The Reserve Bank of India (RBI), is the Central Bank of the country which

is responsible for the regulation and function of the Indian Banking

System.

RBI, also called the Monetary Authority of India, was set up on the
recommendation of the Hilton Young Commission.

The statutory status of the RBI is provided under the Reserve Bank of India
Act of 1934, and become operational on April 1, 1935.

Moreover, when RBI came into force it takes over the functions of
Government so far being performed by the Controller of Currency and from
the Imperial Bank of India.

Additionally, after India’s Partition, The RBI served as the Central Bank of
Pakistan up to June 1948.

Objective of RBI
RBI was nationalized in 1949 and since come under the full ambit of the
Ministry of Finance, Government of India.

The purpose of the RBI is to regulate the issuance of banknotes and the
maintenance of reserves in order to ensure monetary stability in India and,
more generally, to operate the nation’s currency and credit system to its
advantage.

The organization also aims to maintain macroeconomic stability, financial

stability, and a modern monetary policy framework in order to address the
challenges posed by an increasingly complex economy.

Structure of RBI
The affairs of RBI are governed by a central board of directors.

There could be a maximum of 21 members on the central board of

directors including the governor and four deputy governors who are
appointed by the Government of India in keeping with the RBI Act, 1934 for
a period of 4 years.
Functions of RBI
The RBI performs the following functions:

1)Monetary Management/Authority
One of the most important functions of RBI is the formulation and
execution of Monetary Policy and securing monetary stability in India It
functions the currency and credit system to its advantage.

2) Supervision and Regulation of Banking and Non-Banking Financial

Institutions
RBI functions to protect the Interest of depositors through an effective
regulatory framework. Keeping a keen eye over the conduct of banking
operations and solvency of the banks along with maintaining the overall
financial stability through various policy measures.

These powers of RBI come from RBI ACt 1934 and Banking Regulation Act
1949.

This regulatory and supervisory function of the RBI extends to Indian

Banking System as well as Non-Banking Financial Institutions.

3) Regulation of Foreign Exchange Market, Government Securities Market,

and Money Market
Foreign Exchange Market: The Foreign Exchange Management Act 1999
came into light after the liberalization measures introduced in 1991. FEMA
1991 replaced the FERA 1973 and came into effect in June 2022.

So now, the RBI is responsible to oversee the foreign exchange market in

India. RBI supervises and regulates the Foreign Exchange Market through
the provision of the FEMA Act 1999.

Government Securities Market: RBI regulates the trade securities issued by

the Central and State governments. For regulation of this, RBI derives its
power from the RBI Act of 1934.

Money Market: Short-term and highly liquid debt securities are also
regulated by RBI and for this RBI derives its powers from the RBI Act 1934.
4) Foreign Exchange Reserve Management
Foreign exchange reserve includes-

• Foreign Currency Assets (FRAs)

• Special Drawing Rights (SDRs)
• Gold

RBI is the custodian of India’s foreign exchange reserves. The legal

provision regarding the management of foreign exchange reserves is
mentioned in RBI Act 1934.

The RBI Act of 1934 permits the RBI to invest these foreign exchange
reserves in the following instruments-

• Deposit with Banks for International Settlement

• Deposit with foreign Commercial Banks
• Debt Instruments
• Other instruments with approval of the Central Banks of RBI

5) Bankers to Central and State Government

RBI acts as a banker to the government. RBI is the responsible agency for
receiving and paying money on behalf of the various government
departments.

RBI is also authorized to appoint other banks to act as its agent and
undertake banking business on the behalf of the government.

RBI maintains Central and State Government funds like Consolidated

Funds, Contingency Funds, and Public Account.

RBI also provides loans to the central/State/UT Government as a banker to

the government.

6) Advisor to the Government

RBI acts as an advisor to the government when called upon to do so on
financial and banking-related matters.

7) Central and State Government’s Debt Manager

The debt management policy mainly aims at minimizing the cost of
borrowing and smoothening the maturity structure of debt. RBI manages
the public debt and also issue new loans on behalf of central and state
government.

8) Banker to Banks
Banks open their current account with RBI to maintain SLR and CRR.

RBI is a common banker for the different banks that enables the settlement
of interbank transfers of funds.

For special purposes or in need, RBI provides short-term loans and

advances to banks

9) RBI- Lender of last resort

That means RBI comes to rescue the banks that are solvent (facing
temporary liquid problems) but have not gone bankrupt. RBI provides this
facility to protect the interest of depositors and to prevent the possible
failure of the bank.

10) RBI- Issuer of Currency

The RBI and the government are in charge of the creation, manufacturing,
and overall administration of the national currency with the aim of
releasing a sufficient quantity of authentic and clean notes.

The Reserve Bank of India has given some bank branches permission to
set up currency chests in order to simplify the circulation of rupee notes
and coins around the nation (A currency chest is a storehouse where
currency notes and rupee coins are stocked on behalf of RBI)

11) Developmental Role

RBI’s developmental role includes creating institutions to build financial
infrastructure, ensuring credit to the productive sector of the economy, and
expanding access to affordable financial systems.

Following are the several schemes that come under RBI’s developmental
roles-
Priority Sector Lending
As per RBI, priority sectors are those sectors of the economy that may not
get timely and sufficient credit in the absence of these special schemes.

Priority sector guidelines don’t provide a preferential interest rate for loans
to the sector. These small-value loans typically run to those sections of the
population that are weaker sections of society and needed special
attention and to the section intensively employed in agriculture and small
enterprises.

A list of Priority Sectors are-

1. Agriculture
2. MSME
3. Export
4. Education
5. Housing
6. Social Infrastructure
7. Renewable Energy
8. Others
9. Weaker Sections

• Commercial Banks including foreign banks- 40% of total loan to

PSL
• Regional Rural Banks- 75%
• Small Finance Banks- 75%
• Payment Bank- They do not give Credit
• Urban (primary) cooperative banks- 40% (will increase to 75% by
2024 in a phased manner)

Lead Bank Scheme

lead Bank Scheme Introduced by RBI in 1969 aims at coordinating the
activities of banks and other developmental agencies with an objective to
enhance the flow of bank finance to priority sectors and other sectors to
promote the bank’s role in overall development.

12) Data Dissemination/Policy Research

Such research undertaken by RBI focuses on issues and problems arising
at the national and international levels, having a critical impact on the
Indian economy.
India is a signatory of Special Data Dissemination Standards (SDDS) as
defined by IMF for the purpose of releasing data.

RBI has some legal obligations over him under RBI Act. One of them is to
publish two reports every year. One is, the Annual Report, and the other is
the Report on Trends and Progress of Banking in India.

RBI conducts Consumer Confidence Survey and Inflation Expectation

Survey on a quarterly basis.

Key Features Related to the Functions of RBI

• RBI is authorized to issue various guidelines for bank directors
and has the power to appoint additional directors to the board
of a banking company.
• Prior approval of RBI is important for the appointment,
reappointment, and termination of the Chairman, Managing
Director, and CEO of Commercial Banks (except PSBs).
• If the situation arises then RBI with the approval of the Central
Government can take the place of the Board of Directors of
Commercial Banks.
• Public Sector Banks (PSBs) come under dual regulation of the
Central Government and RBI so the RBI’s power regarding the
PSBs is curtailed as it cannot remove the directors and
management and cannot supersede the board of Banks also
cannot enforce mergers.
• As per RBI’s regulation, Banks needed to maintain certain
reserves in the form of CRR and SLR.
• RBI regulates the interest rate on NRI deposits, export credits
(loans), and a few other categories. However, the interest rate
on most of the categories of deposit and lending have been
deregulated so the banks are responsible for determining such
rates.
• RBI set up Deposit Insurance and Credit Guarantee Corporation
(DICGC) for the protection of the interest of small depositors in
case of bank failure or bankruptcy (100% subsidy). It provides
insurance cover to all eligible bank depositors up to 5 lakhs per
depositor per bank. To provide insurance coverage, it charges
premiums from banks. DICGC covers all commercial banks
including foreign bank branches as well along with
UCBs/StCBs/DCCBs. But it is important to note that it does not
 cover deposits of foreign governments, deposits of Central and
State governments, and interbank deposits.
• RBI has permitted the banks to undertake some non-traditional
banking activities such as venture capital, insurance, mutual
fund business, etc.
• Cooperative Banks- Cooperative Banks come under the dual
regulation of RBI and the Government. Both the authorities have
different fields to work on as RBI manages the banking-related
functions and Central Government or State Government
manages the management-related functions.
• Financial Institutions, NBFCs, Primary Dealers, and Credit
Information Companies (CIC)- The four all-India financial
institutions named NABARD, NHB, EXIM Bank, and SIDBI are
under full-fledged regulation and supervision of RBI.
• NBFCs, Primary Dealers and CICs also come under the
regulation and supervision of RBI.
• Note: RBI is authorized to regulate banks and NBFCs both but
till July 2019, RBI had the power to take the place of the Board
of Banks (in case of any mismanagement or default) but not of
NBFCs. In July 2019 an amendment is done to the RBI Act 1934
that empowers the RBI to supersede the bank of NBFCs also in
case of mismanagement or default. RBI now has the power to
appoint administrators as well in the public interest.