Reserve bank of India is central bank of India and regulates all the banks of the country. It all started in late 18th century when first time in the history of India Warren Hastings felt that there is need of centralized bank in India. His recommendation didn't reach at a thoughtful conclusion of creating a central body to regulate the banking in India. Later when demand of central bank increased in the 20th century and Lord Keynes also recommended setting up a central bank. Three Presidency banks Presidency bank of Bengal, Presidency bank of Bombay and Presidency bank of Madras merged to form Imperial bank of India to make central bank of India. A bill was brought in the assembly to establish RBI as central bank in in India in 1927 but got refused. In the third round table conference held in the year 1933, it was recommended to set up a free body to control the banking system in India. Due to all these fresh recommendations a fresh bill tabled in the parliament on 22 December 1933 and got passed in year 1934. Reserve bank started its function from April 1 1935 under the Reserve bank of India Act 1934.
Evolution of Role and Functions
Role of RBI is evolved over the period of time. In the initial stages it performed two basic functions. First, it acted as a central point of reserves for Indian banks and timely lend to the banks as they required funds for the operations in the emergency case. Second, it functioned as regulator on the Indian banks and made sure that they perform their activities in the interest of the depositors. In the years before the independence, banking network and scenario in India was not spread properly all over the country. They were divided in the foreign banks and domestic banks. Foreign banks mostly served to the British companies in India. Domestic banks were only engaged with domestic groups and overall banking intermediation among the banks and the customers was weak.
RBI was initially started with 5 crores of capital and governed by directors of central bank. The demand of nationalization of RBI was there since it started its operations in 1935. This was on the basis of changing economic environment in India. In the year 1949 RBI got nationalized under the Reserve bank of India Act 1949.
The role and functions of RBI became critical after independence and worked in order to increase the saving habit in India to generate more wealth for growth of the country. More the people will save and more will be the investment in the projects. Its roles were primarily on the basis of this hypothesis that the poor were unable to save and increase funds on their own. RBI was assisting government to establish institutions to serve the public by providing funds for specific functions.
After second five year plan in 1956 government of India came up with decision of establishing financial institutions with assistance of RBI. These institutions were Industrial development bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI). They will make credit available and perform their functions at central level and work as apex institutions for such state level and regional institutions. The role of RBI became concentrated after the establishment of these institutions. The Functions of RBI evolved with expansion of banking. RBI played vital role to make the banking facilities available in the concerned areas. Banking reached to remote areas of the country. SBI was formed in 1955. Imperial bank of India was converted in State bank of India in the year 1955. Then came the period of very critical moves of the Indian banking history when 14 banks were nationalized in 1969 and in 1980 when 6 more banks were nationalized. These bold moves led to the increased network in the rural areas of the country where most of the population was based. The traditional credit was for agriculture and a specialized institution being established in 1963 with name of Agriculture Finance Corporation (AFC) which later converted into NABARD in 1982. The role of RBI expanded after these institutions as these institutions helped country to evolve with better banking facilities.
Functions of Reserve Bank of India
These are some basic roles which RBI performs in the country:
Issue currency notes: RBI is only authorized government body to issue notes in the country. It has one issuing department to issue notes of 2,5,10, 20, 50, 100, 500 and 1000. One rupee note is issued by the finance ministry of central government.
Bank of the Government: RBI is known as the banker or Agent of central government. It holds deposit of the government and pays on the demand of government. It also gives timely advice to the government on the financial policies. RBI issues bonds for the government and manages debt for them with appropriate charges.
Bank of the banks: RBI also performs the job of banker for the all the banks in India. All banks who came under RBI act, have to put their cash reserves at the rate called CRR with RBI. RBI will regulate and supervise the operations of banks as soon as they are incorporated under the RBI Act.
Banking System Regulator: RBI is responsible for the regulation of Indian banking system. All banks who comes under RBI Act 1949 are bound follow the guidelines issued by RBI. RBI has powers of licensing, management, expansion, inspection and direction in this regard.
Clearing House: RBI is responsible for the settlements among the banks. It runs clearing houses in major cities to for the settlements and smooth transaction of cash between banks.
Credit Control: Credit Control is another important role that RBI performs. RBI performs credit control duty with the help of qualitative and quantitative instruments. Some qualitative measures are selective credit control, rationing of credit, moral persuasion and direct action. Bank Rate, Cash Reserve Ratio, Statutory Liquidity Ratio, Repo & Reverse Repo and Open Market Operations are quantitative instruments to control credit.
The Reserve Bank of India (RBI) or the Central Bank is the backbone of the Indian financial system. It was set up under the Reserve Bank of India Act, 1934. Since its inception in the year 1935, the functions undertaken by the bank have not only increased but have also undergone changes in accordance with the changing needs of the Indian economy. It was in the year 1949 that the bank was nationalized.
THE ROLE OF THE BANK POST 1990:
In the early 1990s, the country was faced with the crisis of maintaining its diminishing foreign exchange reserves. There was a need to put in place a new economic framework and policies so as to deal with this situation. This period saw the introduction of economic reforms which made the environment more conducive for the functioning of the private sector. During this period it was the Reserve Bank of India which was entrusted with the task of regulating the new system that was put in place, bringing in technology to strengthen, modernize and make the functioning of banks more efficient, introducing varied monetary policy instruments and management of currency.
As of today, keeping in line with the changes that need to be incorporated in the functioning of the Central Bank, the bank is divided into 27 departments where each department is responsible for policy making in a particular area assigned to it. Depending on the requirement the bank has in the past added new departments and closed down some of the existing departments.
The Central Board has the responsibility of the proper functioning of the Central Bank. The aim of the Central Bank is to ensure stability of prices while supporting economic growth. The role of the central Bank has evolved over the years from being the implementer of the monetary policy to include other functions such as regulation and supervision of the country's banking system. Moreover it has also gained greater autonomy in its functioning with regards to managing its own personnel, financing expenditure for the government where the RBI (rather than the government) can decide the amount of funding provided to the government, this further means that the monetary policy can be implemented independently of the fiscal policy and the new instruments introduced by RBI give it more flexibility so to better respond to changing macroeconomic environment.
Post 1990, various changes have been made by the bank in its structure and operations to deal with the responsibilities thrust on it. In the year 1994 the Board for Financial Supervision was formed and was given that task of regulating, auditing and supervising banks, NBFCs, and financial institutions. Although the body exists under the RBI it is independent in its functioning which is not the case for many Central Banks across the world. In the year 1995, Bhartiya Reserve Bank Note Mudran Private Limited was formed as a subsidiary of RBI. The reason for its formation was the management of the bank's two printing presses so as to handle the supply of currency in the economy. The Financial Markets Committee (FMC) has been established in the year 1997 and is responsible for providing inputs on a daily basis with regards to the same. The Technical Advisory Committee (TAC) has been formed in July 2005 where its role is to advise the bank on the actions that it should take while reviewing the monetary policy. Also introduced in the second half of 2005 were the pre - consultation meetings and resource management discussions (conducted every year) where apart from the Indian Bank's Association, representatives from other banking and financial institutions are also present so as to give their opinions and views regarding which direction the economy is headed before the monetary policy review. Such interactions will make the policy review inclusive and transparent. Another area of change is more interaction by the bank with the journalists and the media resulting in better dissemination of information.
NEW MONETARY POLICY INSTRUMENTS:
Apart from the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), the bank in the last decade has introduced other instruments such as Open Market Operations (OMO) and Liquidity Adjustment Facility (LAF) to manage short term liquidity requirements for banks, also introduced in 2004 was the Market Stabilization Scheme (MSS) for managing excess liquidity because of inflow of capital into the country from abroad. The portfolio of monetary policy tools that the bank has, gives it the required flexibility to deal with the changing macroeconomic conditions and make monetary policy transmission more efficient and effective.
To protect the monetary policy from being impacted by the fiscal policy (fiscal deficit monetization), the Fiscal Responsibility and Budget Management Act was passed in the year 2003, this has given more autonomy and control to the bank on the monetary policy. The bank has also given its view with regards to inflation where according to it the upper limit on the inflation should be around 5 %. This has influenced the acceptable level of inflation to come down. The RBI has had the freedom to make changes with respect to the mandatory provisions that banks have to make (such as CRR and SLR which are direct monetary policy tools) and the assignment of risk weights as and when needed.
