RESERVE BANK OF

INDIA
THE CENTRAL BANK OF INDIA
 INTRODUCTION

 The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act,
1934.
 The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and where policies are
formulated.
 Though originally privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of India.
 HISTORY AND EVOLUTION

 The Reserve Bank of India was set up on the basis of the recommendations of the
Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934)
provides the statutory basis of the functioning of the Bank, which commenced
operations on April 1, 1935.
 The Bank was constituted to
* To separate the control of currency and credit from the government.
* To augment banking facilities throughout the country.
 The Bank began its operations by taking over from the Government the functions so
far being performed by the Controller of Currency and from the Imperial Bank of
India, the management of Government accounts and public debt. The existing
currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and
Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking
Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.
 In 1926, the Royal
Commission on Indian
Currency and Finance
recommended creation
of a central bank for
India.
In 1927, a bill to give effect
to the above
recommendation was
introduced in the
Legislative Assembly, but
was later withdrawn due
to lack of agreement.
In 1933, the White Paper
on Indian Constitutional
Reforms recommended the
creation of a Reserve
Bank. A fresh bill was
introduced in the
Legislative A
In 1942 Reserve Bank In 1947, Reserve Bank
ceased to be the currency stopped acting as
issuing authority of Burma banker to the
(now Myanmar). Government of Burma.
In 1935, Reserve Bank
commenced operations as In 1948, Reserve Bank
India’s central bank on stopped rendering
April 1 as a private
shareholders’ bank with a central banking
paid up capital of rupees services to Pakistan.
five cr
In 1949, the Government of
In 1934, the Bill was India nationalized the Reserve
passed and received the Bank under the Reserve Bank
(Transfer of Public
Governor General’s Ownership) Act, 1948. And
assent Banking Regulation Act was
enacted.
 In 1985, the Sukhamoy
In 1951, India Chakravarty and Vaghul
In 1975, Regional Rural Committee reports
embarked in the embarked the era of
Banks started
Planning Era. Financial Market Reforms
in India.

In 1966, the Cooperative In 1991, India came under

Banks came within the In 1974, the Priority the Balance of Payment
regulations of the RBI. Sector Advance Targets crisis and RBI pledged
Rupee was devaluated for started getting fixed. Gold to shore up reserves.
the first time. Rupee was devaluated.

In 1969, Nationalization of
In 1973, the Foreign In 1991-92,
Exchange Regulation act Economic
14 Banks was a Turning
was amended and
point in the history of Reforms started
exchange control was
Indian Banking.
strengthened. in India.
In 1993, Exchange Rate In 2002, The Clearing In 2003, Fiscal
Responsibility and Budget
became Market Corporation of India Management Act
determined. Ltd Started operation. (FRBMA) enacted.

In 2004, Liquidity Adjustment

In 2000, the Foreign Facility (LAF) started working
In 1994, Board for fully, Market Stabilization
Exchange Management Act
Financial Supervision (FEMA) replaced the
Scheme (MSS) was launched,
was set up. and Real Time Gross
erstwhile FERA. Settlement (RTGS) started
working.

In 2006, Reserve Bank

In 1997, the regulation of
Indicator Approach for
the Non Banking Financial
Companies (NBFC) got
strengthened.
In 1998, Multiple
of India was empowered
to regulate the money,
monetary policy was
forex, G-Sec and Gold
adopted for the first
related security
time.
markets.
LEGAL FRAMEWORK

PUBLIC DEBT
RESERVE BANK ACT, 1944/
OF INDIA ACT, GOVT.
1934 SECURITY
ACT, 2006

GOVT.
BANKING
SECURITY
REGULATION
REGULATION
ACT, 1949
S, 2007

FOREIGN PAYMENT AND

EXCHANGE SETTLEMENT
MANAGEMENT SYSTEMS ACT,
ACT, 1999 2007
 RBI-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
OBJECTIVE institutions and non-banking finance companies.

• Restructuring of the system of bank inspections.

• Introduction of off-site surveillance.
INITATIVES • Strengthening of the role of statutory auditors.

• Supervision of financial institutions.

• Legal issues in bank frauds.
CURRENT • Divergence in assessments of non-performing assets.
FOCUS
 FUNCTIONS
OF
RESERVE BANK OF INDIA
(RBI)
 1. CURRENCY AUTHORITY
(BANK OF ISSUE)
 Central Bank has the sole authority for issue of currency in the country . In India,
Reserve Bank of India (RBI) has the sole right of issuing paper currency notes (except
one-rupee notes and coins ,which are issued by Ministry of Finance).
 All the currency issued by the Central Bank is its monetary liability, i.e. Central Bank is
obliged to back the currency with assets of equal value, to enhance the public
confidence in paper currency.
 The objective of this function is to provide uniformity in note circulation. It ensures
public faith in the currency system. It gives the central bank power to influence money
supply because currency with public is a part of money supply and It enables the
government to have supervision and control over the Central Bank with respect to
issue of notes.
 2. BANKER TO THE GOVERNMENT
The Reserve Bank of India acts as a banker, agent and a financial advisor to the Central
Government and all the State Government (except that of Jammu and Kashmir).
As a banker, it carries out all banking business of the government.
It maintains a current account for keeping their cash balances.
It accepts receipts and makes payments for the government and carries out exchange ,
remittance and other banking operations.
It also gives loans and advances to the government for temporary periods. The government
borrows money by selling treasury bills to the Central Bank.
As an agent, the Central Bank also has the responsibility of managing the public debt and
As a financial advisor, the Central Bank advices the government from time to time on
economic, financial and monetary matters.
 3. BANKER’S BANK AND SUPERVISOR
Being the apex bank, RBI acts as the banker to the commercial banks in India. As the banker
to banks, the Central Bank functions in three capacities:
Custodian of cash reserves: Commercial Banks are required to keep a certain proportion of
their deposits (known as Cash Reserve Ratio or CRR) with the Central Bank. In this way, RBI
acts as a custodian of cash reserves of commercial banks.
Lender of the last resort : When commercial banks fail to meet their financial requirements
from other sources, they approach the Central Bank to give loans and advances as lender of
the last resort and RBI assists these banks through discounting of approved securities and bills
of exchange though it might charge a higher rate of interest.
Clearing House: As Central Bank holds the cash reserves of all the commercial banks, it
becomes easier and more convenient for it to act as their clearing house. Therefore, RBI can
easily settle claims of various commercial banks against each other, by making debit and credit
entries in their accounts.
As a supervisor, RBI regulates and controls the commercial banks for their proper
functioning.
4. CUSTODIAN OF FOREIGN EXCHANGE
RESERVES
 The Central Bank acts as the custodian of country’s stock of gold
and international currencies. The Central Bank maintains the
stability of exchange rate. RBI sells the foreign currency in the
foreign exchange market when its supply decreases in the economy
and vice-versa.
 All earnings in foreign exchange transactions are to be deposited
with the Central Bank and are routed through it.
 By the sale and purchase of foreign currencies in the market, Central
Bank can bring the external value of the currencies at par with their
internal values and helps the government to pursue a coordinated
policy towards Balance of Payment situation in the country.
5. CONTROLLER OF MONEY SUPPLY AND CREDIT
Due to economic fluctuation, RBI controls the money supply and credit in the best interests of the economy. As
RBI has the sole monopoly in currency issue, it can control credit and supply of money.
The broad objectives of credit control policy in India have been :-
• Ensure an adequate level of liquidity enough to attain high economic growth rate along with maximum
utilisation of resources but without generating high inflationary pressure.
• Attain stability in the exchange rate and money market of the country.
• Meeting the financial requirement during a slump in the economy and in the normal times as well.
• Control business cycle and meet business needs.
 Monetary Policy is the policy of the Central Bank of a country to regulate and control money supply and credit
in the economy. There are two methods that the RBI uses to control money supply in the economy :-
Qualitative methods
Quantitative methods
During the period of inflation Reserve Bank of India tightens its policies to restrict the money supply, whereas
during deflation it allows the commercial bank to pump money in the economy.
 Quantitative measures and Qualitative
measures
 Bank rate
The RBI lends to other commercial banks a an interest rate which
is called the bank rate. When RBI increases the bank rate it
reduces the willingness of the commercial banks to borrow at a
higher rate. At the same time the commercial banks would
increase their rate of interest and the general public would
dissuaded to borrow from commercial banks .

 Cash reserve ratio(CRR)

It is the percentage of net demand and time liabilities that the
commercial banks has to maintain with RBI. The RBI uses this
control to increase or decrease the supply of money in the
country. It increases the CRR to reduce the money supply and
decreases the CRR when country requires a smooth flow of
funds.
 Statutory liquidity ratio(SLR)
The commercial banks, financial institutions and provident
funds have to invest a minimum of their prescribed assets and
liabilities in government securities and approved securities.
RBI uses SLR as a control measures to expand or restrict bank
credit.

 Open market operations

RBI has used open market operations by buying and selling
government securities in the money market. When It buys the
securities then there is increase in the money supply but when
it sells it money supply reduces . This is a flexible measure
used by RBI to control money supply and credit in the
economy.
 Moral suasion
This control is based on advices , suggestions, as well as
discussions to influence credit policies of commercial banks . The
RBI can request or advice certain changes in allocation of credit
but cannot enforce any of the suggestions because the are not
enactments or legally binding. They are moral controls and do not
have any quantitative implications.

 Selective credit control(SCC)

This control mechanism was introduced to India in 1956 for
regulating credit for certain specific requirements . It has been used
by RBI for fixing a maximum limit of advances to be given to an
individual borrower on the minimum sock of certain specific
commodities.
 ROLE OF RBI IN:
 MONEY MARKETS

 MICROFINANCE

 FOREIGN EXCHANGE MARKET

 Money markets
Monetary policy
RBI played an important role in directing the monetary policy of the
country. The suggestions of Sukhamoy Chakravarty committee in 1980
were taken up by the RBI for monetary targeting in a formal and
secured manner. The RBI provided credit to government and
commercial sector in a consistent manner and kept a check on the
money supply and credit budget.
It introduced many new money market instruments . These are 182
days treasury bills , certificates of deposits(CD’S) , commercial
papers(CP’S)
 Micro-finance
 The Reserve Bank of India (RBI) and National Bank for Agriculture
and Rural Development (NABARD) define micro-finance as
“Provision of thrift, credit and other financial services and products
of very small amounts to the poor in rural, semi-urban or urban areas
for enabling them to raise their income levels and in improving living
standards.”
 Government of India has come out with The Microfinance
Institutions (Development and Regulation) Bill, 2011 which, among
other things, envisages the Reserve Bank of India as the sole
regulator of microfinance sector covering all forms of MFIs in
addition to NBFC – MFIs which are presently being regulated by the
Reserve Bank. The Bill has been circulated among various
stakeholders for their views.
In India, microfinance companies can be registered as a non-banking
financial company (NBFC) under Companies Act or Reserve Bank of
India (RBI). An NBFC engages in accumulating funds and using them
for offering credit and other financial services to other people. An NBFC
generally provides personal loans, car loans, two-wheeler loans, crop
loans, agricultural loans, and lots more. Non-banking financial
companies can offer both regular loans as well as micro loans to the less
fortunate people of the society. These MFIs are regulated by the Reserve
Bank of India (RBI) .
RBI regulates and promotes microfinances as they are a booster
for the economic growth. The main features of microfinance
are:
 Low income groups
 Micro loan,
 High interest rates,
 Group lending approach,
 Collateral free,
 Easy access to finance,
 Flexibility,
 Loan for income generating activities,
 High frequency and smaller amount of repayment.
 FOREIGN EXCHANGE MARKET
Foreign Exchange Management Act (FEMA) envisages that Reserve Bank
of India have a key role in management of foreign exchange.
The main functions of RBI under FEMA are as follows :

 Controlling dealings in foreign exchange by giving general or special

permission for dealing in foreign exchange, excluding those cases
where specific provisions have been made in Act, Rules or Regulations
– Section 3.

 RBI cannot impose any restrictions on current account transactions.

These can be imposed only by Central Government in consultation with
RBI – Section 5. However, in certain cases, prior approval of RBI is
required for current account transactions as provided in Foreign
Exchange Management (Current Account Transactions) Rules, 2000.
 Specifying conditions for payment in respect of capital
account transaction – Section 6(2).
 Regulate/prohibit/restrict the following, by issuing
Regulations:
• Transfer or issue of foreign security to resident and Indian
security to non-resident;
• Borrowing and lending in foreign exchange or to a foreign
person;
• Export/import of currency or currency notes;
• Transfer of immovable property outside India;
• Giving guarantee or surety where foreign exchange
transaction is involved – Section 6(3)
 Specify (by regulation) period and manner in which
foreign exchange due from export of goods and services
should be received – Section 8.

 To grant exemption from realization and repatriation in

cases specified under Section 9.

 Granting authorization to ‘Authorized Person’ to deal in

foreign exchange, to give directions to them and to inspect
the authorized person – Sections 10, 11 & 12.
Thank you
Made by:-
• Ahsaas Malik
• Apoorva Varshney
• Preksha Kumari
• Shivali Jain
• Shreya Manchanda
• Shrutkriti Paliwal