The Reserve Bank Of India, often called the RBI, is the central bank of India. Since 1935, the Reserve Bank of India (RBI) has played a crucial role in the economy. RBI is one of the most influential financial institutions in the world.
The duties of the Reserve Bank Of India (RBI) includes maintaining financial stability, supervising and regulating banks, conducting national monetary policy and providing banking services in India.
Similar to the RBI, the central bank of the United States is The Federal Reserve System, often called the Fed.
RBI’s decision touches the daily life of every Indian and it helps chart the country’s current and future economic and financial course.
In this article, you will learn the structure of the RBI, how the Reserve Bank Of India works and How RBI helps to strengthen our economy and financial system.
Structure of Reserve Bank of India (RBI)
The Reserve Bank of India is wholly owned by the Indian Government.
RBI’s business is managed by the Central Board of Directors which includes the Governor, Deputy Governors and the nominated Directors and a government nominee- Director.
Reserve Bank of India (RBI) can have 4 Deputy Governors, at a maximum.
The Governor is the Reserve Bank’s chief executive.The Governor supervises and directs the affairs and business of the Reserve Bank of India (RBI).
RBI has four local bodies in Chennai, Kolkata, Mumbai and New Delhi, representing the country’s four regions.
Local board members are appointed by the central government to represent regional and economic interests and the interests of co-operative and indigenous banks.
Within RBI we have many departments, regional offices and branches, trading centres, research institutes and subsidiaries like National Housing Bank (NHB) and Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL).
Reserve Bank of India (RBI) also has a majority stake in the National Bank for Agriculture and Rural Development (NABARD).
What does the Reserve Bank of India (RBI) do?
As said earlier, RBI is the central bank of India. Here is a list of activities that RBI does in India;
- ensuring stability of interest rates,
- providing liquidity and adequate supply of currency,
- manage foreign exchange reserves,
- act as a banker and debt manager to the Indian Government,
- act as a banker to banks,
- supervising payment system,
- ensuring bank penetration and safety of depositors’ funds,
- promoting and developing financial institutions and markets, and
- ensuring stability of exchange rates.
Let us discuss various activities of the Reserve Bank of India (RBI) in detail.
Monetary Policies by Reserve Bank of India (RBI)
In order to achieve specific economic objectives, such as low and stable
inflation and promoting growth, Reserve bank of India (RBI) formulate monetary policies.
Monetary policy refers to the use of instruments under the control of the Reserve bank of India (RBI) to regulate the availability, cost and use of money and credit.
The main objectives of monetary policy are to maintain price stability, ensure adequate flow of credit to the economy to support growth and financial stability.
Changes in monetary policy is done by monitoring and analyzing a number of indicators including interest rates, inflation rate, money supply, credit, foreign exchange rate, trade, capital flows and fiscal position, along with trends in output.
Issue Of Currency
The Reserve bank of India (RBI) along with the Indian Government are responsible for design, production and overall management of the nation’s currency.
The Department of Currency Management in Mumbai in cooperation with the Issue Departments in the Reserve Bank’s regional offices, oversees the production and manages the distribution of currency.
Currency chests are maintained at branches of commercial banks to have an adequate quantity of notes and coins so that it is accessible to the public.
RBI act as a banker and manages government debts
One of the key roles of the Reserve bank of India (RBI) is to manage the government’s banking transactions.
The Reserve bank of India helps the Indian government in managing domestic debt and developing markets to raise government securities in order to raise debt at a reasonable cost.
Through its various departments, RBI manages day to day aspects of the government’s banking operation.
RBI helps the government to raise money to finance its requirements. They set policies, determine the size, tenure and nature of the loan.
RBI acts as a Banker to Banks
All banks operating in this country have accounts with the Reserve Bank Of India (RBI).
Inter bank transactions, borrowing from and lending to other banks are done through RBI. As a banker to banks, RBI ensures that clearing and settlement of inter-bank transactions are smooth, swift and seamless.
RBI also acts as a lender of last resort for all banks. It means RBI helps banks to raise short term liquidity in case the concerned bank is unable to raise it.
Banks in India open non-interest bearing current accounts on certain terms and conditions. They use these accounts to settle their obligations arising from inter-bank settlement systems. A bank can use this account to transfer funds to other banks by using the real time gross settlement (RTGS).
Reserve bank of India (RBI) regulate India’s Banking System
In order to maintain safety, soundness of the banking system and financial stability, the Reserve bank of India (RBI) acts as a regulator and supervisor of the whole banking system.
RBI ensures that the depositor’s interest is protected and overall financial stability is maintained.
Following entities are regulated and supervised by the Reserve bank of India (RBI);
- Commercial banks and all-India development financial institutions,
- Urban co-operative banks,
- Regional Rural Banks (RRB),
- District Central Co-operative Banks,
- State Co-operative Bank, and
- Non-Banking Financial Companies (NBFC).
Reserve bank of India (RBI) manages foreign exchange
RBI regulates and develops the foreign exchange market in India. They manage foreign currency assets and gold reserves in the country. They issue licenses to banks and other institutions to act as authorized dealers in foreign exchange.
Reserve bank of India (RBI) sale or purchase foreign currency to ease volatility in periods of excess demand or supply of foreign currency.
Forex trading in India is highly regulated by both RBI and SEBI.
Right now few currency pairs are available for trading on our national stock exchange (NSE) and BSE. You must have seen advertisements on social media platforms asking to invest in the Forex market by using their apps. We suggest, do not invest or trade based on social media advertisements or tips.
Very recently RBI has published a list of apps and entities that are banned for offering forex trading in India. Trading can only be done on a few currency pairs through a SEBI approved broker on NSE or BSE.
Regulating and supervising Payment and Settlement Systems
Reserve bank of India (RBI) focuses on the developing and functioning of safe, secure and efficient payment and settlement mechanisms in India.
The Reserve bank of India’s secure system handles various types of payment and settlement activities. Here is a list of these systems;
- Cheque clearing,
- Electronic funds transfer through National Electronic Funds Transfer (NEFT),
- Settlement of card payments and bulk payments,
- Real Time Gross Settlement System (RTGS),
- Securities Settlement System for the government securities market, and
- Foreign Exchange Clearing for transactions involving foreign currency.
The Reserve bank of India (RBI) regulates the issue of bank notes and keeps reserves to have monetary stability in India and operates the currency and credit system of the country.
Frequently Asked Questions – FAQs
Does the Reserve Bank Of India (RBI) collect taxes?
No. The RBI is not collecting income tax and GST. RBI is responsible for monetary policies and banking system oversight.
Income tax and GST (goods and services tax) are collected by the Government of India through their respective departments such as income tax and GST.
What is the cash reserve ratio?
To ensure that the Indian banking system has sufficient cash to cover customer’s withdrawals, the RBI, being a central bank of India, maintains a certain amount of cash in reserve as a percentage of their deposits. This percentage of cash to be kept in reserve is known as cash reserve ratio.
RBI in its monetary policy, adjusts cash reserve ratio based on the market condition.
What is repo and reverse repo rate?
Both repo and reverse repo rate are interest rates used by the RBI, being the central bank of India, to control India’s economy.
Repo rate is the interest rate at which the central bank lends money to commercial banks. In cases where a bank is unable to meet their expenses or faces a financial crunch, they borrow money from the RBI.
Reverse repo rate is the interest rate at which the central bank borrows money from the commercial banks. It happens when a bank deposits their excess money with RBI if they do not find any other way to use it.
The repo rate will always be higher than the reverse repo rate. Both rates are important. Repo rate is used to control the country’s inflation. Whereas, reverse repo rate is used to make sure we have adequate money supply in India.
As per the 8th December 2023 announcement of RBI, the repo rate is at 6.5%.
Who controls the Reserve Bank of India (RBI)?
The Reserve Bank of India is under the Ministry of Finance, Government of India. It’s the central bank of India, whose primary function is to govern and manage the financial system of India.
RBI is a statutory body established under the Reserve Bank of India Act, 1934 in the year 1935.
