The Reserve Bank of India (RBI) was constituted under the Reserve Bank of India Act, 1934 and started functioning with effect from 1 April, 1935. RBI is the oldest among the central banks operating in developing countries, though it is much younger than the Bank of England and the Federal Reserve Board operating as the central banks in UK and USA respectively, being developed countries. RBI is a state owned institution under the Reserve Bank (Transfer of Public Ownership) of India Act, 1948. This Act empowers the Union Government, in consultation with the Governor of the RBI, to issue such directions to RBI as considered necessary in public interest. The Governor and four Deputy Governors of RBI are appointed by the Union Government. The control of the RBI vests in the Central Board of Directors that comprises the Governor, four Deputy Governors and 15 Directors nominated by the Union Government. The RBI’s internal management is based on functional specialization and coordination amongst about 20 departments, with headquarters at Mumbai, which is the financial capital of the country.

The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads ‘Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and 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 main objectives of RBI may be stated as follows in specific terms:
(i) To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy.
(ii) To maintain financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence,
(iii) To maintain stable payment systems, so that financial transactions can be safely and efficiently executed,
(iv) To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns.
(v) To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability,
(vi) To promote the development of financial markets and systems to enable itself to operate/regulate efficiently.

We will now discuss the essential functions of RBI that help it to achieve the objectives mentioned above. These are as follows:

Notes Issuance
RBI has the sole authority for the issuance of currency notes and putting them into circulation, withdrawing them or exchanging them. RBI has issued and put in circulation notes in the denomination of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000. Except Re. 1 notes and all coins, which are issued by the Government of India, but put into circulation by RBI. The RBI has about seventeen Issue Offices and above 4, 000currency chests where new and reissuable notes are stored. The currency chests are kept by various banking groups as agents of RBI. The RBI Group has over 2,800 currency chests, nationalized banks have about 800, Treasuries about 420 and private sector banks have about 20 currency chests. As a cover for the notes issue, RBI keeps a minimum value of gold coin, bullion and foreign securities as a part of the total approved assets.

Government’s Banker
RBI acts as the banker to the Central and State Governments. As such , it provides them banking services of deposits, withdrawal of funds, making payments and receipts, collection and transfer of funds and management of public debt. Government deposits are received free of interest and RBI does not receive any remuneration for the routine banking business of the government. RBI also makes ‘ways and means advance’ to central and state governments, subject to certain rules and limits on the amount of overdrafts with a view to contain the fiscal deficit as decided by the central government . RBI charges a commission for managing the public debt and interest on overdrafts from the concerned governments.
Banker’s Bank
Every central bank acts as a banker’s bank and so does RBI. The commercial banks and state cooperative banks which are scheduled banks (appearing in the second schedule of the RBI Act) have to keep stipulated reserves in cash and in approved securities as a percentage of their Demand and Time Liabilities (DTL). These reserves, as discussed in a later section of this Unit, regulate the banks’ ability to create credit and affect money supply in the economy. RBI also changes its Bank Rate to regulate the cost of bank credit and thereby its volume indirectly. RBI also acts as a ‘lender of the last resort, for banks by rediscounting bills and by refinance mechanism for certain kinds of credit , subject to the conditions laid down in its Credit Policy announced by annually.

Bank’s Supervision
From November 1993, RBI’s banking supervisory function has been separated from its traditional central banking functions. The Board of Financial Supervision (BFS) was set up in 1994 to oversee the Indian Financial System, comprising not only commercial banks, state cooperative banks, but also the All India Financial Institutions (AIFIs) and Non-Banking Finance Companies (NBFCs). The BFS has a full time vice-chairman and six other members, apart from the RBI Governor as its chairman.
RBI’s supervisory powers over commercial banks are quite wide as mentioned below and their objective is to develop a sound banking system in the country:
(i) To issue licences for new banks and new branches for the existing banks.
(ii) To prescribe the minimum requirements for the paid-up capital and reserves, maintenance of cash reserves and other liquid assets.
(iii) To inspect the working of the scheduled banks in India and abroad from all relevant angles to ensure their sound working.
(iv) To conduct ad hoc investigations into complaints, irregularities and frauds pertaining to the banks.
(v) To control appointments, reappointments, termination of Chairmen and CEOs of private banks.
(vi) To approve or force amalgamation or merger of two banks. The recent example is the merger of Global Trust Bank with Oriental Bank of Commerce, after the RBI’s moratorium of the former in early 2004.

Development of the Financial System
This represents RBI’s developmental role as against its regulatory and supervisory role over banks as mentioned above. RBI has created specialized financial institutions for:
(i) Industrial finance: Industrial Development Bank of India (IDBI) in 1964, small Industries Development Bank of India (SIDBI) in 1989.
(ii) Agricultural credit: National Bank for Agriculture and Rural Development (NABARD) in 1981.
(iii) Export-import finance: Export-Import Bank of India (EXIM Bank) in 1981.
(iv) Deposits Insurance Corporation of India in 1961. Which later became Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
RBI has also initiated several schemes connected with various facets of banking which have significantly impacted the banking development in the country over the last five decades. Some of these are as follows:
(i) Bill Market Scheme of 1952 and 1970.
(ii) Lead Bank Scheme for backward districts development (1970s)
(iii) P.L. Tandon Committee on Inventory norms for Bank Credit, 1974.*
(iv) Credit Authorization Scheme (1960s)*
(v) Consortium Financing Scheme (1970s).*
(vi) Priority Sector Advances Scheme (discussed later in this Unit).

Note: The schemes marked with an asterisk (*) have been discontinued after the liberalization since 1991.
RBI has also tried to integrate the large unorganized financial sector (indigenous bankers, various kinds of non-banking finance companies etc.) into the organized financial system by regulating them to some extent. However, the task is so enormous and complex that it will take longer for RBI to have the desired integration of the two sectors, so as to work as a single financial system in the country.

Exchange Control
RBI is entrusted with duty of maintaining the stability of the external value of the national currency Indian Rupee. It used to regulate the foreign exchange market in the country in terms of the Foreign Exchange Regulation Act (FERA), 1947 (amended and enlarged in 1973). The FERA, 1973 has been replaced by the Foreign Exchange Management Act, 1999 (FEMA) and RBI is now guided by the provisions of the new Act The RBI performs the following tasks:
(i) It administers foreign exchange control through its Exchange- Control Department. It authorizes the bank’s specified branches and other dealers, called Authorized Dealers (ADs) to deal in the prescribed kinds of foreign exchange transactions and issues the AD series of circulars for regulating such transactions.
(ii) It manages the exchange rate between the Indian Rupee and foreign currencies, by selling and buying foreign exchange to/ from the Authorized Dealers and by other means.
(iii) It manages the foreign exchange reserves of the country and maintains reserves in gold and foreign securities issued by foreign governments and international financial institutions.

Monetary Control
The RBI controls the money supply, volume of bank credit and also cost of bank credit (via the Bank Rate) and thereby the overall money supply in the economy. Money supply change is a technique of controlling inflationary or deflationary situations in the economy. The RBI issues monetary policy for the country as the Ministry of Finance issues fiscal policy and the Ministry of Commerce issues the EXIM policy of the country from time to time. All these policies are among the important macroeconomic policies that influence various businesses in the country. RBI issues monetary and credit policies annually.
Financial Supervision
The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
BFS meetings
The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.
Some of the initiatives taken by BFS include:
  1. restructuring of the system of bank inspections
  2. introduction of off-site surveillance,
  3. strengthening of the role of statutory auditors and
  4. strengthening of the internal defences of supervised institutions.
The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions.
Current Focus
  • supervision of financial institutions
  • consolidated accounting
  • legal issues in bank frauds
  • divergence in assessments of non-performing assets and
  • supervisory rating model for banks.
Regulation and Supervision of Payment systems
The Payment and Settlement Systems Act 2007(PSS Act 2007) empowers the Reserve Bank of India to regulate and supervise the payment systems in the country. The Act states that these powers will be exercised by the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) constituted by it for the purpose. The BPSS will be a Committee of the Reserve Bank of India's Central Board.
Objective and Functions
The functions of the BPSS will be to lay down policies for regulation and supervision of the payment systems in the country, laying down standards for existing and future payment systems, authorisation of payment systems, determination of the criteria for membership of payment systems including continuation, termination and rejection of membership, overseeing the administration of regulations and guidelines framed under the PSS Act 2007, issuing directions to payment system operators, calling for returns/information, etc.
The BPSS consists of the Governor of the RBI as Chairperson, Deputy Governors as Members out of whom the Deputy Governor who is in charge of the Department of Payment and Settlement Systems will be the Vice Chairperson and three Directors of Reserve Bank of India Central Board will be members.
Two Executive Directors of Reserve Bank of India and its principal Legal Adviser will be permanent invitees to the meetings. Persons with experience in the field of payment and settlement systems may be invited to the meetings of the BPSS either as permanent or ad-hoc invitees.
BPSS is assisted by the Department of Payment and Settlement Systems.
Current Focus
  1. Authorisation/ refusal of authorisation of/to payment systems.
  2. To lay down policies for encouraging the movement from paper-based payment systems to electronic modes of payments.
  3. Setting up of the regulatory framework of newer payment methods.
  4. Enhancement of customer convenience in payment systems.
  5. Improving security and efficiency in paper-based and electronic modes of payment.
Umbrella Acts
Acts governing specific functions
  • Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market
  • Securities Contract (Regulation) Act, 1956: Regulates government securities market
  • Indian Coinage Act, 1906:Governs currency and coins
  • Foreign Exchange Regulation Act, 1973/ Foreign Exchange Management Act, 1999 : Governs trade and foreign exchange market
  • Payment and Settlement Systems Act 2007: Regulation and supervision of the payment systems.
Acts governing Banking Operations
  • Companies Act, 1956:Governs banks as companies
  • Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks
  • Bankers'' Books Evidence Act
  • Banking Secrecy Act
  • Negotiable Instruments Act, 1881
Acts governing Individual Institutions
  • State Bank of India Act, 1954
  • The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
  • The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
  • National Bank for Agriculture and Rural Development Act
  • National Housing Bank Act
  • Deposit Insurance and Credit Guarantee Corporation Act

Monetary Authority:
  • Formulates, implements and monitors the monetary policy.
  • Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system:
  • Prescribes broad parameters of banking operations within which the country''s banking and financial system functions.
  • Objective: maintain public confidence in the system, protect depositors'' interest and provide cost-effective banking services to the public.
  • Regulator and supervisor of the payment systems
    • Authorises setting up of payment systems
    • Lays down standards for operation of the payment system
    • Issues direction, calls for returns/information from payment system operators.
Manager of Foreign Exchange
  • Manages the Foreign Exchange Management Act, 1999.
  • Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
  • Issues and exchanges or destroys currency and coins not fit for circulation.
  • Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
Developmental role
  • Performs a wide range of promotional functions to support national objectives.
Related Functions
  • 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.

  • Has 19 regional offices, most of them in state capitals and 9 Sub-offices.
Has five training establishments
  • Two, namely, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank
  • Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT)
For details on training establishments, please check their websites links which are available in Other Links.
Fully owned: Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)

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