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THE CENTRAL BANK
OF INDIA:
RESERVE BANK OF
INDIA (RBI)

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Name
XII COMMERCE D

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CENTRAL BANK OF A COUNTRY
DEF: A central bank, reserve bank, or monetary authority is an institution that
manages the currency and monetary policy of a state or formal monetary union, and
oversees their commercial banking system. In contrast to a commercial bank, a central
bank possesses a monopoly on increasing the monetary base. Most central banks also
have supervisory and regulatory powers to ensure the stability of member
institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior
by member banks.

SOME THE FEDERAL RESERVE

MAJOR • Central bank of U.S

CENTRAL BANK OF ENGLAND (BOE)

BANKS • Central bank of England

ARE:- RESERVE BANK OF AUSTRALIA (RBA)

• Central bank of Australia

RESERVE BANK OF NEW ZEALAND (RBNZ)

• Central bank of New Zealand

BANK OF JAPAN (BOJ)

• Central bank of Japan 4
FUNCTIONS OF CENTRAL BANK IN AN ECONOMY

1. Central banks can be defined as state-owned entities tasked with

formulating monetary policy, acting as banks to the Government and other
Bankers, serving as the Lender of Last Resort, and overseeing the domestic
banking system with financial supply and rate of interest.
2. The core roles of central banks are to assist the government in maintaining
macroeconomic stability and encouraging financial stability in the monetary
system.
3. Regulating the note issue, functioning as the bankers’ bank, operating as
even the government’s bank, selling and purchasing currencies to affect the
exchange rate, and interfacing with foreign central banks and international
organisations are other roles that central banks do.
4. A central bank plays a vital role in the regulation of the financial sector.
There are varying degrees of the Government’s Control over Central Bank.
To implement monetary policy in the economy, a central bank has three
basic methods.
• Altering reserve requirements
• Adjusting the bank rate
• Open market operations
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RESERVE BANK OF INDIA (RBI)
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INTRODUCTION

The Reserve Bank of India, chiefly known as RBI, is

India's central bank and regulatory body responsible
for regulation of the Indian banking system. It is
under the ownership of Ministry of
Finance, Government of India. It is responsible for
the control, issue and maintaining supply of
the Indian rupee. It also manages the country's main
payment systems and works to promote its economic
development.

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 HISTORY OF RBI
The Reserve Bank of India was set up on the basis of the
recommendations of the Hilton Young Commission. The Reserve
Bank of India Act, 1934 (II of 1934) provides the statutory basis of
the functioning of the Bank, which commenced operations on April
1, 1935.
The Bank was constituted to
* Regulate the issue of banknotes
* Maintain reserves with a view to securing monetary stability and
* To operate the credit and currency system of the country to its
advantage.
The Bank began its operations by taking over from the Government
the functions so far being performed by the Controller of Currency
and from the Imperial Bank of India, the management of
Government accounts and public debt.
After the partition of India, the Reserve Bank served as the central
bank of Pakistan upto June 1948 when the State Bank of Pakistan
commenced operations. The Bank, which was originally set up as a
shareholder’s bank, was nationalised in 1949. 8
SIGNIFICANCE OF RBI LOGO
The emblem of Reserve Bank of India has Royal Bengal tiger standing in front of a palm tree.
The tiger was referred from the statue at the gate of Belvedere, Kolkata. These are
ensconced by ‘भारतीय ररजर्व बैंक’ on top and ‘RESERVE BANK OF INDIA’ at the bottom. This
has been completed by two concentric circles with thin and thick lines.

Royal Bengal Tiger: Bengal Tiger plays vital rule in Indian Tradition, It was used in Indus Valley
Civilization , Chola Dynasty and now the National animal of India. Bengal tiger represents -
grace, strength, agility and enormous power.

Palm Tree: The head of the palm is visually comparable to glowing sun-star and with
symbolic meanings such as honor, truth, value, vitality, warmth, fertile, expansion,
protection, aspiration, attainment, unification, resurrection and singleness of purpose. It
emanates masculine energy.

भारतीय ररजर्व बैंक and RESERVE BANK OF INDIA: The name of the central bank in
Devanagari and English is written using rounded bevel serif typefaces. This typeface closely
resembles Cooper Old Style Bold by Linotype, which was designed in 1919 by Ozwald Bruce
Cooper, an American.

Circles: Circles do not begin or end and therefore they are infinite. They move freely without
restriction, meaning energy and power. This free movement can protect what’s inside their
boundaries and denotes defence, endurance and safety or femininity and the womb.
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10
ORGANISATIONAL STRUCTURE OF RBI

The central board of directors is the main committee of

the central bank. The Government of India appoints the
directors for a four-year term. The board consists of a
governor, and not more than four deputy governors;
four directors to represent the regional boards;[44] two –
usually the Economic Affairs Secretary and the Financial
Services Secretary – from the Ministry of Finance and
ten other directors from various fields. The Reserve
Bank – under Raghuram Rajan's governorship – wanted
to create a post of a chief operating officer (COO), in the
rank of deputy governor and wanted to re-allocate work
between the five of them (four deputy governor and
COO).

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CENTRAL BOARD
OF DIRECTORS OF
RESERVE BANK OF
INDIA

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FIRST GOVERNOR AND CURRENT GOVERNOR OF RBI

Sir Osborne Smith 01-04-1935 to 30-06-1937

Sir Osborne Smith was the first Governor of the Reserve Bank. A
professional banker, he served for over 20 years with the Bank of
New South Wales and 10 years with the Commonwealth Bank of
Australia before coming to India in 1926 as a Managing Governor
of the Imperial Bank of India.

Shri Shaktikanta Das 12-12-2018 to date

Shri Shaktikanta Das, IAS Retd., former Secretary, Department of Revenue

and Department of Economic Affairs, Ministry of Finance, Government of
India assumed charge as the 25th Governor of the Reserve Bank of India
effective December 12, 2018. Immediately prior to his current assignment,
he was acting as Member, 15th Finance Commission and G20 Sherpa of
India.
During his long tenure in the Ministry of Finance, Government of India, he
was directly associated with the preparation of as many as 8 Union
Budgets. Shri Das has also served as India’s Alternate Governor in the
World Bank, Asian Development Bank (ADB), New Development Bank
(NDB) and Asian Infrastructure Investment Bank (AIIB). He has represented
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India in international fora like the IMF, G20, BRICS, SAARC, etc.
MAIN OBJECTIVES OF RBI

• The Reserve Bank of India was established with the main motto of
regulating all the banks in India. The objective was to keep in
check the reserves as well as the issue of bank notes.
• So, the primary target for RBI was to control and regulate the
various financial policies and help in the development of the
banking facilities throughout India.
• The primary objective for the RBI would be to regulate the
various banking functions for India in the money market. Thus,
they focus mainly on issuing new notes.
• The RBI was established with the aim of being a banker’s bank
and also the bank for the government. Its task was to promote
the economic growth of the country through various frameworks
and economic policies of the government.

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FUNCTIONS OF RBI

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METHODS OF CREDIT
CONTROL
(QUANTITATIVE METHODS)

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 REPO RATE POLICY
Repo rate is the rate at which the central bank of a country (RBI in
case of India) lends money to commercial banks to meet their
short-term needs. The central bank advances loans against
approved securities or eligible bills of exchange.
An increase in repo rate increases the cost of borrowings from the
central bank. It forces the commercial banks to increase their
lending rates, which discourages borrowers from taking loans. It
reduces the ability of commercial banks to create credit. A
decrease in the repo rate will have the opposite effect.
The repo rate is determined by the Monetary policy committee
(MPC) which is headed by the governor of RBI.

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REVERSE REPO RATE POLICY

This is the exact opposite of Repo Rate. Reverse Repo Rate is the
rate of interest at which commercial banks can deposit their
surplus funds with the Central Bank, for a relatively shorter period
of time. So, it is the rate of interest at which the Central Bank
(Reserve Bank of India) accepts deposits from the Commercial
Banks.
• When the reverse repo rate is raised, it encourages the
commercial banks to deposit their funds with the central bank.
This has the negative effect on the lending capability of the
commercial banks.
• Lowering reverse repo rate has the opposite effect, which raises
demand for borrowings . From the commercial banks.

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BANK RATE POLICY

Bank rate is the rate at which the central bank of a

country (RBI in case of India) lends money to
commercial banks to meet their long-term needs.

RBI has been actively using Bank rate to control credit.

Bank rate has the same effect as that of Repo rate, i.e.
an increase in Bank rate increases the cost of
borrowings from the central bank, which leads to
increase in lending rates by commercial banks. It
discourages borrowers from taking loans, which reduces
the ability of commercial banks to create credit.
Bank Rate is decided by the Reserve Bank of India.
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OPEN MARKET OPERATIONS

Open market operations (OMO) refers to buying and selling

government securities by the Central Bank from/to the public and
commercial banks.
RBI is authorised to sell or purchase treasury bills and government
securities. It does not matter whether the securities are bought or
sold to the public or banks because ultimately the amounts be
deposited in or transferred from some bank.
• Sale of securities by central bank reduces the reserves of
commercial banks. It adversely affects the bank’s ability to create
credit and therefore decrease the money supply in the economy.
• Purchase of securities by central bank increases the reserves and
raises the bank’s ability to give credit.

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LEGAL RESERVE REQUIRMENTS

According to Legal reserve requirements, commercial banks are

obliged to maintain reserves. It is a very quick and direct
method for controlling the credit creating power of commercial
banks. Commercial Banks are required to maintain reserves on
two accounts:
(i) Cash Reserve Ratio (CRR): It refers to the minimum
percentage of net demand and time liabilities, to be kept by
commercial banks with the central bank.
(ii) Statutory Liquidity Ratio (SLR): It refers to minimum
percentage of net demand and time liabilities which commercial
banks are required to maintain with themselves.

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 MARGIN
MORALSUATION
REQUIREMENT METHODS OF CREDIT
CONTROL
QUALITATIVE
METHODS (QUALITATIVE METHODS)

SELECTIVE CREDIT
CONTROL

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Moral Suasion

Moral suasion is a qualitative method of credit

control, being used by the central bank. Under this
method, the Central Bank merely uses its moral
influence on the commercial banks. It includes the
advice, suggestion request and persuasion with the
commercial banks to co-operate with the Central
Bank.
If the commercial banks do not follow the advice
extended by the Central Bank, no penal action is
taken against them. The success of this method
depends upon the co-operation between the
Central Bank and Commercial Banks and the respect
the Central Bank commands from other banks.

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Marginal Requirements
Margin is the difference between the amount of loan and market
value of the security offered by the borrower against the loan. If the
margin fixed by the Central Bank is 40%, then commercial banks are
allowed to give a loan only up to to 60% of the value of security. By
changing marginal requirements, the Reserve Bank can alter the
amount of loan against securities by the banks.
• An Increase in margin reduces the borrowing capacity and money
supply.
• A fall in increases the people to borrow more.
• RBI may prescribe different margins for different types of
borrowers against security of the same commodity.
• Margin is necessary because if a bank gives a loan equal to the
value of security, then the bank will suffer a loss in case of fall in
price of security.
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Selective Credit Controls
It refers to a method in which the Central Bank gives
directions to other banks to give or not to give credit
for certain purposes to the particular sector. The
selective credit control method of monetary policy
includes those instruments which focus on the
selected sectors of the economy and not the size of
the total credit in the economy as it is a qualitative
method used by the central bank to change affected
areas only and not the whole economy. It regulates
the credit for some specific purpose which can be
priced for a specific commodity etc.

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FACTS ABOUT RBI
1. The RBI logo was inspired from the East India Company Double Mohur.
2. RBI was formed on April 1, 1935 as a private entity, but is a government
entity now. Nationalization of the central bank did not happen till 1949.
3. The financial year of RBI is from 1 July to 30 June.
4. RBI is responsible only for printing the currency notes. Minting of coins is done
by the Government of India.
5. RBI demonetized notes in the denominations of five thousand rupees (Rs.
5,000) and ten thousand rupees (Rs. 10,000) in 1938. They were reintroduced in
1954 and again demonetized in 1978. RBI can print these notes according to the
RBI act of 1934.
6. RBI was also the central bank for two other countries. It played the role of
Central Bank of Pakistan till June 1948 and the Central Bank of Burma (
Myanmar) till April 1947.
7. RBI was established on the recommendation of the Hilton Young Commission.
8. RBI does not have second class employees. It has 17000 Class I, Class III & Class
IV employees.
9. RBI has 29 offices in India which are mostly located in the state capitals.
10.RBI runs a Monetary Museum in the premises of the Mumbai head office.
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ECONOMIC GROWTH UNDER RBI
Pre – Reform

▪ Before 1991 , the financial sector was controlled by RBI through its norms
and restrictions . RBI used to decide the interest rates, the amount of money
can a bank keep and lend to different sectors.

Post – Reform

• After 1991 the RBI changed from regulator to facilitator , at present the role
of RBI has changed from Regulator to Facilitator which means that the
financial sector can now take decisions without consulting with RBI.
• With the reform policies there have been establishment of private sectors.
• Foreign Investment in bank has increased to 50% , Foreign Institutional
investment such as merchants , pension funds were now allowed to invest
in the Indian Financial Market.

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Achievements And Failures Of RBI
ACHIEVEMENTS:

Flexible Monetary Policy:

The Reserve Bank has adopted a flexible monetary policy. It has introduced changes in
monetary regulations keeping in view the seasonal character of Indian money market.
The pressure of seasonal demand has been adequately met.
Stable Structure of Interest Rates:
The interest rate policy of the Reserve Bank has resulted into a relatively stable
structure of interest rates in the economy. The bank initially adopted cheap money policy
from its beginning. The bank rate remained unchanged at the low level of 3 percent up
to 1951.
Cheap Remittance Facilities:
The Reserve Bank has introduced very cheap remittance facilities. These have been widely
used by the commercial banks, the Government and cooperative banks.
Exchange Stability:
The Reserve Bank has succeeded in maintaining the exchange stability to a large extent. The
Bank has maintained the exchange value of the rupee at a relatively higher rate than would
have prevailed in the market.
Development of Bill Market:
The Reserve Bank has made serious efforts to develop a sound bill market in India. It has
imparted a substantial degree of elasticity to the credit structure of the country by introducing
the several Bill Market Schemes. 28
FAILURES:
Lack of Adjustment in the Money Market:
Reserve Bank has succeeded in controlling the organized sector of the Money Market, but not
the unorganized one. It has virtually failed in regulating or controlling the activities of rural
money lenders and other indigenous bankers.
Lack of Bill Market:
Reserve Bank prepared a plan for the development of Bill Market in 1952. But till date there is
no independent and organized widespread bill market in India. Bill Market in India does not
receive first-rate Discountable Bills.
Insufficient Availability of Agricultural Credit:
Despite the fact that lot of steps have been initiated by the Reserve Bank to provide enough
agricultural credit, its availability continues to be far behind its requirement. Agricultural credit it
still being dominated by rural money lenders and other indigenous bankers who charge very
high interest rates.
Instability in the Internal Value of the Rupee:
Instability in the internal value of the rupee has been the biggest failure of the Reserve Bank.
Because of the ever increasing circulation of money, prices have been rising almost non-stop.
Value of the rupee has been reduced to just 7 Paise during the last 47-years or so.
Failure of the Banks:
Reserve Bank has also failed as a Bank of the Bankers its lack of assistance to the Commercial
Banks caused their closure. Between 1939 to 1946 nearly 444 banks failed in the country.
Closure of three banks in 1985 is also a notable point. Failure of the banks erodes faith of the
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people in the banking system.