Central Banking in India RBI

  • Post last modified:10/01/2022
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How did RBI came into existence?

In the monetary system of all countries, the central bank occupies an important place. The Central bank of a country enjoys a special status in the banking structure of the country. It is an apex institution of the monetary system, which seeks to regulate the functioning of the commercial banks of a country. It is a monetary authority of the country and has to function in a manner so as to promote economic stability and development. The Central Bank of India is called the Reserve Bank of India which was set up in 1935.

The macroeconomic environment in India is affected by monetary policy and fiscal policy. Monetary policy refers to the regulation and control of money supply and credit by the monetary authority of a country. This article analyzes the history of the Reserve Bank of India, the functions of RBI, the instruments of credit control and the main features of the Reserve Bank of India.


Phases of RBI (Central Banking in India)

The evolution of central banking in the Indian context has its own specificity. The RBI, while discharging its statutory responsibilities, has played a crucial role in the nation-building process, particularly in the development of the financial sector.

In fact, institution-building constitutes a distinguishing feature of central banking in India. For analytical convenience, the evolution of central banking in India over the period 1935-2005 is sub-divided into three broad phases:

  1. Foundation Phase (1935-50)
  2. Development Phase (1951-1990)
  3. Reform Phase (1991 Onwards)

Foundation Phase (1935-50)

During most of the formation phase, it was a private bank, though formed under a statute and overseen by the then colonial government. The functions of the Bank during this phase were confined essentially to traditional central banking, i.e., note issue authority and banker to the Government.

During the war and post-war years, its major preoccupation was the facilitation of war finance, repatriation of sterling debt and planning and administration of exchange control. Upon the nationalization of the Bank in 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 and the enactment of the Banking Regulation Act, 1949, regulation and supervision of banks received the focus.

On the initiative of the Reserve Bank, the Government appointed the Rural Banking Enquiry Committee in1949 to consider important policy issues relating to the extension of banking facilities in the country.

Development Phase (1951-1990)

With the launching of five-year plans, the Bank’s functions became more diversified in terms of plan financing and the establishment of specialized institutions to promote savings and investment in the Indian economy and meet the credit requirements of the priority sectors.

Two important events during the 1960s – the devaluation of the rupee in June 1966 and the nationalization of 14 private commercial banks in July 1969 – greatly influenced the functions of the Reserve Bank in the subsequent years.

Externally, the uncertainties in the global economy following the breakdown of the Bretton Woods system of stable exchange rates and the emergence of the floating regimes exacerbated by the oil shock of 1973-74 presented serious challenges for exchange rate management and gave rise to a balance of payments difficulties in India as in many other developing countries.

Reform Phase (1991 Onwards)

The process of liberalization and globalization the Indian economy initiated since 1991 added several new dimensions to the responsibilities of the Reserve Bank. Along with financial sector reforms, the monetary policy framework has been fine-tuned and the conventional central banking functions including those of currency management and payment and settlement systems have been revamped in tandem with the global trends and domestic expediency.

The reform measures in the financial sector and the initiatives taken by the Reserve Bank for developing financial markets to ensure efficient transmission of monetary policy impulses constituted the hallmark of this phase.

The first phase of reforms, guided by the recommendations of the Committee on Financial System (Narasimham Committee-I), aimed at enhancing the operational flexibility and functional autonomy of the financial sector with a view to fostering efficiency, productivity and profitability.

The second phase, based on the recommendations of the Committee on Banking Sector Reforms (Narasimham Committee-II), focused on strengthening the foundations of the banking system and bringing about structural improvements.


Management of Reserve Bank of India

The Reserve Bank of India had a paid-up capital of Rs. 5 Crores divided into 5 lakhs shares of Rs. 100 each. The Government of India owns all shares. The management is vested in the Central Board of Directors overseeing the Reserve Bank’s business.

The Central Board has primary authority for the oversight of the Reserve Bank. It delegates specific functions to its committees and sub-committees. The total members in Central Board of Directors are twenty whose description is as given below:

  • 1 Governor and 4 Deputy Governors appointed by the Government of India for a period of five years. Their salary, etc., are decided by the Central Board of Directors in consultation with the Government of India.

  • 4 Directors nominated from the local boards, located at Mumbai, Kolkata, Chennai and New Delhi by the Government of India. Their tenure is also five years.

  • Ten other directors nominated by the Government of India with expertise in various segments of the economy for a term offour years each.

  • An official of the Government of India to attend the meetings of the Central Board. His tenure is not fixed and he does not enjoy the right to vote in the meetings.

  • The Central Board is required, under the Act, to meet at least six times a year. At least 1 meeting at a minimum in each quarter must be called. The Governor of the Reserve Bank can call the meeting of the Central Board, whenever he thinks necessary.

    Each local board has at least four members, appointed by the Government of India for a period of four years and representing all interests. The local boards render advice to the Central Board and also perform the various jobs assigned to them by the Central Board.

The details about the central board and its committees and sub-committees include the following:

  1. Central Board
  2. Local Boards of RBI
  3. Board of Financial Supervision
  4. Board for Payment and Settlement Systems
  5. Sub-committees of the Central Board

Central Board

The Reserve Bank’s affairs are governed by a Central Board of Directors. The Central Board is appointed or nominated by the Government of India in keeping with the Reserve Bank of India Act for a period of four years. It consists of official directors and non-official directors. Official directors: The governor and not more than four deputy governors are full-time official directors.

Non-official directors: They are fifteen in number. Ten directors from various fields and one government official are nominated by the government while four directors from four local boards are nominated as non-official directors.

The functions of the central board are general superintendence and direction of the bank’s affairs. It oversees the current business of the central bank and typically meets every week, on Wednesdays. The agenda focuses on current business, including approval of the weekly statement of accounts related to the Issue and Banking Departments.

Local Boards of RBI

There are four local boards, one each for the four regions of the country in Mumbai, Kolkata, Chennai and New Delhi. The membership of each local board consists of five members appointed by the central government for a term of four years.

The functions of the local board are to advise the central board on local matters; to represent territorial and economic interns of local cooperative and indigenous banks’ interests, and to perform such other functions as delegated by the central board from time to time.

Board of Financial Supervision

The Reserve Bank of India performs the supervisory 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 under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.

It regulates and supervises commercial banks, Non-Banking Finance Companies (NBFCs), development finance institutions, urban cooperative banks and primary dealers.

Board for Payment and Settlement Systems

The board for payment and settlement systems regulates and supervises the payment and settlement systems.

Sub-committees of the Central Board

It includes those on Inspection and Audit; Staff; and Building. The focus of each sub-committee is on specific areas of operations.


Organization of the Reserve Bank of India

The bank is managed by a central board of directors and four local boards of directors. The Governor is the Reserve Bank’s chief executive.

The Governor supervises and directs the affairs and business of the Reserve Bank. The management team also includes Deputy Governors and Executive Directors. The RBI is made up of:

  1. 26 Departments
  2. 26 Regional Offices and Branches
  3. Training Centers
  4. Research Institutes
  5. Subsidiaries

26 Departments

These focus on policy issues in the Reserve Bank’s functional areas and internal operations.

26 Regional Offices and Branches

These are the Reserve Bank’s operational arms and customer interfaces, headed by Regional Directors. Smaller branches / sub-offices are headed by a General Manager / Deputy General Manager.

Training Centers

The Reserve Bank Staff College at Chennai addresses the training needs of RBI officers; the College of Agricultural Banking at Pune trains staff of co-operative and commercial banks, including regional rural banks. The ZonalTraining Centers, located at regional offices, train non-executive staff.

Research Institutes

RBI-funded institutions to advance training and research on banking issues, economic growth and banking technology, such as the National Institute of Bank Management (NIBM) at Pune, Indira Gandhi Institute of Development Research (IGIDR) at Mumbai, and Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad.

Subsidiaries

Fully-owned subsidiaries include National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL). The Reserve Bank also has a majority stake in the National Bank for Agriculture and Rural Development (NABARD).


Legal Framework of RBI

There are various acts governing the Reserve Bank functions, specific functions, banking operations and individual institutions owned by RBI. These are:

  1. Umbrella Acts
  2. Acts Governing Specific Functions
  3. Acts Governing Banking Operations
  4. Acts Governing Individual Institutions

Umbrella Acts

  • The Reserve Bank of India Act, 1934 governs the Reserve Bank functions.
  • The Banking Regulation Act, 1949 governs the financial sector.

The RBI Act, along with the Banking Regulation Act, 1949, provides wide-ranging powers to the Reserve Bank to issue directions to the banking and financial sectors.

Acts Governing Specific Functions

  • The Public Debt Act, 1944/The Government Securities Act, 2006 govern government debt market.
  • The Securities Contract (Regulation) Act, 1956 regulates government securities market.
  • The Indian Coinage Act, 1906 governs currency and coins.
  • The Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999 govern foreign exchange market.

Acts Governing Banking Operations

  • The Companies Act, 1956 governs banks as companies.
  • The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/ 1980, relate to nationalization of banks.
  • The Banker’s Books Evidence Act, 1891.
  • The Banking Secrecy Act, 1970.
  • The Negotiable Instruments Act, 1881.

Acts Governing Individual Institutions

  • The State Bank of India Act, 1954.
  • The Industrial Development Bank of India Act, 1964.
  • The Industrial Finance Corporation of India Act, 1948.
  • The National Bank for Agriculture and Rural Development Act, 1981.
  • The National Housing Bank Act, 1987.
  • The Deposit Insurance and Credit Guarantee Corporation Act, 1961.

Functions of RBI

The Reserve Bank is the umbrella network for numerous activities, all related to the nation’s financial sector, encompassing and extending beyond the functions of a typical central bank. An overview of the primary activities of RBI is given below:

  1. Monetary Authority
  2. Issuer of Currency
  3. Banker and Debt Manager to Government
  4. Banker to Banks
  5. Regulator of the Banking System
  6. Manager of Foreign Exchange
  7. Regulator and Supervisor of Payment and Settlement Systems
  8. Developmental Role

Monetary Authority

Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal of monetary policy is to achieve specific economic objectives such as low and stable inflation and promoting growth.

RBI monitors and analyses the movement of a number of indicators including interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output as it develops its policy perspectives.

The Reserve Bank’s Monetary Policy Department (MPD) formulates monetary policy. The Financial Markets Department (FMD) handles day-to-day liquidity management operations. The Reserve Bank explains the relative importance of its objectives in a given context in a transparent manner, emphasizes a consultative approach in policy formulation as well as autonomy in policy operations and harmony with other elements of macroeconomic policies.

Issuer of Currency

The RBI is the nation’s sole note-issuing authority. Along with the Government of India, RBI is responsible for the design and production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes. The Reserve Bank also makes sure there is an adequate supply of coins, produced by the government.

In consultation with the government, RBI routinely addresses security issues and targets ways to enhance security features to reduce the risk of counterfeiting or forgery. 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 at more than 4,000 bank branches typically commercial banks contain an adequate quantity of notes and coins so that currency is accessible to the public in all parts of the country. The Reserve Bank has the authority to issue notes up to the value of Rupees Ten Thousand.

Banker and Debt Manager to Government

Managing the government’s banking transactions is a key RBI role. Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public.

As a banker to the central government, the Reserve Bank maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds. RBI also acts as the banker to those state governments that have entered into an agreement with it.

The role as banker and debt manager to government includes several distinct functions:

  • Undertaking banking transactions for the central and state governments to facilitate receipts and payments and maintaining their accounts.
  • Managing the governments’ domestic debt with the objective of raising the required amount of public debt in a cost-effective and timely manner.
  • Developing the market for government securities to enable the government to raise debt at a reasonable cost, provide benchmarks for raising resources by other entities and facilitate transmission of monetary policy actions.

Banker to Banks

Like individual consumers, businesses and organizations of all kinds, banks need their own mechanism to transfer funds and settle inter-bank transactions – such as borrowing from and lending to other banks and customer transactions.

As the banker to banks, the Reserve Bank fulfils this role. In effect, all banks operating in the country have accounts with the Reserve Bank, just as individuals and businesses have accounts with their banks. As the banker to banks, RBI focuses on:

  • Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations.
  • Providing an efficient means of funds transfer for banks.
  • Enabling banks to maintain their accounts with us for purpose of statutory reserve requirements and maintain transaction balances.
  • Acting as lender of the last resort.

The RBI provides similar products and services for the nation’s banks to what banks offer their own customers. RBI helps the banks by Non-interest earning current accounts, the deposit account department, remittance facilities, lender of the last resort and Loans & advances.

RBI is planning to implement core banking solutions for its customers to enhance the safety and efficiency of the payments and settlement services in the country.

Regulator of the Banking System

Banks are fundamental to the nation’s financial system. The central bank has a critical role to play in ensuring the safety and soundness of the banking system—and in maintaining financial stability and public confidence in this system.

As the regulator and supervisor of the banking system, the RBI protects the interests of depositors, ensures a framework for orderly development and conduct of banking operations conducive to customer interests and maintains overall financial stability through preventive and corrective measures.

The Reserve Bank makes use of several supervisory tools such as on-site inspections; Off-site surveillance, making use of required reporting by the regulated entities; and thematic inspections, scrutiny and periodic meetings. The Board for Financial Supervision oversees the Reserve Bank’s regulatory and supervisory responsibilities.

The RBI’s Regulatory Role

As the nation’s financial regulator, the Reserve Bank handles a range of activities, including:

  • Licensing
  • Prescribing capital requirements
  • Monitoring governance
  • Setting prudential regulations to ensure solvency and liquidity of the banks.
  • Prescribing lending to certain priority sectors of the economy.
  • Regulating interest rates in specific areas.

  • Setting appropriate regulatory norms related to income recognition, asset classification, provisioning, investment valuation, exposure limits and the like.
  • Initiating new regulation

Manager of Foreign Exchange

With the transition to a market-based system for determining the external value of the Indian rupee, the foreign exchange market in India gained importance in the early reform period. In recent years, with the increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market.

The Reserve Bank plays a key role in the regulation and development of the foreign exchange market and assumes three broad roles relating to foreign exchange:

  • Regulating transactions related to the external sector and facilitating the development of the foreign exchange market.
  • Ensuring smooth conduct and orderly conditions in the domestic foreign exchange market.
  • Managing the foreign currency assets and gold reserves of the country.

Regulator and Supervisor of Payment and Settlement Systems

Payment and settlement systems play an important role in improving overall economic efficiency. They consist of all the diverse arrangements that we use to systematically transfer money – currency, paper instruments such as cheques, and various electronic channels.

The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, RBI focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms.

Most operate on the security platform of the Indian Financial Network (INFINET), using digital signatures for further security of transactions. Here is an overview of the various systems used:

  • Retail payment systems: Facilitating cheques clearing, electronic funds transfer, through National Electronic Funds Transfer (NEFT), settlement of card payments and bulk payments, such as electronic clearing services. Operated through local clearing houses throughout the country.

  • Large value systems: Facilitating settlement of inter-bank transactions from financial markets. These include: o Real Time Gross Settlement System (RTGS): for funds transfers o Securities Settlement System: for the government securities market o Foreign Exchange Clearing: for transactions involving foreign currency.

  • Department of Payment and Settlement Systems: The Reserve Bank’s payment and settlement systems regulatory arm.

  • Department of Information Technology: Tech support for the payment systems and for the Reserve Bank’s internal IT systems.

Developmental Role

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring that credit is available to the productive sectors of the economy, establishing institutions designed to build the country’s financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.

Over the years, the Reserve Bank has added new institutions as the economy has evolved. Some of the institutions established by the RBI include:

  • Deposit Insurance and Credit Guarantee Corporation (1962), to provide protection to bank depositors and guarantee cover to credit facilities extended to certain categories of small borrowers.

  • Unit Trust of India (1964), the first mutual fund of the country.


  • Industrial Development Bank of India (1964), a development finance institution for industry.

  • National Bank of Agriculture and Rural Development (1982), for promoting rural and agricultural credit.

  • Discount and Finance House of India (1988), a money market intermediary and a primary dealer in government securities.

  • National Housing Bank (1989), an apex financial institution for promoting and regulating housing finance.

  • Securities and Trading Corporation of India (1994), a primary dealer.

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