RESERVE BANK OF INDIA

The Reserve Bank of India as the Central Bank of our country was established on 1st
April, 1935 under the Reserve Bank of India Act, 1934.
The Bank was started originally as a shareholder’s bank and its paid-up capital was
Rs. 5 crores.
The Bank took over the function of currency issue from the Government of India and
the power of credit control from the then Imperial Bank of India.
The Bank was nationalised in the year 1948.
The Reserve Bank was established under the Reserve Bank of India Act, 1934 on
April 1. 1935 as a private shareholders' bank, but since its nationalization in 1949, is
fully owned by the Government of India.
The Reserve Bank; is placed under the Entry 38 of List I of Schedule VII of the
Constitution of India, which is the Union List.
Shaktikanta Das -Governor of the Reserve Bank of India (RBI).
Under Section 22 of the Reserve Bank of India Act, the Reserve Bank of India has
sole authority to issue currency notes of various denominations, excluding one rupee
note. The Ministry of Finance issues the one rupee note and coins, which bear the
signature of the Finance Secretary.
T. V. Somanathan is the incumbent Finance Secretary.

PRINCIPLES OF CENTRAL BANKING

i. National Welfare:
The Commercial Banks are generally guided almost exclusively by the profit-motive.
But the Central Bank is always inspired by the Spirit of National Welfare.

ii. Monetary and Financial Stability: Central Bank should help in the
maintenance of monetary and financial stability in the Country.
iii. Freedom from Political influence.
The Central Bank should remain free from all political influences. In other words, it
should not allow itself to be dominated by the ideology of a particular political party.

FUNCTIONS OF RBI

1) MONETARY POLICIES OF RBI

Monetary policy is a policy formulated by the central bank, i.e., RBI

 (Reserve Bank of India) and relates to the monetary matters of the
country.

The policy involves measures taken for regulating the money supply,
availability and cost of credit in the economy. The policy also oversees
distribution of credit among users as well as borrowing and lending rates
of interest. In a developing country like India, it is significant in the
promotion of economic growth.

The various instruments of monetary policy include variations in bank

rates, other interest rates, selective credit controls, supply of currency,
variations in reserve requirements and open market operations.

a) Promotion of saving and investment

b) Controlling the imports and exports
c) Managing business cycles
d) Regulation of aggregate demand
e) Generation of employment
f) Helping with the development of infrastructure

g) Allocating more credit for the priority segments

h) Managing and developing the banking sector
2. RBI AS BANKER’S BANK

 CUSTODIAN OF CASH RESERVE OF COMMERCIAL BANK.

In many countries, the central bank sets reserve requirements, which are the
minimum amount of funds that commercial banks are required to hold in
reserve, usually in the form of cash or deposits with the central bank.

 LENDER OF LAST RESORT

When a bank is experiencing a liquidity crisis, meaning it is temporarily

unable to meet its short-term obligations, it may seek assistance from the
central bank. The central bank provides funds to the troubled institution to
help it meet its immediate payment obligations and avoid a potential collapse.

 BANK OF CLEARANCE, SETTLEMENT AND TRANSFER

A clearinghouse, also known as a clearing house or clearing agency, is a

 financial institution or organization that facilitates the settlement of financial
transactions between multiple parties. Its primary purpose is to improve the
efficiency and security of transactions by acting as an intermediary and
centralizing the clearing and settlement processes.
 CUSTODIAN OF FOREIGN EXCHANGE RESERVES
The Reserve Bank of India (RBI), plays a pivotal role as the custodian of
India's foreign exchange reserves. The RBI, through its intervention in
the foreign exchange market, aims to manage currency fluctuations,
safeguard external trade, and build a robust buffer against economic
uncertainties.
THE ORGANIZATIONAL SETUP OF THE RESERVE BANK OF
INDIA (RBI)
CENTRAL BOARD
The highest decision-making body of the RBI is the Central Board of
Directors. It is headed by the Governor of the RBI and includes four
Deputy Governors for 5 years, representatives from the Ministry of
Finance, and other government officials. The Governor is the chief
executive officer of the RBI and is responsible for overall administration
and supervision of the functions and operations of the central bank. The
RBI typically has four Deputy Governors who assist the Governor in
various functions. Each Deputy Governor is responsible for specific
portfolios, such as monetary policy, banking supervision, financial
stability, and internal operations.
10 other directors nominated by the Central Government from various
fields for terms of 4years.
4 Directors are nominated by Local Board for the term of 5 years
1 Government Official- tenure is not fixed and has no voting right in the
meeting.
Central Board is required to meet at least 6 times in a year.
LOCAL BOARD -Set up for 4 regions of the country.
The RBI has four regional representations: North in New Delhi, South in
Chennai, East in Kolkata and West in Mumbai. The representations are formed
by five members, appointed for four years by the central government and with
the advice of the central board of directors serve as a forum for regional banks
and to deal with delegated tasks from the Central Board.
 DEPARTMENTAL STRUCTURE:
The RBI is organized into various departments, each handling specific functions.
Some of the important departments include the Department of Banking
Regulation, Department of Currency Management, Exchange Control
Department, Agriculture Credit Department, Industrial Credit Department, Legal
Department, Department of Economic and Policy Research, and Department of
External Investments and Operations.

METHODS OF CREDIT CONTROL

The Reserve Bank of India (RBI) uses various methods of credit control to
influence the quantity and direction of credit in the economy. These methods can
be broadly categorized into two types: quantitative methods and qualitative
methods:

1. QUANTITATIVE METHODS
(GENERAL CREDIT CONTROL MEASURE)
Bank Rate Policy
Open Market Operations (Omo
Reserve Requirements
 BANK RATE POLICY
The bank rate is the rate at which a central bank (such as the Reserve
Bank of India, RBI) lends money to commercial banks. The bank rate
policy refers to the central bank's strategy or decisions regarding changes
in the bank rate. The bank rate is one of the tools used by the central
bank to influence monetary and credit conditions in the economy.
 OPEN MARKET OPERATIONS (OMO): OMO involves buying and
selling government securities in the open market.
Liquidity Injection or Absorption:
Buying Securities (Liquidity Injection): When the RBI buys
government securities in the open market, it releases funds into the
banking system. Commercial banks receive these funds, which increases
 their liquidity and lending capacity. As a result, credit availability in the
market expands.
Selling Securities (Liquidity Absorption): Conversely, when the RBI
sells government securities, it absorbs funds from the banking system.
This reduces the liquidity available to commercial banks, restraining
their ability to lend. It acts as a measure to control excessive credit
expansion.
 RESERVE REQUIREMENTS
Reserve requirements refer to the proportion of deposits that banks are
required to hold in reserve, either in the form of cash or as deposits with
the central bank. These requirements are set by the central bank, in this
case, the Reserve Bank of India (RBI), and serve as a tool for monetary
policy and financial stability. The two main types of reserve
requirements are the Cash Reserve Ratio (CRR) and the Statutory
Liquidity Ratio (SLR).
2. QUALITATIVE METHODS:
CREDIT RATION
Credit rationing refers to a situation in which borrowers, particularly
businesses or individuals seeking loans, are unable to secure the full amount
of credit they desire from financial institutions. In a credit rationing scenario,
the demand for credit exceeds the available supply, and borrowers may face
restrictions on the amount of credit they can access.
REGULATION OF CONSUMERS CREDIT
Regulation of consumers credit involves the establishment and enforcement
of rules, policies, and guidelines by regulatory authorities, such as central
banks, to ensure fair, transparent, and responsible lending practices in the
consumer credit market. The aim is to protect consumers and maintain the
stability of the financial system
MORAL SUASION
Moral suasion is an informal and non-binding approach used by
central banks or regulatory authorities to influence the behaviour of
financial institutions or market participants.
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.
PUBLICITY
Publicity, in the context of financial markets and central banking, refers to
the dissemination of information or announcements by regulatory authorities
to the public, market participants, or financial institutions. Publicity aims to
convey important messages, policy changes, or information that may impact
market behaviour.
MARGIN REQUIREMENT
Margin requirement is the amount of funds that an investor must deposit with a
broker when engaging in margin trading. It represents a percentage of the total
value of the securities being purchased, and it acts as a collateral or security against
potential losses.
DIRECT ACTION
Direct action refers to the directions and controls which the central bank may
enforce on all banks or a particular bank concerning their lending and
investment. The central bank may issue directives from time to time to the
banks to follow a particular policy regarding loans and advances. The direct
action also includes coercive measures taken by the central bank against the
offering bank.
CEILING OF CREDIT
It refers to the maximum limit or cap imposed by the RBI on the amount of
credit that banks and financial institutions can extend to various sectors of
the economy. This limit is often set as part of the monetary policy measures
implemented by the central bank to control inflation, manage liquidity, and
ensure the stability of the financial system.