Under the Reserve Bank of India Act, the Reserve Bank of India was established on April 1, 1935, as the country's central bank. The Reserve Bank of India is in charge of overseeing the country's currency and credit systems via the implementation of monetary policy. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"to regulate the issue of Banknotes 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; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."
The Governor is appointed by the central government.
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.
Appointed/nominated for a period of four years
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability while keeping in mind the objective of growth. The RBI (Reserve Bank of India) formulates the country's monetary policy, which deals with the country's money supply. The measures are undertaken to regulate the economy's money supply, availability, and cost of credit are part of the policy. The policy also oversees the distribution of credit among users as well as the borrowing and lending rates of interest. In a developing country like India, the monetary policy is significant in the promotion of economic growth.
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. It is a banker to banks and oversees their functions, this enables the building of public trust in the financial system of the nation which is certainly a prerequisite for efficient functioning.
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.
For a long time, foreign exchange in India was treated as a controlled commodity because of its limited availability. The country's early phases of foreign currency management focused on controlling foreign exchange through regulating demand owing to limited supply. The statutory power for exchange control was provided by the Foreign Exchange Regulation Act (FERA) of 1947, which was subsequently replaced by a more comprehensive Foreign Exchange Regulation Act, 1973.
This Act empowered the Reserve Bank and, in some cases, the Central Government to control and regulate transactions involving foreign exchange payments outside India, the export and import of currency notes and bullion, the transfer of securities between residents and non-residents, the acquisition of foreign securities, and the acquisition of immovable property in and outside India, among other things.
The 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.
Prior to 1934, the Indian government was in charge of printing currency. However, the Reserve Bank of India Act of 1934 established the RBI's responsibility in currency control. Section 22 of the RBI Act specifically grants the bank the power to issue currency notes.
Performs a wide range of promotional functions to support national objectives. The RBI also serves as a development agency by establishing sister organizations such as the Agricultural Refinance Development Corporation.
Industrial Development Bank of India etc. for rendering agricultural credit and industrial credit in the country. As RBI is responsible for credit control and rate of interest, it ensures efficient and affordable credit availability to priority sectors that further the agenda of development.
NABARD was created on July 12, 1986, and has taken over the entire responsibility of ARDC. The Reserve Bank of India has contributed half of NABARD's share capital (Rs. 100 crore). As a result, the Reserve Bank serves an important purpose in overseeing and administering the country's overall banking, monetary, and financial system.
Regulator and Supervisor of Payment and Settlement Systems
Introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.
Objective: maintain public confidence in the payment and settlement system. Financial Market Infrastructure (FMI) is described as a multilateral system used for clearing, settling, or documenting payments, securities, derivatives, or other financial transactions among participating institutions, including the system's operator. RBI regulates RTGS, CCIL, and SSS. Oversight is defined as a “central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change”. The word supervision is reserved to denote the distinctive obligations and tools that central banks have with relation to payment and settlement systems owing to their unique nature as both public authority and a bank. These are imperative tools that central banks may employ to fulfill their public policy goals with regard to public, payment, and settlement systems.
Banker to the Government: performs merchant banking functions for the central and the state governments; also acts as their banker. The RBI serves as a banker to both the federal and state governments. As such, it conducts all of the government's financial transactions, which includes receiving and paying money on behalf of the government, as well as carrying out exchange, remittance, and other banking operations. In exchange, governments deposit their cash balances with the RBI on a current account.
The RBI, as the government's banker, extends short-term credit to the government to cover any shortages in revenues over disbursements. It also offers state governments short-term loans in the form of ways and means advances.
The Ways and Means Advances system was created to address discrepancies between the government's receipts and expenditures. The government can avail of immediate cash from the RBI if required. But it has to return the amount within 90 days. The current repo rate is used to calculate interest.
If the WMA surpasses 90 days, it is considered an overdraft (the interest rate on overdrafts is 2 percentage points more than the repo rate).
As Banker to Banks, the Reserve Bank focusses on:
Enabling smooth, swift and seamless clearing and settlement of inter-bank
Providing an efficient means of funds transfer for banks
Enabling banks to maintain their accounts with the Reserve Bank for statutory reserve requirements and maintenance of transaction balances
Acting as a lender of last resort