RICE

RBI

  • Established: April 1, 1935 (under the RBI Act, 1934). 
  • Recommendation: Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926). 
  • Initial Capital: ₹5 Crore  
  • Nationalisation: January 1, 1949 under the Reserve Bank (Transfer to Public Ownership) Act, 1948. 
  • Headquarters: Kolkata (1935–1937)  shifted permanently to Mumbai in 1937. 
  • Financial Year: April 1 to March 31 (Changed in 2020 from July–June).  
  • First Leadership: Sir Osborne Smith was the first Governor and Sir C. D. Deshmukh was the first Indian Governor. 

 Structure & Governance 

The Central Board of Directors governs the affairs of the RBI, appointed/nominated by the Government of India for a 4-year term: 

Official Directors: 

  • 1 Governor (Current leadership details should be verified via latest updates). 
  • Not more than 4 Deputy Governors.  

Non-Official Directors: 

  • 10 Directors nominated from various sectors.  
  • 2 Government Officials.  
  • 4 Directors representing local boards (Mumbai, Kolkata, Chennai, New Delhi).  

 Functions of RBI 

  • Monetary Authority: Formulates, implements, and monitors the monetary policy to maintain price stability while keeping growth in mind.  
  • Issuer of Currency: Sole authority to issue currency notes in India (except ₹1 notes and coins, which are issued by the Ministry of Finance, Government of India). RBI uses the Minimum Reserve System (maintaining gold and foreign exchange reserves worth at least ₹200 crore, with a minimum gold component of ₹115 crore). 
  • Banker to the Government: Manages government accounts, provides short-term loans (Ways and Means Advances – WMA), and floats government securities. 
  • Banker’s Bank & Supervisor: Regulates commercial banks, cooperative banks, and NBFCs under the Banking Regulation Act, 1949. It acts as a lender of last resort.  
  • Custodian of Foreign Exchange Reserves: Manages foreign exchange under the Foreign Exchange Management Act (FEMA), 1999, to maintain the external value of the Rupee. 

Monetary Policy of RBI 

  • It is the process by which the Reserve Bank of India controls the supply, cost, and availability of money and credit in the economy. 
  • Primary Objective is to maintain price stability (inflation control) while keeping the growth objective in mind. 
  • Flexible Inflation Targeting framework mandates a target of 4% Consumer Price Index (CPI) inflation, with a tolerance band of  ± 2% (2% – 6%). 

Monetary Policy Committee (MPC) 

  • Statutory Status: Formed under Section 45ZB of the revised RBI Act, 1934. 
  • Composition: 6 members ; 3 from RBI (Governor as Ex-Officio Chairperson, Deputy Governor in-charge of MP, 1 RBI officer) + 3 external members nominated by the Government. 
  • Voting: Each member gets 1 vote. In case of a tie, the Governor has a casting vote. 
  • Meeting Frequency: Meets at least 4 times a year (typically bi-monthly). 

Policy Tools/Instruments  

Tool What it is Economic Impact when Increased 
Repo Rate Rate at which RBI lends short-term money to banks against securities.  Controls inflation. 
Reverse Repo Rate Rate at which RBI borrows surplus funds from commercial banks.  Reduces market liquidity. 
Cash Reserve Ratio (CRR) Percentage of Net Demand and Time Liabilities (NDTL) banks must keep in cash with RBI. Earns zero interest. Curbs money supply. 
Statutory Liquidity Ratio (SLR) Percentage of NDTL banks must maintain in liquid assets (Gold, Govt. Securities) with themselves. Restricts credit expansion capacity of banks. 
Bank Rate Rate at which RBI lends long-term funds to banks without collateral. Aligned with the MSF; signals long-term borrowing costs. 
Marginal Standing Facility (MSF) Emergency window allowing banks to borrow overnight up to a limit by dipping into their SLR portfolio. Acts as a safety valve during severe liquidity crunches. 

Important Subsidiaries & Training Centers of RBI 

Fullly Owned Subsidiaries 

  • DICGC (Deposit Insurance and Credit Guarantee Corporation)  
  • BRBNMPL (Bharatiya Reserve Bank Note Mudran Private Limited)  
  • REBIT (Reserve Bank Information Technology Private Limited). 
  • IFC (Indian Financial Technology and Allied Services – IFTAS). 
  • RBIH(Reserve Bank Innovation Hub) 

Quantitative Tools & Instruments 

 Policy Rates (Direct & Indirect) 

  • Repo Rate: Rate at which RBI lends short-term funds to commercial banks against government securities. (Primary policy benchmark rate). 
  • Standing Deposit Facility (SDF): Floor of the Liquidity Adjustment Facility (LAF) corridor; allows banks to park surplus funds with RBI without collateral. 
  • Marginal Standing Facility (MSF): Emergency overnight borrowing window for banks by dipping into their SLR securities (charged above Repo Rate). 
  • Bank Rate: Rate for long-term lending to commercial banks without collateral; aligned with the MSF rate. 

Reserve Ratios 

  • Cash Reserve Ratio (CRR): Percentage of Net Demand and Time Liabilities (NDTL) that banks must keep with RBI in cash. Earns 0% interest. 
  • Statutory Liquidity Ratio (SLR): Percentage of NDTL that banks must maintain with themselves in liquid assets (Gold, Cash, Govt. Securities). 

Open Market Operations (OMOs) 

  • Sale and purchase of Government Securities (G-Secs) by RBI in the open market to absorb or inject long-term liquidity. 

Monetary Policy Tools  

Monetary Policy & Policy Rates 

The Monetary Policy Committee (MPC) is a statutory body (constituted under Section 45ZB of the RBI Act) responsible for fixing the benchmark interest rate to control inflation. 

  • Composition: 6 members (3 from RBI, including the Governor who holds a casting vote, and 3 external members appointed by the government). Meets at least 4 times a year.  reserve Bank of India (RBI) uses various instruments of monetary policy to regulate the supply of money, manage liquidity, control inflation, and support economic growth. 

Monetary Policy Stances 

  • Hawkish: Rate hikes to curb rising inflation (tightens liquidity). 
  • Dovish: Rate cuts to stimulate economic growth (eases liquidity). 
  • Accommodative: Keeping rates low or cutting them to boost money supply. 
  • Neutral: Flexibility to increase or decrease rates depending on economic data. 

Practice Questions

Q1. Which of the following is the primary objective of the RBI’s monetary policy?

A. Financing the government’s fiscal deficit
B. Maintaining price stability while keeping growth in mind
C. Maximising commercial banks’ profits
D. Fixing the prices of all essential commodities

Answer: B. Maintaining price stability while keeping growth in mind

Q2. Which institution issues most currency notes in India, with the exception of the ₹1 note?

A. Ministry of Finance
B. State Bank of India
C. Reserve Bank of India
D. NITI Aayog

Answer: C. Reserve Bank of India

Q3. If the RBI increases the repo rate, what is the most likely immediate effect, other things remaining equal?

A. Borrowing becomes cheaper for banks
B. Borrowing costs tend to rise, helping curb inflationary demand
C. The money supply automatically doubles
D. The government stops collecting taxes

Answer: B. Borrowing costs tend to rise, helping curb inflationary demand.