RESERVE BANK OF INDIA

ESTABLISHMENT:

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 nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

HISTORY:

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 Pakistan until 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

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central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support
the economic plan with loans.

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 Gandhi administration and their successors 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 20 banks. The regulation of the
economy and especially the financial sector was reinforced by the Gandhi administration and
their successors 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 analyzed 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

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financial law improved the versatility of direct deposit by more security measures and
liberalization.

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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Organization & management of RBI :

Central Board of Directors

Governor

Deputy Governors

Directors

Local Boards

Central Board:

The Reserve Bank's affairs are governed by a central board of directors. The board is appointed
by the Government of India in keeping with the Reserve Bank of India Act.

 Appointed/nominated for a period of four years

 Constitution:

o Official Directors
 Full-time : Governor and not more than four Deputy Governors
o Non-Official Directors
 Nominated by Government: ten Directors from various fields and one
government Official
 Others: four Directors - one each from four local boards

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CENTRAL BOARD OF DIRECTORS:

The Central Board of Directors is the main committee of the central bank and has not more than
20 members. The government of the republic appoints the directors for a four year term.

NAME POSITION
Duvvuri Subbarao Governor
Shyamala Gopinath Deputy Governor
Anand sinha Deputy Governor
K.C.Chakrabarty Deputy Governor
Subir Gokarn Deputy Governor
Y.H. Malegam Regional of the West
Suresh D. Tendulkar Regional of the East
U.R. RAO Regional of the North

Lakshmi Chand Regional of the South

H.V. Ranina Lawyer Supreme Court of India
Ashok S. Ganguly Chairman Firstsource Solutions Limited
Azeem Premji Chairman WIPRO Limited
Kumar Mangalam Birla Chairman Aditya Birla Group of Companies
Sashi Rajagopalan Advisor
Suresh Neotia former Chairman Ambuja Cement Co.
A. Vaidyanadan Economist, Professor Madras Inst.
Manmohan Sarma Chemist, Professor Mumbai University
D. Jayavardhanvelu Chairman Lakshmi Machine Works Limited
Sanjay Labroo CEO Asahi India Glass Ltd.
Sunanda Padmanabhan Government representative
Ashok Chawla Government representative

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GOVERNER:

Reserve Bank of India Governor

Incumbent: Duvvuri Subbarao, 61

Term: September 2008 to September 2011. Can be reappointed to a second

term.

Key Facts:

-- A career bureaucrat and finance ministry veteran, Subbarao served in the prime minister's
economic advisory council in the Congress party government's previous term. Before that he was
a World Bank economist. Soft-spoken, he is known for springing surprises when setting
monetary policy.

-- Hawkish comments have been accompanied by a series of monetary policy tightening

measures this year, despite the government's pro-growth stance.

-- Under his leadership, the bank recently doubled the frequence of monetary policy reviews
from quarterly to eight times a year in a move to decrease the need for off-cycle rate moves, of
which there have been two this year.

-- Subbarao was a senior official in the finance ministry when Manmohan Singh, now the prime
minister, began reforming the economy in the early 1990s as finance minister.

-- Part of the Indian Administrative Service, the country's elite civil service, Subbarao is a
physics graduate of the Indian Institute of Technology and also holds a doctorate in economics.

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OFFICES AND BRANCHES:
The Reserve Bank of India has branch offices at most state capitals and at a few major cities in
India Ahmedabad,Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hy
derabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai,Nagpur, Patna,
and Thiruvananthapuram. Besides it has sub-offices
at Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar. The Bank has also
two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of
Agricultural Banking at Pune. There are also four Zonal Training
Centres at Belapur, Chennai, Kolkata and New Delhi.

REGIONAL OFFICES AND HEAD OFFICES

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TOTAL EMPLOYEES: (As on December 31, 2009)

Class Actual
Strength
1 2
Class I  
1. Senior Officers in Grade
88
F
2. Senior Officers in Grade
170
E
3. Senior Officers in Grade
393
D
4. Officers in Grade C 878
5. Officers in Grade B 1,470
6. Officers in Grade A 6,180
7. Treasurer 16
8. Deputy Treasurer 45
9. Assistant Treasurer 190
Total Strength in Class I 9,430
Class III  
1. Senior Assistant 1,296
2. Assistant 1,037
3. Secretarial assistant 120
4. Word Processor Assistant 400
5. Special Assistant (Teller) 448
6. Class III (Others) 488
Total Strength in Class III 3,789
Class IV  
1. Maintenance Staff 1,511
2. Service Staff 4,593
3. Technical Staff 212
4. Other Staff 760
Total Strength in Class IV 7,076
Total Strength in the RBI 20,295

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PROFITS:

RBI's profit halves to Rs 32,884 crore in FY10

After recording a steep growth for over four years, RBI’s profits almost halved to Rs 32,884
crore in FY10. However, its dividend payout to the government has not been commensurate with
the revenue drop, indicating that it has transferred a larger share of its profits to the Centre.

In its annual report for FY10, which was released on Tuesday, RBI said: “As return on foreign
assets tracked the near-zero policy rates maintained by the central banks of advanced economies,
income on such assets declined significantly.”

As a result, the country’s foreign exchange reserves, which are parked with foreign central
banks, yielded very low returns.

As of end June 2010, RBI’s total foreign currency assets were worth $249.6 billion as the central
bank had parked nearly half — $117.1 billion — in various foreign central banks, besides IMF
and the BIS (Bank of International Settlements). The rate of earnings on foreign currency assets
and gold was lower at 2.09% in 2009-10 compared with 4.16% in 2008-09.

RBI has changed its accounting policy, which has improved its numbers. Shedding its earlier
practice of ignoring any appreciation in the value of its securities, this year, in its balance sheet,
it has booked depreciation as well as appreciation in security prices.

With more than half its foreign currency assets parked in securities, this has helped RBI show an
appreciation of Rs 9,370 crore under its Investment Revaluation Account as global security
prices were moving up.

RBI has also spent more by way of interest as it was continuously mopping up funds under its
reverse-repo window. This resulted in gross income falling from Rs 60,732 crore in FY09 to Rs
32,884 crore in 2009-10. After meeting the necessary transfer to the contingency reserve and
asset development reserve, Rs 18,759 crore was transferred to the government.

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MAIN FUNCTIONS:
Role of Reserve Bank of India
 Issue of notes
 Banker, Agent and advisor to the Government
 Banker’s Bank
 Custodian of Foreign Exchange Reserves
 Regulation of Banking System
 Credit Control
 Other Functions

Monetary Authority
The Reserve Bank of India is the main monetary authority of the country and beside that the
central bank acts as the bank of the national and state governments. It formulates, implements
and monitors the monetary policy as well as it has to ensure an adequate flow of credit to
productive sectors. Objectives are maintaining price stability and ensuring adequate flow of
credit to productive sectors. The national economy depends on the public sector and the central
bank promotes an expansive monetary policy to push the private sector since the financial market
reforms of the 1990s.

The institution is also the regulator and supervisor of the financial system and prescribes broad
parameters of banking operations within which the country's banking and financial system
functions. Objectives are to maintain public confidence in the system, protect depositors' interest
and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has
been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by
bank customers. The RBI controls the monetary supply, monitors economic indicators like
the gross domestic product and has to decide the design of the rupee banknotes as well as coins.

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Manager of exchange control
The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation.The
Objectives are giving the public adequate supply of currency of good quality and to provide
loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to
issue bank notes, to maintain the currency and credit system of the country to utilize it in its best
advantage, and to maintain the reserves. RBI maintains the economic structure of the country so
that it can achieve the objective of price stability as well as economic development, because both
objectives are diverse in themselves.

Developmental role
The central bank has to perform a wide range of promotional functions to support national
objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of this problems are results of the dominant part of the public sector.

Related functions
The RBI is also a banker to the Government and performs merchant banking function for the
central and the state governments. It also acts as their banker. The National Housing
Bank (NHB) was established in 1988 to promote private real estate acquisition. The institution
maintains banking accounts of all scheduled banks, too.

There is now an international consensus about the need to focus the tasks of a central bank upon
central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate
described above. The recent financial turmoil world-over, has however, vindicated the Reserve
Bank's role in maintaining financial stability in India.

Financial Supervision

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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.

Objective

Primary objective of BFS is to undertake consolidated supervision of the financial sector

comprising commercial banks, financial institutions and non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directors from the Central Board as members for a
term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank
are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of
banking regulation and supervision, is nominated as the Vice-Chairman of the Board.

Functions

Some of the initiatives taken by BFS include:

i. restructuring of the system of bank inspections

ii. introduction of off-site surveillance,
iii. strengthening of the role of statutory auditors and
iv. strengthening of the internal defences of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of
empanelment and appointment of statutory auditors, the quality and coverage of statutory audit
reports, and the important issue of greater transparency and disclosure in the published accounts
of supervised institutions.

Current Focus

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 supervision of financial institutions
 consolidated accounting
 legal issues in bank frauds
 divergence in assessments of non-performing assets and
 supervisory rating model for banks

 Credit Control
 The reserve Bank is the most appropriate body to control the creation of credit.
 For smooth functioning of the economy
 RBI control credit through,
•Quantitative or General Methods.
•Qualitative or selective methods

 Quantitative or General Methods

 1) Cash Reserve Ratio (CRR)
 2) Statutory Liquidity Ratio (SLR)
 3) Bank Rate
 4)Open Market Operation (OMO)
 5)Repo and Reverse repo rate

 Cash Reserve Ratio (CRR)

 CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks Have to
keep/maintain with the RBI
 Statutory Liquidity ratio
 Banks are required to invest a portion of their deposits in government securities as a part
of their
 Statutory liquidity ratio (SLR) requirements

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 Bank rate:
 Bank rate is the minimum rate at which the central bank provides loans to the commercial
banks.
 OPEN MARKET OPERATION
 An important instrument of credit control, the Reserve Bank of India purchases and sells
securities in open market operations.
 Repo rate & Reverse repo rate
 A repurchase agreement or ready forward deal is a secured short-term(usually 15 days)
loan by one bank to another against government securities

 Qualitative or selective methods

1) Selective credit control
2) Rationing of Credit
3) Moral Persuasion
4) Direct action
 Regulation of Banking System
 Regulate the banking system.
 It has power of
 –Licensing
–management
–branch expansion
–power of inspection of bank
–power to issue directions
 Other Functions
 i. Agriculture Credit
 ii. Industrial Finance
 iii.Publication of Data
 iv.Banking Education and Training
 v. Remitting Facility
 vi.Conversion of currency

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  vii. To accept Deposits
 viii.Transactions with international institutions

CONCLUSION:

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