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July 28, 2014

Banking Awareness : Reserve Bank of India (RBI)


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Friends, in our last post we have discussed about the Types of Banks. In today's post, we shall discuss about the Reserve Bank of India (RBI) in detail.

The Reserve Bank of India (RBI)

The RBI was established on 1st April 1935 under the RBI Act, which was passed on 6th March 1934. After the establishment, RBI took over the functions of issuing paper currency from the central government and the controlling of the credit from the Imperial Bank of India (now called as State Bank of India). The bank was nationalized on 1st January 1949 in terms of the RBI Act 1948. The RBI head office is located at Mumbai since its inception.

The management of RBI is vested in the central board of directors which comprises of one full time Governor and not more than four Deputy Governors appointed by the central government under section 8 (1) (a) of the RBI Act 1934. 10 directors from various fields of business, industry, finance and cooperation may nominate by central government. Four directors nominated by the central government. One from each of the four local boards, One Government official nominated by the central Government. RBI has four local boards in Mumbai, Kolkata, Chennai and New Delhi. The local boards carry out the functions of advertising the central board of directors on such matters of local importance. Generally the local boards deals with the management of regional commercial transactions. To carry out functions smoothly and efficiently, the RBI has 15 departments.

According to the Preamble to the Reserve Bank of India Act 1934, the primary objective of the Bank is to regulate the issue of bank notes and keeping of reserve with a view to securing monetary stability in India and generally to operate the currency and the credit system of the country to its advantage. The major functions of RBI are mentioned below.

Major Functions of RBI

  1. Monopoly of Note Issue : Under section 22 of the RBI act, it is the sole authority for the issue of currency other than one rupee coins, one rupee notes and subsidiary coins are issued by the Ministry of Finance, Government of India, but these are put into circulation through RBI. AN important task before the Central Government is to maintain the stability of currency and it can discharge this responsibility efficiently only if it exercises proper control on commercial banks. The RBI has also the responsibility of advising the government on financial matters. If the RBI has full control over the issue of currency then its task is tendering the right type of advice becomes easy. Therefore, the monopoly of note issue has been the prerogative of central banks in different countries.
  2. Banker to the Government : Under the section 20, 2, and 21 A of the RBI act, the bank looks after the current financial transactions of the government and manages the public debt of the government. As a government banker, the RBI conducts banking business with out any charge, viz., accepting money on government account, making payments on its behalf etc. It also provides short-term advances to state governments, which are called ways and means advances. In addition, the RBI gives advisory services to the government on all monetary and banking matters i.e., industrial finance, cooperative organizations, international finance etc. 
  3. Bankers Bank : RBI serves as a clearing agent for commercial banks. It provides clearing and remittance facilities to the scheduled commercial banks at centers where it has offices or branches. RBI has been vested with a wide range of powers and supervision and control over Commercial and Cooperative Banks. RBI also serves as a lender of last resort by re-discounting eligible bills of exchange of commercial banks during the period of credit stringency. The RBI performs  its functions as banker's bank on the basis of the statutory authority vested in it to discharge its supreme duty of controlling the volume of credit and money supply and maintaining the stability of the currency.
  4. Controller of Credit : As a controller of credit, the RBI must have a complete control over currency and banking system in the country. This is essential because credit plays a very dominant role in the settlement of monetary and business  transactions of all kinds and thus it represents a powerful force of good or evil. RBI adopts quantitative or general methods such a s bank rate, open market operations and the power to vary the reserve requirements of the banks, but also extensive power of selective credit controls and direct actions. By adopting such methods, the RBI tires to influence and control credit creation by commercial banks in order to stabilize economic activity in India. 
  5. Exchange Management : The RBI has responsibility to maintain not only the internal value of rupee, but also to maintain the external value of rupee. In this connection the RBI sells and purchases the foreign exchange of fixed rates through its exchange control department. RBI has the responsibility of maintaining the fixed exchange rates with all other member countries of the international monetary fund. It has also the responsibility of maiontaining the exchange value fo the rupee in terms of the US dollar or gold as accepted by IMF. The RBI manages the exchange control operations by supplying foreign currencies to importers and persons visiting foreign countries on business, studies, etc, in keeping with the rules laid down by the Government of India.
  6. Monetary Data and Publications : RBI acts as a source of all economies, financial and Banking data, which are essential for the critical evaluation of economic policies. For this purpose, the RBI publishes the data continuously in its weekly statements in the monthly RBI bulletin, trends and progress of banking in India and other periodic publications. These publications provide valuable statistical information on the monetary and financial developments in the economy and also on the working of the banking system. 
  7. Other Promotional Functions : RBI performs a number of developmental and promotional functions. Some of the promotional functions are given below.
    1. RBI has expanded banking facilities in rural and semi urban areas by reducing inter regional disparities
    2. To improve the working of Indian money market, RBI introduced bill market scheme
    3. RBI has also assisted the emergence and growth of development banking and other term lending institutions, such as the Unit Trust of India (UTI).
    4. The RBI has helped the establishment of Export Import bank in India to provide finance to exporters.
    5. RBI appoints ad-hoc committees / expert group from time to time, to enquiry into specific banking problems and make recommendations to solve them.  Read more about the Recent working Committees of RBI from here


  1. Thanku soo much....pls upload more material for reasoning for rbi..thanks in advance! :))

  2. Dear Admin, Please provide pdf format of the above page regarding RBI

  3. RBI head office was first located at Kolkata, but later it was shifted to Mumbai.The governor will be there at Head office only. present 4 Deputy governors are H.R.Khan,Urjit patel,S.S.Mundra,R.Gandhi(replaced Anand sinha), and K.C.Chakraborthy have taken voluntary retirement(because of clashes with Governor).even RBI site is not showing correct info. only god can save our i am placing these info. here,thank you


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