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Reserve Bank of India (RBI)

Published by Usman Ahmed, MBA (Researcher)

Reviewed by Bowen Khong, ACCA

The “RBI” stands for the Reserve Bank of India. Established in 1935, RBI is the central bank of India. The bank acts as a prime regulator of national currency and credit functions. The bank also takes care of financial concerns and formulates the monetary policies of India. 

What does RBI do?

Based in Mumbai, the RBI regulates the financial markets across India. Its duties include managing treasury functions of the country along with consolidated supervision and regulation of financial institutions, such as commercial banks and intermediaries entrusted with public money. 

Besides defining the lending rate for interbank transactions, it also sets the Mumbai Interbank Offer Rate (MIBOR) threshold for the interest-carrying financial instruments inside India.

The RBI also conducts activities such as occasional bank inspections, remote surveillance of the banking sector and other financial institutions. It also appraises procedures for strengthening audit practices within the country. 

How Does It Work?

The RBI devises monetary policies for the country. The bank implements a regulatory framework on concerned institutions in force with law. Controlled in vigilance also falls under the framework of the RBI. The bank ensures the economic stability of the country. It also maintains systematic credit flow to all economic sectors inside India.

The RBI manages all exchange dealings in foreign currency derivatives under the Foreign Exchange Management Act – (FEMA 1999). Besides controlling import and export payments, the bank also maintains healthy foreign exchange market conditions in India. 

The effective management of the foreign exchange market boosts public confidence in the national financial system. It also helps RBI to consider providing reliable banking alternatives to the masses. One of the bank’s prime functions is to issue the national currency. The RBI decides how many currency notes need to be printed. Any excess circulation of money is either destroyed or re-invested on the sole instructions of the RBI. 

The bank issues usable currency notes (Indian Rupee) and coins (Paisa). It is worth mentioning here that the bank doesn’t appreciate the use of virtual currencies. Therefore, in 2018 the bank banned trading or exchange of digital currencies in India. On more legality, check out the followings:

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Legal Framework of the RBI 

The Reserve Bank of India falls under the domain of the accompanying Acts:

  1. Reserve Bank of India Act, 1934
  2. Public Debt Act, 1944
  3. Enforcement of Security Interest Act, 2002
  4. Foreign Exchange Management Act, 1999
  5. Securitization and Reconstruction of Financial Assets and 
  6. Government Securities Regulations, 2007
  7. Banking Regulation Act, 1949
  8. Credit Information Companies(Regulation) Act, 2005
  9. Payment and Settlement Systems Act, 2007

Major Monetary Policies of RBI

Repo Rate (RR) – It is the rate at which the RBI gives short-term loans to other banks. The Repo Rate is the benchmark of the RBI for offering short-term lending. Borrowings from the RBI become expensive for banks or individuals with an increase in the repo rate and vice versa. 

Reverse Repo Rate (RRR) -The reverse repo rate is the rate at which the RBI borrows money from other banks on a short-term basis. The RBI also uses the reverse repo rate to control the inflationary outlook of the country’s economy. 

Cash Reserve Ratio (CRR) – It is the threshold amount of deposits (liquid cash) that all commercial banks need to maintain with the RBI. The bank ensures liquidity through the cash reserve ratio and utilizes the pool of funds to aid banks running short of cash on a temporary basis. 

Statutory liquidity ratio (SLR) – Setting aside the cash reserve ratio, banks also need to maintain liquid assets, such as gold and approved securities with the RBI. It is worth mentioning here that a higher SLR results in forfeiting the rights of affected banks to grant more loans.

RBI – Board of Directors

The RBI consists of a board of directors, including executive and non-executive directors. A chairman or the governor of the bank heads the board of directors of the RBI. The Government of India appoints the governor as well as other directors of the bank through a transparent and rigorous process defined under the Reserve Bank of India Act 1949. All members of the board of directors are subject to re-appointment after four years on a merit basis. 

RBI – Annual Report 

The RBI releases an annual report under statutory obligation each year. The report explains the valuation and performance of the RBI for the fiscal as well as calendar year. It also features the agenda of the bank for the upcoming year. An overview of the pipeline projects for the betterment of the economic conditions of the country also makes part of this report. 

Quick Points to Recall

  • It is the central bank of India. 
  • RBI was initially set up as a private business concern under the RBI Act in 1935. However, the bank was nationalized in 1949. 
  • It regulates financial institutions of the country, including banks and the non-banking sector.
  • It also regulates the foreign exchange market of India under FEMA ACT 1939. 

Final Words

In addition to periodic performance evaluation, the RBI looks forward to increasing the scope of its framework. While dealing with legal affairs related to the banking sector, it also plans to leap ahead to introduce advanced fraud control management models. 

Read more: What Are RBI Guidelines For Foreign Exchange Transactions?

Usman Ahmed, MBA (Researcher)
Usman Ahmed, MBA (Researcher)
Usman Ahmed is a currency trader and financial market analyst with more than 7 years of active trading experience. Besides holding a Masters degree in Business Administration, he has worked for some of the most renewed companies in the forex industry including FXCM, IQOption, MetaQuotes, Alpari, FXStreet, DailyFX and several others. Usman possesses strong technical analytical skills and is famous for his very own, informative and entertaining, writing style. He believes in naked chart trading analysis that is commonly known as price action trading. He follows global financial news and macro-economic events very closely.
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