Reserve Bank of India (RBI)

Introduction

Every country has its wings that control its monetary and economic affairs of the country. To control and check the financial, monetary, and economic affairs, these organizations play an important role. In India, the Reserve Bank of India is such an authority.

What is the Reserve Bank of India?

Established by the British Raj in 1935, the Reserve Bank of India is the chief banking and regulation authority that regulates the Indian banking systems. The RBI is also responsible for monitoring the economy and providing support to banks in times of economic downturn.

There are some specialized divisions of RBI that act as subsidiaries. Bharatiya Reserve Bank Note Mudran is a division that mints and prints the coins and notes for the Indian economy. National Payments Corporation of India is the division that looks after the regulation of payment and settlement systems in India.

For providing insurance of deposit securities and guaranteeing credit facilities of all Indian banks, a division of RBI, Deposit Insurance and Credit Guarantee Corporation was established. Before the creation of the Monetary Policy Committee in 2016, RBI had full authority over the monetary policy of India.

RBI is a member bank of the Asian Clearing union and Alliance for Financial Inclusion (AFI). RBI is often referred to by the nickname Mint Street.

In simple words, the RBI is the governing body of Indian financial and economic systems. It is responsible for directing the flow of the economy as well as maintaining the health of the Indian financial system. The RBI becomes very critical in times of economic downturns as it is also responsible for the overall well-being of the citizens in terms of economy and financial fluency.

The RBI works in tandem with the finance ministry of India. Most decisions of RBI have to be approved by the finance ministry before they reach their fruition. The Reserve Bank has four regional representatives, New Delhi in the North, Kolkata in the East, Chennai in the South, and Mumbai in the West. It has 31 assisting branches in various other cities.

Structure of Reserve Bank of India

The main board that governs the RBI is the board of directors. The directors are appointed by the government of India for a four-year term.

The board consists of –

• a governor as the head

• a maximum of four deputy governors

• four directors who represent the regional offices

• the economic services, and financial services secretaries, and

• ten other directors from various walks of life.

Two of the four deputy governors in the central bank are selected usually from the bank’s executive directors’ role. One of them is selected from public sector banks, while the other is usually an economist. Indian Administrative Services (IAS) officers can also be appointed as Deputy Governor who may become governors in their terms.

Objectives of the Reserve Bank of India

Like most central banks in the world, the following 5 objectives are the major responsibility of RBI:

Keeping Price Stability Intact

The RBI aims to keep the price stability intact by keeping inflation at the desired level. After witnessing inflations in 1970 and 1980 and the great inflation in 1929, the RBI can no more ignore the overtly effective inflation.

Usually, all central banks tend to contain inflation at a 2% level because it is an optimum level to increase the value of goods. Moreover, such a rate does not decrease the value of the currency at a too high level. It also boosts consumption but does not lead to panic buying.

Full Employment

Full employment is a primary concern of central banks and RBI is no different. In order to achieve the goal of full employment, the banks usually decrease interest rates on loans. This makes capital available in the economy and demand for jobs automatically increases in the economy to contain the extra consumption.

Financial Stability

The RBI and all central banks play a key role in maintaining financial stability. The central banks work as a lender of last resort to do so. In many cases, commercial banks need loans to align their assets and liabilities. However, their capital may be invested in loans and other illiquid assets. The central banks help these commercial banks get short-term loans to maintain financial stability.

Economic Growth

Central banks engage in economic growth mainly to improve the lifestyle and living conditions of the citizens. Economic growth leads to financial prosperity which is achieved by more consumption and increased demand. This may not be the main objective of central banks though as they have to look at the advantages and disadvantages of direct stimulus. Instead, central banks look at maintaining inflation to start developing an economy.

Exchange rate stability

Central banks also look to keep the currency shocks at bay that may occur due to political or economic reasons. Currency shocks may lead to a rapid decline in the value of the currency which is detrimental to the economy. When the exchange rate falls sharply the central banks buy local currency from the exchange markets to increase its demand. It may also increase the value of the currency which helps importers, exporters, and the supply chain.

Functions of the Reserve Bank of India

All central banks, such as RBI, have four main functions. They are as follows:

Setting the base rate

The setting of base interest rates impacts commercial banks and the general public. When the base rate is increased, the commercial banks have to get loans from RBI at higher rates which they pass on to the customers. An increased loan rate is undesirable for the public and it decreases the circulation of money. The reverse is also true. When the base rate is diminished, the loan rate to commercial banks and the rate to consumers fall down. This increases the circulation of money.

Open market operations

The idea of open market operations is to create money and invest it in other projects. It is also called quantitative easing. In quantitative easing, toxic assets are taken away or assets are bought to free up money. The central banks create cash in open market operations and then buy bonds and gilts. The cash is passed on to the financial institutions. This then works as new money in the economy.

Reserve Requirements

Central banks also determine the reserves of commercial banks by defining the required reserve to be kept by the commercial banks. An increase in reserve usually stocks money in commercial banks’ accounts so money circulation decreases.

Foreign Exchange Reserves

RBI has to keep a certain amount of foreign exchange reserves so that it can buy Rupees with these reserves when the value of the Rupee goes down. So, it helps to stabilize the economy.

Role of the Reserve Bank of India in Indian Economy

The Reserve Bank of India acts as the savior of the Indian economy by maintaining economic regulations and keeping inflation and other disparities under control. As is obvious from the objectives and functions, it is the boss of commercial banks and helps in keeping commercial banks profitable thereby helping the entrepreneurs get more assistance from the banks. In simpler words, the RBI is the boss of the Indian economy.

Conclusion

No one can deny the role of central banks in making the living conditions better in an economy. RBI is no different. With its holistic approach to providing economic prosperity, the RBI is the chief institution that looks after both the economic condition and financial fluidity of the country.

In short, the Reserve Bank of India is the governing body that oversees the well-being of the financial health of the country.

FAQs

1. Can the Reserve bank of India print banknotes and coins?

Ans. Yes. The RBI is the organization that prints and mints banknotes and coins for the Indian economy.

2. Who is the head of the Reserve bank of India?

Ans. The governor of the Reserve Bank is its head. Currently, it is Shakltikanta Das.