
RBI Act authorizes the RBI to engage
in the purchase of securities of central
and State Government and such other
securities as specified by Central Govt.
But by and large, its
open market operations are confined to
Central Government Securities and to a
very limited extend to State Government
Securities. RBI uses this weapon to offset
the seasonal fluctuations in money
market. When there is an excessive
supply of money, RBI sells the securities
in the open market. In that way RBI is
able to withdraw the excess money from
circulation. But when there is shortage of
money supply in the market, it purchases
securities from the open market and as a
result, more money is arrived at for
circulation
3. Variable Cash reserve ratio:
Under the RBI Act of 1934, every
scheduled and non- scheduled bank is
required to maintain a fixed percentage of
total time and demand liabilities as cash
reserve with RBI. It is called statutory
Cash Reserve Ratio (CRR). An increase
in CRR reduces lending capacity of the
bank and a decrease in CRR increases the
lending capacity. RBI can prescribe a
CRR ranging up to 15% which is at
present 4% (as on April ’2016).
4. Variable Statutory Liquidity Ratio
According to sec 24 of BRA 1949,
every commercial bank is required to
maintain a certain percentage of its total
deposits in liquid assets such as cash in
hand, excess reserve with RBI, balances
with other banks, gold and approved
Government and other securities. This
proportion of liquid assets to total
deposits is called SLR. BRA empowers
RBI to fix the SLR up to 40%. The
variation of the SLR is intended to reduce
the lendable funds in the hands of the
commercial banks and to check the
expansion of bank credit. An increase
in SLR will decrease the lendable funds
in the hands of commercial banks and
vice versa. Present rate of SLR is 21.25%.
(As on April 2016).
5. Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI
lends to commercial banks generally
against government securities. Reduction
in Repo rate helps the commercial banks
to get money at a cheaper rate and
increase in Repo rate discourages the
commercial banks to get money as the
rate increases and becomes expensive.
Reverse Repo rate is the rate at which
RBI borrows money from the commercial
banks. The increase in the Repo rate will
increase the cost of borrowing and
lending of the banks which will
discourage the public to borrow money
and will encourage them to deposit. As
the rates are high the availability of credit
and demand decreases resulting to
decrease in inflation. This increase in
Repo Rate and Reverse Repo Rate is a
symbol of tightening of the policy. As of
April 2016, the repo rate is 6.50 % and
reverse repo rate is 6%.
b. Selective credit controls (Qualitative
weapons)
1. Credit Ceiling
In this operation RBI issues prior
information or direction that loans to the
commercial banks will be given up to a
certain limit. In this case commercial
bank will be tight in advancing loans to
the public. They will allocate loans to
limited sectors. Few example of ceiling
are agriculture sector advances, priority
sector lending.
2. Credit Authorization Scheme
Credit Authorization Scheme was
introduced in November, 1965 when P C
Bhattacharya was the chairman of RBI.
Under this instrument of credit the
commercial banks are required to obtain
the RBI’s prior authorization for
sanctioning any fresh credit beyond the
authorized limits.
3. Moral Suasion
Moral Suasion is just as a request by
the RBI to the commercial banks to
follow a particular line of action. RBI
may request commercial banks not to
give loans for unproductive purpose
which does not add to economic growth
but increases inflation.
4. Regulation of margin requirements:
Margin refers to the difference
between loan amount and the market
value of collateral placed to raise the
loan. RBI fixes a lower margin to
borrowers whose need is urgent. For
e.g. if RBI believes that farmers should
be financed urgently, RBI would direct to
lower the margin requirement on
agricultural commodities. RBI has used
this weapon for a number of times.
5. Issuing of directives:
BRA empowers RBI to issue
directives to banks and banks are bound
to comply with such directives. RBI
directives may relate to:
- Purpose for which advance may or may
not be made
- Margins requirement
 - Maximum amount of loan that can
be sanctioned to any company, firm
or individual
- Rate of interest and other terms and
conditions on which loans may be
given
E Control of foreign Exchange operations
One of the central banking functions
of the RBI is the control of foreign
exchange operations. For the control of
foreign exchange business, the RBI has
set up a separate department called the
Exchange Control Department in
September, 1939. This Department has
been granted wide powers to regulate the
foreign exchange business of the country.
As the central bank of India, it is the
responsibility of the RBI to maintain the
external value of the Indian rupee stable.
India being member of the IMF, the RBI
is required to maintain stable exchange
rates between the Indian rupee and the
currencies of all other member countries
of the I.M.F. Besides maintaining stable
exchange rates, RBI also acts as the
custodian of the foreign exchange
reserves of the country. The foreign
exchange reserves of the country held by
RBI includes Euro, U.S. dollars, Japanese
yen etc.
RBI also acts as the administrator of
exchange control. It ensures that the
foreign exchange reserves of the country
are utilized only for approved purposes
and the limited foreign exchange reserves
of the country are conserved for the
future.
II. Supervisory functions
 RBI has been given several
supervisory powers over the different
banking institutions in the country. The
supervisory
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functions relate to licensing and

establishment, branch expansion,
liquidity of assets, amalgamation,
reconstruction and liquiditation of
commercial banks and co- operative
banks
III. Promotional and developmental
functions
RBI is also performing promotional
and developmental functions. These
functions includes the following
a) Provision of Agricultural Credit:
For the promotion of agricultural credit
RBI has set up a separate department
called the Agricultural Credit
Department. It. has also set up two funds
namely – 1. The National Agricultural
Credit (Long term operations) and 2. The
National Agricultural credit (stabilization)
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 BCM4A14/BBA4A14: Banking and Insurance
fund for facilitating Long term, Medium
term and Short term finance for
agricultural purposes.
b) Provision for Industrial finance: -
RBI has played a very significant role in
the field of industrial finance by helping
the setting up of a number of public
sector industrial finance corporations that
provide short term, medium term, and
long term finance for industrial purpose.
These industrial finance corporations
include 1. Industrial finance Corporation
of India (IFCI), 2. State Finance
Corporations (SFC), Industrial
Development Bank of India (IDBI), 3.
Industrial Reconstruction Corporation of
India (IRCI), 4. Refinance Corporation of
India, and 5. Unit Trust of India (UTI).
Besides the above RBI also renders
the Credit Guarantee Scheme which
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intends to give protection to banks against
possible losses in respect of their
advances to small scale industrial units.

c.)Development of Bill Market: - A bill

market is a place where short term bill of
3 month duration are generally
discounted or rediscounted. RBI plays a
very important role in the promotion of
Bill Market as a well-developed bill
market is essential for the smooth
functioning of the credit system.
d.)Collection and publication of
statistics on financial and economic
matters: - These functions of RBI are
extremely useful to the Government in
knowing and solving the various
economic problems. They are also of
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immense help to financial institutions,
business and industry and for general
public.
e.)Miscellaneous functions:- RBI has
established training centers for staff for
its own staff and other banks. Bankers’
training college Mumbai, National
Institute of Bank Management Mumbai,
Staff Training College Madras, and
College of Agricultural Banking at Pune
are the institutions run by RBI.

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