2316 LRM Poject

HISTORY AND FUNCTIONS OF RBI
Submitted By:
ANUJ RAJ
B.A.L.L.B (Hons) 2316
Submitted to:
Mr. Vijayant Sinha
Assistant professor of Legal Method & research Methodology
The final draft is submitted for the partial fulfilment of the
(B.A.L.L.B) Legal Method & research Methodology
Date 04/02/2021
Chanakya national law university
1
Table contents
Declaration by the candidate ……………………………………………………………….…3
Acknowledgement………………………………………………………………………..……4
I. Introduction…………………………………………………………………………....
…....5
Aims and objective……………………………………………………………………..........6
Hypothesis………………………………………………………………...............................6
Limitations…………………………………………………………………………........…..6
Research Methodology………………………………………………………………….........6
II. History and functions of RBI…………………………………………………..…................7
History of RBI…………………………………………………………………...........…....7
Dr Ambedkar’s Role in the Formation of Reserve Bank of India (RBI)...............................7
Functions of RBI……………………………………………………………..................…12
Objective of RBI..................................................................................................................12
III .Role of Reserve Bank of India (RBI) in Indian Economy…………………….............…

12
Monetary policy................................................................................................................17
Inflation ............................................................................................................................21
IV. Critical analysis……………………………………………………………………….…

23
Bibliography……………………………………………………………………………...23
2
Declaration by the candidate
I, hereby, declare that the work reported in the B.A L.L.B (Hons.) Project
Report
titled “History and functions of RBI” submitted at CHANAKYA NATIONAL LAW
UNIVERSITY, PATNA is an authentic record of my work carried out under the
supervision of Mr. Vijayant Sinha , Assistant Professor of Legal Method &
research Methodology. I have not submitted this work elsewhere for any
other degree or diploma. I am fully responsible for the contents of my Project
Report.
(Signature of the Candidate)
ANUJ RAJ
ROLL NO 2316
B.A.L.L.B 1ST YEAR
CNLU PATNA
3
Acknowledgement
I would like to show my gratitude towards my guide, Mr. Vijayant Sinha,

Assistant Professor of Legal Method & research Methodology under whose
guidance, I structured my project. I owe the present accomplishment of my
project to everyone, who helped me immensely with materials throughout the
project and without whom I couldn’t have completed it in the present way. I
would also like to extend my gratitude to my friends and all those unseen
hands that helped me out at every stage of my project
THANK YOU,
ANUJ RAJ
ROLL NO 2316
B.A.L.L.B 1ST YEAR
CNLU PATNA
4
Introduction
The Reserve Bank of India (RBI)is the central bank of India, which was
established on Apr. 1, 1935, under the Reserve Bank of India Act. The Reserve
Bank of India uses monetary policy to create financial stability in India, and it
is charged with regulating the country’s currency and credit systems.
The RBI was originally set up as a private entity, but it was nationalized in
1949. The reserve bank is governed by a central board of directors appointed by
the national government. The government has always appointed the RBI’s
directors, and this has been the case since the bank became fully owned by the
government of India as outlined by the Reserve Bank of India Act. Directors are
appointed for a period of four years.
The main purpose of the RBI is to conduct consolidated supervision of the

financial sector in India, which is made up of commercial banks, financial
institutions, and non-banking finance firms. Initiatives adopted by the RBI
include restructuring bank inspections, introducing off-site surveillance of
banks and financial institutions, and strengthening the role of auditors.
The RBI formulates, implements, and monitors India’s monetary policy. The
bank’s management objective is to maintain price stability and ensure that
credit is flowing to productive economic sectors. The RBI also manages
all foreign exchange under the Foreign Exchange Management Act of 1999.
This act allows the RBI to facilitate external trade and payments to promote the
development and health of the foreign exchange market in India.
The RBI acts as a regulator and supervisor of the overall financial system. This
injects public confidence into the national financial system, protects interest
rates, and provides positive banking alternatives to the public. Finally, the RBI
acts as the issuer of national currency. For India, this means that currency is
either issued or destroyed depending on its fit for current circulation. This
provides the Indian public with a supply of currency in the form of dependable
notes and coins, a lingering issue in India.
5
_______________________Aims and objective_______________________
 Analyse the role of RBI for Indian economy

 Importance of RBI in Indian economy
 Role of RBI in monetary policy India
________________________Hypothesis______________________________
_
 RBI plays important role in Indian economy

 RBI plays important role to maintain inflation rate (4 +or – 2)
_______________________Limitations_______________________________
The unavailability of the literature or commentary in book form is a concern for
the researcher. The researcher has a limited time to prepare this project report.
Having less time, it is very difficult to make it more comprehensive. The
researcher for gathering the information and reviews have to go through various
videos and documentary. This was a horrible experience when it took hours for
the video to buffer and play on YouTube.
___________________Research methodology_________________________
The researcher has chosen to do doctrinal type of research. While doing this
project, he consulted various news reports and govt. website. The researcher,
after reading the materials available, prepared a comprehensive analysis. This
helped in understanding the problems existing in functions of RBI and brings
out the solution for the problem existing .
6
Origin & History Of The Reserve Bank Of India
The origins of the Reserve Bank of India can be traced to 1926 when the Royal
Commission on Indian Currency and Finance – also known as the Hilton-Young
Commission – recommended the creation of a central bank for India to separate
the control of currency and credit from the Government and to augment banking
facilities throughout the country. The Reserve Bank of Indian Act of 1934
established the Reserve Bank and set in motion a series of actions culminating in
the start of operations in 1935. Since then, the Reserve Bank’s role and functions
have undergone numerous changes, as the nature of the Indian economy and
financial sector changed.
Dr Ambedkar’s Role in the Formation of Reserve Bank of India (RBI)
Reserve Bank of India was conceptualised as per the guidelines, working style
and outlook presented by Dr Ambedkar in front of the Hilton Young
Commission (also known as Royal Commission on Indian Currency and
Finance).
When this commission came to India under the name of “Royal Commission on
Indian Currency and Finance”, each and every member of this commission was
holding Dr Ambedkar’s book named “The Problem of the Rupee – Its origin
and its solution.”1
The legislative assembly passed this under the name of RBI act 1934, its need,
working style and its outlook were presented by Dr Ambedkar in front of Hilton
Young Commission. For more details read, “Evidence before the Royal
1
https://velivada.com/dr-b-r-ambedkar-books
7
Commission on Indian Currency and Finance” and “The Problem of the Rupee
– Its origin and its solution.”
Hilton Young Commission submitted its report in 1926 and it was on the
recommendations of the report RBI was established. Reserve Bank of India
(RBI) came into the picture on 1st April 1935. Dr Babasaheb Ambedkar had
submitted a statement of evidence to the commission and one can find clear
authority and evidence of Babasaheb’s expertise on the matter in the statement
submitted. It is really shameful that India has not recognized Babasaheb’s
thoughts.
1935—1950
The central bank was founded in 1935 to respond to economic troubles after the
first world war. The Reserve Bank of India was set up on the recommendations
of the Hilton-Young Commission. The commission submitted its report in the
year 1926, though the bank was not set up for another nine years. The Preamble of
the Reserve Bank of India describes the basic functions of the Reserve Bank as to
regulate the issue of bank notes, to keep reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system
in the best interests of the country. The Central Office of the Reserve Bank was
initially established in Kolkata, Bengal, but was permanently moved to Mumbai
in 1937. The Reserve Bank continued to act as the central bank for Myanmar till
Japanese occupation of Burma and later up to April 1947, though Burma seceded
from the Indian Union in 1937. After partition, the Reserve Bank served as the
central bank for Pakistanuntil June 1948 when the State Bank of Pakistan
commenced operations. Though originally set up as a shareholders’ bank, the RBI
has been fully owned by the government of India since its nationalization in 1949
1950—1960
Between 1950 and 1960, the Indian government developed a centrally planned
economic policy and focused on the agricultural sector. The administration
nationalized commercial banks and established, based on the Banking Companies
Act, 1949 (later called Banking Regulation Act) a central bank regulation as part
of the RBI. Furthermore, the central bank was ordered to support the economic
plan with loans.
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1960—1969
As a result of bank crashes, the reserve bank was requested to establish and
monitor a deposit insurance system. It should restore the trust in the national bank
system and was initialized on 7 December 1961. The Indian government founded
funds to promote the economy and used the slogan Developing Banking. The
Government of India restructured the national bank market and nationalized a lot
of institutes. As a result, the RBI had to play the central part of control and
support of this public banking sector.
1969—1985
Between 1969 and 1980, the Indian government nationalized 6 more commercial
banks, following 14 major commercial banks being nationalized in 1969(As
mentioned in RBI website). The regulation of the economy and especially the
financial sector was reinforced by the Government of India in the 1970s and
1980s. The central bank became the central player and increased its policies for a
lot of tasks like interests, reserve ratio and visible deposits The measures aimed at
better economic development and had a huge effect on the company policy of the
institutes. The banks lent money in selected sectors, like agri-business and small
trade companies.
The branch was forced to establish two new offices in the country for every newly
established office in a town.The oil crises in 1973 resulted in increasing inflation,
and the RBI restricted monetary policy to reduce the effects.
1985—1991
A lot of committees analysed the Indian economy between 1985 and 1991. Their
results had an effect on the RBI. The Board for Industrial and Financial
Reconstruction, the Indira Gandhi Institute of Development Research and the
Security & Exchange Board of India investigated the national economy as a
whole, and the security and exchange board proposed better methods for more
effective markets and the protection of investor interests. The Indian financial
market was a leading example for so-called "financial repression" (Mackinnon
and Shaw). The Discount and Finance House of India began its operations on the
monetary market in April 1988; the National Housing Bank, founded in July
1988, was forced to invest in the property market and a new financial law
improved the versatility of direct deposit by more security measures and
liberalisation.
9
1991—2000
The national economy came down in July 1991 and the Indian rupee was
devalued The currency lost 18% relative to the US dollar, and the Narsimahmam
Committee advised restructuring the financial sector by a temporal reduced
reserve ratio as well as the statutory liquidity ratio. New guidelines were
published in 1993 to establish a private banking sector. This turning point should
reinforce the market and was often called neo-liberal The central bank deregulated
bank interests and some sectors of the financial market like the trust and property
markets. This first phase was a success and the central government forced a
diversity liberalization to diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalized banks in July to interact with the capital market to reinforce
their capital base. The central bank founded a subsidiary company—the Bharatiya
Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes.
Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000.
It should improve the foreign exchange market, international investments in India
and transactions. The RBI promoted the development of the financial market in
the last years, allowed online banking in 2001 and established a new payment
system in 2004 - 2005 (National Electronic Fund Transfer). The Security Printing
& Minting Corporation of India Ltd., a merger of nine institutions, was founded in
2006 and produces banknotes and coins.
The national economy's growth rate came down to 5.8% in the last quarter of
2008 – 2009 and the central bank promotes the economic development.
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FUNCTIONS OF RBI
The functions of RBI (Reserve Bank of India) is as important as the Ministry of

Finance. RBI is not just a bank, it bank of banks.
When I was a child I always wanted to open a bank account in Reserve Bank of
India.The enormity and magnitude of its office building itself used to tell me
that this bank is the best.But as I grew up I began to realize that even my father
(whom I considered as my epitome) did not had account in this bank.I even
never heard him talking about reserve bank of India.But I used to hear the name
of reserve bank of India in television news channels.A doubt came to my mind
that whether this is a bank at all?
I asked this question to my father and in simple terms he explained me that

“Reserve Bank of India is Banker to the Government of India and all India
Banks I could make it that RBI is possibly BOSS of all banks in India.
As a common man saves and lends money from banks like SBI, ICICI, HDFC
etc, in the same way these banks saves and lends money from reserve bank of
India“.
FOLLOWING FUNCTIONS OF RBI
 Monetary Authority: The main function of RBI is formulating

implementing the monetary policies of India. Creating and balance
between “Price stability” and “future economic growth” is the main
challenge of RBI as a monetary authority.
 Regulator and supervisor of the financial system: RBI sets the rules
and regulations under which Indian banks and financial system must
operate. The idea is to run the banks and financial system so efficiently
that public trust on the system is maintained. When people feel confident
about the financial system, it’s a win for RBI. How RBI ensures public
confidence? By ensuring that the depositors money is safe with the banks,
and all banking & financial functions are operating seamlessly as per
rules.
 Manager of Foreign Exchange: In India, all foreign currency flow must

be done as per FEMA (Foreign Exchange Management Act). It is the RBI
who ensures that transactions happens as per FEMA. The bigger role of
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RBI is in ensuring that external trade happens in a seamless manner.

Whether, the trader is a resident Indian or a foreign national, they must be
able to deal in foreign exchange in an easy and transparent manner.
 Issuer of Currency: It is in the responsibility of the RBI to print and

issue new currency notes in India. It is also the RBI’s responsibility to
exchange old or damaged notes for new ones. This way RBI can manage
the availability of enough “good quality cash” needed in the market at a
given point in time. Here, “cash” means both notes and coins.
 Regulator and Supervisor of Payment and Settlement Systems: In

India, all payments must be settles as per PSS Act, 2007 (Payment and
Settlement Systems Act). It is the RBI who ensures that transactions
happens as per PSS. In India there are several payments systems like
ECS, Credit Card, Debit Card, RTGS, NEFT, IMPS and UPI. All these
payments system are covered by PSS Act, 2007. The overall objective of
RBI is to provide fast, safe and efficient payment system for the public.
Efficient payment flows is one of the main confidence booster of the
public in the Indian financial system.
 Banker to Government: Like retail and commercial banks gives service

to common public, RBI is the retail bank for the Government of India
(GOI). RBI also acts as a merchant banker for the GOI.
Objectives of the Reserve Bank of India
The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives
of the Reserve Bank as: ―to regulate the issue of Bank notes and the keeping of
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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.‖ Prior to
the establishment of the Reserve Bank, the Indian financial system was totally
inadequate on account of the inherent weakness of the dual control of currency
by the Central Government and of credit by the Imperial Bank of India. The
Hilton-Young Commission, therefore, recommended that the dichotomy of
functions and division of responsibility for control of currency and credit and
the divergent policies in this respect must be ended by setting-up of a central
bank – called the Reserve Bank of India – which would regulate the financial
policy and develop banking facilities throughout the country. Hence, the Bank
was established with this primary object in view. Another objective of the
Reserve Bank has been to remain free from political influence and be in
successful operation for maintaining financial stability and credit.
The fundamental object of the Reserve Bank of India is to discharge purely

central banking functions in the Indian money market, i.e., to act as the note-
issuing authority, bankers’ bank and banker to government, and to promote the
growth of the economy within the framework of the general economic policy of
the Government, consistent with the need of maintenance of price stability. A
significant object of the Reserve -Bank of India has also been to assist the
planned process of development of the Indian economy. Besides the traditional
central banking functions, with the launching of the five-year plans in the
country, the Reserve Bank of India has been moving ahead in performing a host
of developmental and promotional functions, which are normally beyond the
purview of a traditional Central Bank.
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Role of Reserve Bank of India (RBI) in Indian Economy
Bank Issue: Under Section 22 of the Reserve Bank of India Act, the bank has
the sole sight to issue bank notes of all denominations. The notice issued by the
Reserve bank has the following advantages:
 It brings uniformity to note issue.
 It is easier to control credit when there is a single agency of note issue.
 It keeps the public faith in the paper currency alive.
 It helps in the stabilization of the internal and external value of the currency
and
 Credit can be regulated according to the needs of the business
Banker, Agent and Financial Advisor to the State: As a banker agent and
financial advisor to the State, the Reserve Bank performs the following
functions:
 It keeps the banking accounts of the government.
 It advances short-term loans to the government and raises loans from the
public.
 It purchases and sells through bills and currencies on behalf to the

government.
 It receives and makes payment on behalf of the government.
 It manages public debt and
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Custodian of Foreign Exchange Reserves: It is the responsibility of the

Reserve bank to stabilize the external value of the national currency. The
Reserve Bank keeps golds and foreign currencies as reserves against note issue
and also meets adverse balance of payments with other counties. It also
manages foreign currency in accordance with the controls imposed by the
government. As far as the external sector is concerned, the task of the RBI has
the following dimensions:
 To administer the foreign Exchange Control;
 To choose ,the exchange rate system and fix or manages the exchange rate
between the rupee and other currencies;
 To manage exchange reserves;
 To interact or negotiate with the monetary authorities of the Sterling Area,

Asian Clearing Union, and other countries, and with International financial
institutions such as the IMF, World Bank, and Asian Development Bank
Controller of Credit: In modern times credit control is considered as the most

crucial and important functional of a Reserve Bank. The Reserve Bank
regulates and controls the volume and direction of credit by using quantitative
and qualitative controls. Quantitative controls include the bank rate policy, the
open market operations, and the variable reserve ratio. Qualitative or selective
credit control, on the other hand includes rationing of credit, margin
requirements, direct action, moral suasion publicity, etc. Besides the above
mentioned traditional functions, the Reserve Bank also performs some
promotional and supervisory functions. The Reserve Bank promotes the
development of agriculture and industry promotes rural credit, etc. The Reserve
Bank also acts as an agent for the international institutions as I.M.F., I.B.R.D.,
etc.
Supervisory Functions: In addition to its traditional central banking functions,

the Reserve Bank has certain nonmonetary functions of the nature of
15
supervision of banks and promotion of sound banking in India. The supervisory

functions of the RBI have helped a great deal in improving the methods of their
operation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949
have given the RBI wide powers of:
 Supervision and control over commercial and cooperative banks, relating to

licensing and establishments.
 Branch expansion.
 Liquidity of their assets.
 Management and methods of working, amalgamation reconstruction and

liquidations. The RBI is authorized to carry out periodical inspections off the
banks and to call for returns and necessary information from them.
RBI Actions During Global Recession/Subprime Crisis
Since September 2008, RBI has taken multiple actions in order to ensure that
the economy does not suffer a massive downturn. The RBI has cut the repo rate
by 400 basis points from 9% to 5%, reverse repo rate by 250 basis points from
6% to 3.5% and the CRR by 400 basis points from a high of 9% to the current
5%. Where as the Statutory Liquidity Ratio (SLR) was reduced from 25% to
24%. The RBI has also reprimanded the Banks which have been slow in passing
on the benefits of the lower interest rate onto the borrower. It clearly pointed out
that the interest rate cuts by the public sector banks have been in the range of
1.25%-2.25%, 1%-1.25% for private banks and 1% for foreign banks. The
slackness in passing on benefits to the consumers can be seen in a comparison
between reactions of banks to RBI policies in 2004 and 2008. Towards the
beginning of 2004 the RBI key policy rates were at approximately similar levels
although private banks were charging about 7.5-8% during that time and are
currently charging approximately 10-11% for home loans.
The RBI has adopted a comparatively more conservative target of 6%, as

compared to the Government’s 7% GDP growth target for the current fiscal, in
light of the global downturn resulting in moderation of growth and muted
inflationary pressures that are being experienced currently by the Indian
economy. The policy announced a cut in repo and reverse repo by 25 bps in
order to encourage lowering of lending rates, increased lending and stimulate
16
aggregate demand within the economy in order to mitigate downside risks.

After the additional 25 bps cut, currently the repo rate has lowered down to
4.75% and reverse repo rate to 3.25%.There is also a clear indication that the
central bank will continue to monitor the economic performance as downside
risks continue to persist in the economy and necessary action will be undertaken
as deemed favourable which translates to possibly more rate cuts in the short
term.
RBI and its monetary policy2
Monetary policy is the process by which the monetary authority of a country,

generally the central bank, (RBI) controls the supply of money in the economy
by its control over interest rates in order to maintain price stability and achieve
high economic growth.
objectives of the monetary policy of India
Price stability
Price stability implies promoting economic development with considerable

emphasis on price stability. The centre of focus is to facilitate the environment
which is favourable to the architecture that enables the developmental projects
to run swiftly while also maintaining reasonable price stability.
Controlled expansion of bank credit
One of the important functions of RBI is the controlled expansion of bank credit
and money supply with special attention to seasonal requirement for credit
without affecting the output.
2
"Reserve Bank of India". www.rbi.org.in
17
Promotion of fixed investment
The aim here is to increase the productivity of investment by restraining non

essential fixed investment.
Restriction of inventories and stocks
Overfilling of stocks and products becoming outdated due to excess of stock

often results in sickness of the unit. To avoid this problem, the central monetary
authority carries out this essential function of restricting the inventories. The
main objective of this policy is to avoid over-stocking and idle money in the
organisation.
Promoting efficiency
It tries to increase the efficiency in the financial system and tries to incorporate
structural changes such as deregulating interest rates, easing operational
constraints in the credit delivery system, introducing new money market
instruments, etc.
Reducing rigidity
RBI tries to bring about flexibilities in operations which provide a considerable

autonomy. It encourages more competitive environment and diversification. It
maintains its control over financial system whenever and wherever necessary to
maintain the discipline and prudence in operations of the financial system.
Monetary policy committee
The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance
Act, 2016, to provide a statutory and institutionalised framework for a Monetary
Policy Committee, for maintaining price stability, while keeping in mind the
objective of growth. The Monetary Policy Committee is entrusted with the task
of fixing the benchmark policy rate (repo rate) required to maintain inflation
within the specified target level. As per the provisions of the RBI Act, three of
the six Members of the Monetary Policy Committee will be from the RBI and
the other three Members will be appointed by the Central Government.
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The Government of India, in consultation with RBI, notified the 'Inflation

Target' in the Gazette of India Extraordinary dated 5 August 2016 for the period
beginning from the date of publication of the notification and ending on the
March 31, 2021 as 4%. At the same time, lower and upper tolerance levels were
notified to be 2% and 6% respectively. Inflation rate in 2020 is 0.62% .3
These instruments are used to control the money flow in the economy:
Repo rate and reverse repo rate
Repo rate is the rate at which RBI lends to its clients generally against
government securities. Reduction in repo rate helps the commercial banks to get
money at a cheaper rate and increase in repo rate discourages the commercial
banks to get money as the rate increases and becomes expensive. The reverse
repo rate is the rate at which RBI borrows money from the commercial banks.
The increase in the repo rate will increase the cost of borrowing and lending of
the banks which will discourage the public to borrow money and will encourage
them to deposit. As the rates are high the availability of credit and demand
decreases resulting to decrease in inflation. This increase in repo rate and
reverse repo rate is a symbol of tightening of the policy. As of May 2020, the
repo rate is 4.00% and the reverse repo rate is 3.35%.4
Cash reserve ratio (CRR)
Cash reserve ratio is a certain percentage of bank deposits which banks are

required to keep with RBI in the form of reserves or balances. The higher the
CRR with the RBI, the lower will be the liquidity in the system, and vice versa.
RBI is empowered to vary CRR between 15 percent and 3 percent. Per the
suggestion by the Narasimham Committee report, the CRR was reduced from
15% in 1990 to 5 percent in 2002. As of 9th October 2020, the CRR is 3.00
percent.5
3
https://pib.gov.in/newsite/PrintRelease.aspx?relid=151264
4
https://www.rbi.org.in/home.aspx
5
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Statutory liquidity ratio (SLR)
Every financial institution has to maintain a certain quantity of liquid assets

with themselves at any point of time of their total time and demand liabilities.
These assets have to be kept in non cash form such as G-secs precious metals,
approved securities like bonds. The ratio of the liquid assets to time and demand
liabilities is termed as the Statutory liquidity ratio. There was a reduction of
SLR from 38.5% to 25% because of the suggestion by Narsimham Committee.
As on 9th October 2020, the SLR stands at 18%.6
Bank rate policy
The bank rate also known as the discount rate, is the rate of interest charged by
the RBI for providing funds or loans to the banking system. This banking
system involves commercial and co-operative banks, Industrial Development
Bank of India, IFC, EXIM Bank, and other approved financial institutions.
6
"Reserve Bank of India". www.rbi.org.in. Retrieved 9 October 2020.
20
Funds are provided either through lending directly or discounting or buying

money market instruments like commercial bills and treasury bills. Increase in
bank rate increases the cost of borrowing by commercial banks which results in
the reduction in credit volume to the banks and hence the supply of money
declines. Increase in the bank rate is the symbol of tightening of RBI monetary
policy. As of 9th October 2020, the bank rate is 4.25 percent.7
MSF
REPORATE INTERESST
CRR LOAN
SLR CASH
DEMAND
PRICE
INFLATION
Inflation control by RBI8
Inflation is the supply of excess money and credit relative to the goods and
services produced, resulting in increased prices. Inflation results in the increase
in the price of some set of goods and services in a given economy over a period
of time. It is measured as the percentage rate of change of a price index.
Method to control
Monetary Measures:
7
8
http://www.rbi.org.in/home.aspx
21
The government of a country takes several measures and formulates policies to

control economic activities. Monetary policy is one of the most commonly used
measures taken by the government to control inflation.
In monetary policy, the central bank increases rate of interest on borrowings for
commercial banks. As a result, commercial banks increase their rate of interests
on credit for the public. In such a situation, individuals prefer to save money
instead of investing in new ventures.
This would reduce money supply in the market, which, in turn, controls
inflation. Apart from this, the central bank reduces the credit creation capacity
of commercial banks to control inflation.
Fiscal Measures:
Apart from monetary policy, the government also uses fiscal measures to
control inflation. The two main components of fiscal policy are government
revenue and government expenditure. In fiscal policy, the government controls
inflation either by reducing private spending or by decreasing government
expenditure, or by using both.
It reduces private spending by increasing taxes on private businesses. When

private spending is more, the government reduces its expenditure to control
inflation. However, in present scenario, reducing government expenditure is not
possible because there may be certain on-going projects for social welfare that
cannot be postponed.
Besides this, the government expenditures are essential for other areas, such as
defense, health, education, and law and order. In such a case, reducing private
spending is more preferable rather than decreasing government expenditure.
When the government reduces private spending by increasing taxes, individuals
decrease their total expenditure.
For example, if direct taxes on profits increase, the total disposable income
would reduce. As a result, the total spending of individuals decreases, which, in
turn, reduces money supply in the market. Therefore, at the time of inflation, the
government reduces its expenditure and increases taxes for dropping private
spending.
22
Price Control:
Another method for ceasing inflation is preventing any further rise in the prices
of goods and services. In this method, inflation is suppressed by price control,
but cannot be controlled for the long term. In such a case, the basic inflationary
pressure in the economy is not exhibited in the form of rise in prices for a short
time. Such inflation is termed as suppressed inflation.
The historical evidences have shown that price control alone cannot control
inflation, but only reduces the extent of inflation. For example, at the time of
wars, the government of different countries imposed price controls to prevent
any further rise in the prices. However, prices remain at peak in different
economies. This was because of the reason that inflation was persistent in
different economies, which caused sharp rise in prices. Therefore, it can be said
inflation cannot be ceased unless its cause is determined.
Critical analysis
The Reserve Bank of India (RBI) is the apex financial institution of the
country’s financial system entrusted with the task of control, supervision,
promotion, development and planning. RBI is the queen bee of the Indian
financial system which influences the commercial banks’ management in more
than one way. The RBI influences the management of commercial banks
through its various policies, directions and regulations. Its role in bank
management is quite unique. In fact, the RBI performs the four basic functions
of management, viz., planning, organising, directing and controlling in laying a
strong foundation for the functioning of commercial banks
Bibliography
 The story of reserve bank of India – By Rahul Bajoria

 Reports on trend and progress of banking in India 2001-02 -By RBI
 Committee on financial sector assessment -By RBI
23
 The Problem of the Rupee – Its origin and its

solution.”By Dr Ambedkar
WEBILIOGRAPHY
https://www.rbi.org.in/home
https://www.investopedia.com/terms/r/rbi.asp
https://www.jstor.org
https://pib.gov.in/indexd.aspx
https://velivada.com/
http://allindiaradio.gov.in
24

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HISTORY AND FUNCTIONS OF RBI

B.A.L.L.B (Hons) 2316

Mr. Vijayant Sinha

Assistant professor of Legal Method & research Methodology

The final draft is submitted for the partial fulfilment of the

(B.A.L.L.B) Legal Method & research Methodology

Chanakya national law university

Aims and objective……………………………………………………………………..........6

II. History and functions of RBI…………………………………………………..…................7

Dr Ambedkar’s Role in the Formation of Reserve Bank of India (RBI)...............................7

III .Role of Reserve Bank of India (RBI) in Indian Economy…………………….............…

IV. Critical analysis……………………………………………………………………….…

Declaration by the candidate

(Signature of the Candidate)

I would like to show my gratitude towards my guide, Mr. Vijayant Sinha,

The main purpose of the RBI is to conduct consolidated supervision of the

_______________________Aims and objective_______________________

 Analyse the role of RBI for Indian economy

 RBI plays important role in Indian economy

Origin & History Of The Reserve Bank Of India

Dr Ambedkar’s Role in the Formation of Reserve Bank of India (RBI)

The functions of RBI (Reserve Bank of India) is as important as the Ministry of

I asked this question to my father and in simple terms he explained me that

FOLLOWING FUNCTIONS OF RBI

 Monetary Authority: The main function of RBI is formulating

 Manager of Foreign Exchange: In India, all foreign currency flow must

RBI is in ensuring that external trade happens in a seamless manner.

 Issuer of Currency: It is in the responsibility of the RBI to print and

 Regulator and Supervisor of Payment and Settlement Systems: In

 Banker to Government: Like retail and commercial banks gives service

Objectives of the Reserve Bank of India

reserves with a view to securing monetary stability in India and generally to

The fundamental object of the Reserve Bank of India is to discharge purely

Role of Reserve Bank of India (RBI) in Indian Economy

 It brings uniformity to note issue.

 It is easier to control credit when there is a single agency of note issue.

 It keeps the public faith in the paper currency alive.

 Credit can be regulated according to the needs of the business

 It keeps the banking accounts of the government.

 It purchases and sells through bills and currencies on behalf to the

 It receives and makes payment on behalf of the government.

 It manages public debt and

Custodian of Foreign Exchange Reserves: It is the responsibility of the

 To administer the foreign Exchange Control;

 To manage exchange reserves;

 To interact or negotiate with the monetary authorities of the Sterling Area,

Controller of Credit: In modern times credit control is considered as the most

Supervisory Functions: In addition to its traditional central banking functions,

supervision of banks and promotion of sound banking in India. The supervisory

 Supervision and control over commercial and cooperative banks, relating to

 Liquidity of their assets.

 Management and methods of working, amalgamation reconstruction and

RBI Actions During Global Recession/Subprime Crisis

The RBI has adopted a comparatively more conservative target of 6%, as

aggregate demand within the economy in order to mitigate downside risks.

RBI and its monetary policy2

Monetary policy is the process by which the monetary authority of a country,

objectives of the monetary policy of India

Price stability implies promoting economic development with considerable

Controlled expansion of bank credit

Promotion of fixed investment

The aim here is to increase the productivity of investment by restraining non

Restriction of inventories and stocks

_Aims and objective_