Nature of RBI

• The Central Bank is the apex institution of a country’s banking system. It controls, regulates, and supervises the activities of banks and the overall banking system of the country.
• In India, the Central Bank was established in 1935 under private management and was later nationalized by the Government in 1949, becoming the Reserve Bank of India (RBI).
• It is owned by the Union Ministry of Finance and acts as a regulatory body responsible for overseeing the Indian banking system. It also controls, issues, and manages the money supply within the Indian economy.
• The Central Office of the RBI was initially established in Kolkata but was permanently relocated to Mumbai in 1937.
• After its nationalization in 1949, the RBI became fully owned by the Government of India. Its preamble outlines its primary objectives: regulating the issuance of banknotes, maintaining reserves to ensure monetary stability, and managing the country’s currency and credit system in alignment with economic goals.
• The RBI initially operated as a privately-owned shareholders' bank. It replaced the Imperial Bank of India in its role of issuing currency notes and acting as a banker to the government.
• Post-independence, to align the policies of the RBI with government objectives, it was decided to nationalize the RBI, ensuring its full integration into India's economic framework.

Organizational Structure

• The RBI was established on April 1, 1935, under the provisions of the Reserve Bank of India Act, 1934.
• The central office of the RBI has been located in Mumbai since 1937. It was inaugurated with a share capital of ₹5 crore, divided into shares of ₹100 each, fully paid-up.
• The RBI was nationalized on January 1, 1949, through the Reserve Bank of India (Transfer to Public Ownership) Act, 1948, making it fully owned by the Government of India.

Regional and Sub-Offices

• The RBI has 20 regional offices, mostly in state capitals, and 11 sub-offices.

Governing Structure

• The Reserve Bank of India is governed by a Central Board of Directors, headed by the Governor, who is appointed by the Central Government. The board consists of:

  • 1 Governor
  • Up to 4 Deputy Governors
  • 2 Government officials from the Ministry of Finance
  • 10 nominated directors from various fields, representing key elements of the economy
  • 4 directors representing local boards in Mumbai, Kolkata, Chennai, and New Delhi

  Each local board consists of five members appointed by the Central Government for a term of four years. These members represent territorial, economic, cooperative, and indigenous banking interests.

  

Hierarchical Organizational Structure

Objectives of the RBI

The RBI operates with the following primary objectives:

1. Maintaining the internal value of the currency: Ensuring stability in the purchasing power of the domestic currency.
2. Preserving the external value of the currency: Safeguarding the currency’s exchange rate stability against foreign currencies.
3. Ensuring price stability: Controlling inflation and avoiding excessive price fluctuations.
4. Promoting financial institutions: Supporting the development and stability of the financial system.
5. Facilitating economic development: Implementing policies that foster growth, job creation, and sustainable development.

Functions of the RBI

1. Currency Issuance - The RBI is the sole authority for issuing currency notes in India, ensuring control over the money supply.

2. Banker to the Government:

   • Maintains accounts of government funds.
   • Receives and disburses payments on behalf of the government.
   • Provides short-term advances to manage temporary revenue-expenditure mismatches.
   • Issues loans and manages public debt.

3. Banker's Bank:

   • Acts as a custodian of cash reserves for commercial banks.
   • Serves as the lender of last resort in times of liquidity shortages.
   • Operates as a clearinghouse for inter-bank transactions.

4. Lender of Last Resort: The RBI serves as the lender of last resort not only to commercial banks but also to other financial institutions, such as discount houses. These institutions can approach the RBI for liquidity support when facing a cash crunch or liquidity crisis.

5. Credit Controller - Controls credit volume using monetary policies to stabilize inflation and deflation.

6. Custodian of Foreign Exchange Reserves - Manages India's foreign exchange reserves and exchange rate stability.

Distinction Between the RBI (Central Bank) and Commercial Banks