Function of Reserve Bank of India (RBI)

Reserve Bank of India (RBI) holds a crucial role as the Central Bank, overseeing and managing the workings of the Indian Banking System. Commonly known as the Monetary Authority of India, came into operation on April 1, 1935, following the recommendations of the Hilton Young Commission. The Reserve Bank of India Act of 1934 provides the legal foundation for the RBI.

Objective of RBI

In 1949, the RBI became a part of the Ministry of Finance, Government of India, marking a significant moment in its history.
The RBI has a crucial role in overseeing the issuance of banknotes and managing reserves to uphold monetary stability in India. In simpler terms, it strives to ensure that the country’s currency and credit system work effectively.
Beyond that, the RBI has broader goals: it aims to keep the overall economy stable, maintain financial security, and establish a modern framework for monetary policies.

Structure of RBI

The Reserve Bank of India (RBI) is overseen by a central board of directors.
The central board can have up to 21 members, which includes the governor and four deputy governors.
These members are appointed by the Government of India in accordance with the RBI Act, 1934.
The term of appointment for these directors, including the governor and deputy governors, is set at four years.

Function 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

The RBI plays a crucial role in safeguarding the interests of depositors by creating a strong regulatory framework. It keeps a watchful eye on how banks operate and ensures their financial health, all while maintaining overall financial stability through different policy measures.
The RBI Act of 1934 and the Banking Regulation Act of 1949 grant the authority to carry out these functions.
These powers extend beyond traditional banks; the RBI’s regulatory and supervisory functions also cover non-banking financial institutions, providing a comprehensive oversight of the entire financial landscape.

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

In 1991, when the Indian government introduced liberalization measures, it paved the way for the Foreign Exchange Management Act (FEMA) of 1999. This act replaced the Foreign Exchange Regulation Act (FERA) of 1973 and became effective in June 2022.
Now, the Reserve Bank of India (RBI) takes charge of overseeing the foreign exchange market in the country, ensuring its smooth functioning through the provisions outlined in FEMA 1999.
When it comes to the Government Securities Market, the RBI plays a crucial role in regulating the trade of securities issued by both the Central and State governments.
The RBI derives the authority for this regulation from the RBI Act of 1934.
Similarly, in the realm of the Money Market, the RBI regulates short-term and highly liquid debt securities, and its authority in this domain also originates from the RBI Act of 1934.

4) Foreign Exchange Reserve Management

India’s foreign exchange reserves, managed by the Reserve Bank of India (RBI), comprise various components:

Foreign Currency Assets (FRAs): These include holdings in different foreign currencies.
Special Drawing Rights (SDRs): An international reserve asset created by the International Monetary Fund (IMF).
Gold: Physical gold reserves held by the country.

The RBI, acting as the custodian, oversees the management of these reserves in accordance with the RBI Act of 1934. According to this act, the RBI is authorized to invest the 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

This framework provides the RBI with flexibility in managing and optimizing India’s foreign exchange reserves.

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 goal of the debt management policy is to make borrowing more cost-effective and ensure a balanced maturity structure for debt.
The RBI takes care of public debt, handling both existing and new loans on behalf of the central and state governments.
This helps in keeping borrowing costs down and maintaining a smooth repayment schedule.

8) Banker to Banks

Banks establish current accounts with the Reserve Bank of India (RBI) to fulfill statutory requirements such as the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR).
RBI serves as a central banking hub for various banks, facilitating the smooth settlement of funds during interbank transfers.
In times of specific requirements or financial urgency, banks can seek short-term loans and advances from the RBI, emphasizing its role as a financial support system for the banking sector.

9) RBI – Lender of last resort

When banks face short-term financial challenges but aren’t completely bankrupt, the Reserve Bank of India (RBI) steps in to help.
The main goal is to safeguard the interests of the people who have deposited their money in these banks. RBI wants to ensure that depositors don’t lose their hard-earned savings.
By providing support to solvent banks experiencing temporary liquidity problems, the RBI aims to prevent these banks from collapsing. This helps maintain stability in the banking system and the economy as a whole.

10) RBI – Issuer of Currency

The RBI and the government work together to create, produce, and manage the national currency, ensuring an ample supply of genuine and clean notes.
To facilitate the smooth flow of rupee notes and coins across the country, certain bank branches have been authorized by the Reserve Bank of India to establish currency chests.
These currency chests serve as storage facilities where RBI-designated bank branches stock currency notes and rupee coins on behalf of the central bank.

11) Developmental Role

The RBI plays a vital role in laying the groundwork for economic development by establishing institutions that strengthen the financial backbone of the country.
One of its key tasks is to ensure that sufficient credit flows into sectors that drive the economy, helping businesses thrive and contribute to overall productivity.
The RBI is committed to making financial services more inclusive and affordable, striving to expand access so that individuals from all walks of life can benefit from a robust financial system.

Following are the several schemes that come under RBI’s developmental roles:

Priority Sector Lending:

The Reserve Bank of India (RBI) identifies certain key areas in the economy as priority sectors. These sectors might struggle to get enough and timely loans without special assistance.
While these priority sectors are crucial, there isn’t a special interest rate for loans in these areas. The focus is more on ensuring they receive the necessary financial support.
The priority sectors include small-value loans that target vulnerable sections of society. This could be people in need of extra attention, as well as those heavily involved in agriculture and small businesses.

List of Priority Sectors:

Agriculture
MSME (Micro, Small, and Medium Enterprises)
Export
Education
Housing
Social Infrastructure
Renewable Energy
Others
Commercial Banks (including foreign banks): Aim to allocate 40% of total loans to Priority Sector Lending (PSL).
Regional Rural Banks: Targeting 75% allocation.
Small Finance Banks: Also aiming for 75% allocation.
Payment Banks: They focus on services and do not provide credit.
Urban (Primary) Cooperative Banks: Currently at 40%, with plans to increase to 75% by 2024 in a phased manner.

Lead Bank Scheme:

In 1969, the RBI launched the Lead Bank Scheme to unite banks and developmental agencies. The goal was to enhance the flow of bank finances into priority sectors, strengthening their role in overall development.
This initiative aimed to bring together different entities, encouraging collaboration to boost growth and advancement across various economic sectors.

12) Data Dissemination/Policy Research

The Reserve Bank of India (RBI) engages in research that addresses issues and challenges affecting both the national and international aspects, significantly influencing the Indian economy.
India, as a participant, adheres to the Special Data Dissemination Standards (SDDS) established by the International Monetary Fund (IMF) for the purpose of releasing data.
Under the RBI Act, the Reserve Bank of India carries certain legal responsibilities, including the obligation to publish two reports annually. These reports consist of the Annual Report and the Report on Trends and Progress of Banking in India.
On a quarterly basis, the RBI conducts surveys that provide valuable insights into economic aspects. These surveys include the Consumer Confidence Survey and the Inflation Expectation Survey.

The RBI, or Reserve Bank of India, has the authority to issue guidelines for directors of banks.
It can also appoint additional directors to the board of a banking company.
The RBI plays a crucial role in appointing, reappointing, or terminating the Chairman, Managing Director, and CEO of Commercial Banks, except Public Sector Banks (PSBs).For these appointments in Commercial Banks, prior approval from the RBI is necessary.
In extreme situations, the RBI, with the Central Government’s approval, can step in and take the place of the Board of Directors of Commercial Banks.
PSBs fall under the dual regulation of the Central Government and RBI.
The RBI established the Deposit Insurance and Credit Guarantee Corporation (DICGC) to protect small depositors in case of bank failure.
DICGC provides insurance coverage up to 5 lakhs per depositor per bank, charging premiums from banks.
Cooperative Banks are under dual regulation by both the RBI and the Government.
RBI handles banking functions, while the Central or State Government manages management-related functions.
An amendment in July 2019 to the RBI Act 1934 granted the RBI the power to supersede the board of NBFCs in case of mismanagement or default, along with the authority to appoint administrators in the public interest.