3. Group Members
Reserve Bank of India (RBI)
4. Reserve Bank of India (RBI)
The central bank of the country is the Reserve Bank of India (RBI). It was established in
April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of
the Hilton Young Commission. The share capital was divided into shares of Rs. 100
each fully paid which was entirely owned by private shareholders in the begining. The
Government held shares of nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The general superintendence
and direction of the Bank is entrusted to Central Board of Directors of 20 members, the
Governor and four Deputy Governors, one Government official from the Ministry of
Finance, ten nominated Directors by the Government to give representation to important
elements in the economic life of the country, and four nominated Directors by the
Central Government to represent the four local Boards with the headquarters at
Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each
Central Government appointed for a term of four years to represent territorial and
economic interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934
(II of 1934) provides the statutory basis of the functioning of the Bank.
The functions of the Reserve Bank of India are as follows:(1) Monopoly of note issue:
The RBI has the sole right of note issue. All currency notes except one rupee
note and coins are issued by the Issue Department of the central bank. The
RBI follows the minimum reserves system under which the bank has to
maintain a minimum reserve of Rs.200 crores of which a minimum of Rs.115
crores in gold and bullion and the rest in foreign securities. This function
helps the Central Bank to control money supply in the economy.
(2) Banks to the Government:
The RBI is the Banker's agent and adviser to the government. It accepts
deposits and make payments on behalf of the Government. Issue of loans,
management of public debt, sale of treasury bills are undertaken by the
bank. It helps the government in ensuring better co-ordination of monetary
and fiscal policies. It provides short term loans namely "ways and means
5. advances" to the Central Government and State Government. These loans
have to be rapid within a period of 3 months.
It represents the government in various international organizations like IMF,
World Bank etc. It sends its official as representative of the government for
international seminars and conferences. All important policy decision are
taken by the government in consultation with the RBI. It advises the
government on important matters like agricultural credit, devaluation of
rupee, credit policy for the industrial and export sectors etc.
(3) Banker's Bank:
RBI acts as a banker for all the commercial banks. All scheduled banks come
under the direct control of RBI. All commercial as well as schedule bank has
to keep a minimum reserve with the RBI. They have to submit weekly
reports to RBI about their transactions. By performing 3 functions, the RBI
helps the member banks significantly. They are given below such as:
(a) It acts as the lender of the last resort.
(b) It is the custodian of cash reserves of commercial banks.
(c) It clears, transfers the transaction. It acts as the central clearing house.
(4) Management of foreign exchange reserves:
RBI is the custodian of the foreign exchange reserves of the country. It is
the responsibility of the RBI to stabilize external value of rupee and carry out
transactions in foreign currencies. The Foreign Exchange Regulation Act
(FERA) passed by the government empowered RBI to have full control over
management of foreign exchange.
(5) Credit control:
The central bank uses the quantitative and qualitative tools to control credit.
It is one of the principal functions of RBI. It helps the bank to ensure
exchange rate stability and price stability. In quantitative credit control, the
volume of credit is controlled and in qualitative credit control, the direction
of credit is regulated. Bank rate, open market operations and cash reserve
ratio are used under the quantitative method. In selective credit control, the
weapons used are variation in margin requirements, moral suasion, rationing
of credit, issue of directives etc. At present selective control has been given
much importance and it is more suitable for India.
(6) Supervisory Functions
6. The Reserve Bank of India performs the following supervisory functions. By these
functions it controls and administers the entire financial and banking systems of the
Traditional Functions of RBI
Traditional functions are those functions which every central bank of each nation
performs all over the world. Basically these functions are in line with the objectives with
which the bank is set up. It includes fundamental functions of the Central Bank. They
comprise the following tasks.
1. Issue of Currency Notes : The RBI has the sole right or authority or monopoly of
issuing currency notes except one rupee note and coins of smaller denomination.
These currency notes are legal tender issued by the RBI. Currently it is in
denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not
only to issue and withdraw but even to exchange these currency notes for other
denominations. It issues these notes against the security of gold bullion, foreign
securities, rupee coins, exchange bills and promissory notes and government of India
2. Banker to other Banks : The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in the country. The RBI can
control the volumes of banks reserves and allow other banks to create credit in that
proportion. Every commercial bank has to maintain a part of their reserves with its
parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for
fund. Thus it is called as the lender of the last resort.
3. Banker to the Government : The RBI being the apex monitory body has to work as an
agent of the central and state governments. It performs various banking function such
as to accept deposits, taxes and make payments on behalf of the government. It
works as a representative of the government even at the international level. It
maintains government accounts, provides financial advice to the government. It
manages government public debts and maintains foreign exchange reserves on
behalf of the government. It provides overdraft facility to the government when it faces
4. Exchange Rate Management : It is an essential function of the RBI. In order to
maintain stability in the external value of rupee, it has to prepare domestic policies in
that direction. Also it needs to prepare and implement the foreign exchange rate
policy which will help in attaining the exchange rate stability. In order to maintain the
exchange rate stability it has to bring demand and supply of the foreign currency (U.S
Dollar) close to each other.
5. Credit Control Function : Commercial bank in the country creates credit according to
the demand in the economy. But if this credit creation is unchecked or unregulated
then it leads the economy into inflationary cycles. On the other credit creation is below
the required limit then it harms the growth of the economy. As a central bank of the
7. nation the RBI has to look for growth with price stability. Thus it regulates the credit
creation capacity of commercial banks by using various credit control tools.
6. Supervisory Function : The RBI has been endowed with vast powers for supervising
the banking system in the country. It has powers to issue license for setting up new
banks, to open new braches, to decide minimum reserves, to inspect functioning of
commercial banks in India and abroad, and to guide and direct the commercial banks
in India. It can have periodical inspections an audit of the commercial banks in India.
Supervisory Functions of RBI
The reserve bank also performs many supervisory functions. It has authority to regulate
and administer the entire banking and financial system. Some of its supervisory
functions are given below.
1. Granting license to banks : The RBI grants license to banks for carrying its business.
License is also given for opening extension counters, new branches, even to close
down existing branches.
2. Bank Inspection : The RBI grants license to banks working as per the directives and
in a prudent manner without undue risk. In addition to this it can ask for periodical
information from banks on various components of assets and liabilities.
3. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the
working of a monitory policy. However RBI has a right to issue directives to the NBFIs
from time to time regarding their functioning. Through periodic inspection, it can
control the NBFIs.
4. Implementation of the Deposit Insurance Scheme : The RBI has set up the Deposit
Insurance Guarantee Corporation in order to protect the deposits of small depositors.
All bank deposits below Rs. One lakh are insured with this corporation. The RBI work
to implement the Deposit Insurance Scheme in case of a bank failure.
8. Developmental / Promotional Functions of RBI
Along with the routine traditional functions, central banks especially in the developing
country like India have to perform numerous functions. These functions are country
specific functions and can change according to the requirements of that country. The
RBI has been performing as a promoter of the financial system since its inception.
Some of the major development functions of the RBI are maintained below.
1. Development of the Financial System : The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient
financial system is a precondition of the rapid economic development of the nation.
The RBI has encouraged establishment of main banking and non-banking institutions
to cater to the credit requirements of diverse sectors of the economy.
2. Development of Agriculture : In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It has
successfully rendered service in this direction by increasing the flow of credit to this
sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC)
to look after the credit, National Bank for Agriculture and Rural Development
(NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance : Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small,
medium and large industry is very significant. In this regard the RBI has always been
instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI
and EXIM BANK etc.
4. Provisions of Training : The RBI has always tried to provide essential training to the
staff of the banking industry. The RBI has set up the bankers' training colleges at
several places. National Institute of Bank Management i.e NIBM, Bankers Staff
College i.e BSC and College of Agriculture Banking i.e CAB are few to mention.
5. Collection of Data : Being the apex monetary authority of the country, the RBI collects
process and disseminates statistical data on several topics. It includes interest rate,
inflation, savings and investments etc. This data proves to be quite useful for
researchers and policy makers.
6. Publication of the Reports : The Reserve Bank has its separate publication division.
This division collects and publishes data on several sectors of the economy. The
reports and bulletins are regularly published by the RBI. It includes RBI weekly
reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks
India., etc. This information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits : As an apex organization, the RBI always tries to
promote the banking habits in the country. It institutionalizes savings and takes
measures for an expansion of the banking network. It has set up many institutions
such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-
9. 1982, NHB-1988, etc. These organizations develop and promote banking habits
among the people. During economic reforms it has taken many initiatives for
encouraging and promoting banking in India.
8. Promotion of Export through Refinance : The RBI always tries to encourage the
facilities for providing finance for foreign trade especially exports from India. The
Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee
Corporation of India (ECGC) are supported by refinancing their lending for export
The growth trend of the Indian economy over the last few years appears to indicate the
beginning of a new phase of higher growth. From an average growth rate of around 6.0
per cent for a quarter of a century, the growth rate has accelerated to 8.1 per cent over
the last few years. Along with declining population growth, this suggests high growth in
per capita income in excess of 6 per cent in recent years, and perhaps approaching 7
per cent, which would lead to doubling of per capita income every ten years. Most
importantly, the current growth process is not a flash in the pan and is exhibiting signs
of sustainability along with financial stability, notwithstanding the pressures from
unforeseen external shocks.
On the savings front, the increasing trend in gross domestic saving as a proportion of
GDP witnessed since the early 2000s has also continued unabated. The gross domestic
savings rate has improved from 23.6 per cent of GDP in 2001-02 to 29.1 per cent in
2004-05, led by a turnaround of 4.2 per cent in public saving, from a dis-saving of 2.2
per cent of GDP in 2001-02 to a saving of 2.0 per cent in 2004-05, mainly reflecting the
fiscal consolidation process. Household savings continue to grow and increased
corporate savings reflect their healthy growth in profitability. The encouraging sign of a
pick up in investment has also strengthened unhindered. Along with the improvements
in savings and investment rates, there has also been a marked lowering of inflation from
7.8 per cent in the 1990s to 4.7 per cent in recent years. With such healthy increases in
savings and investment rates financial intermediation is assuming increasing
importance (Annex Table 1).
Alongside these improvements there has also been a resurgence of manufacturing
activity. There had been noted stagnation in manufacturing during 1997-2003. Overall
industrial recovery set in during 2002-03 and this has been sustained since then on the
back of healthy growth in domestic demand, along with that of exports supported by
high world economic growth, increasing capacity utilisation, augmentation of capacity,
and positive business and consumer confidence. But there is little evidence of
significant growth in manufacturing employment leading to emerging doubts in the
inclusive nature of this growth.
10. The current high industrial growth is reflected in the acceleration in growth of bank credit
in recent years. Average growth in non-food credit between 1970 and 2000 had been
16.9 per cent, which had been seen as evidence of finance led industrialisation by some
(Bell, 2001). In the period of industrial slowdown, 1998 to 2002, annual growth in nonfood credit had also slowed to 14.5 per cent - leading to my comment on "lazy banking".
In recent years, during 2002-03 to 2005-06, this growth has accelerated significantly to
28.8 per cent, possibly signalling financial deepening of the system.
Much of this recent expansion in non-food credit has been fuelled by an increase in
retail credit. During the same period, 2002-03 to 2005-06 annual growth in retail credit
was 46 per cent: its share in overall bank credit consequently increased from 6.4 per
cent in 1990-91 to 25.5 per cent in 2005-2006. Earlier, most of bank credit had gone to
the industrial corporate sector. Hence this shift to retail credit can also be seen as a
move toward financial deepening, and one that itself fuels industrial and overall
economic growth through expansion of greater demand for consumer goods.
The high industrial growth is also corroborated by the record of very healthy
performance of the corporate sector, which has recorded unusually high profit growth
over the past three years: over 40 per cent growth in profit after tax for 11 successive
quarters from Q3 2002-03 to Q1 2005-06. Although this growth has slowed somewhat in
the last four quarters, it continues to be high, between 25 and 35 per cent. Corporate
sector savings have grown from 4.4 per cent of GDP in 1999-2002 to 5.3 per cent in
2004-05. Hence, the probability of continued high corporate growth in terms of output is
made more likely by the availability of high retained earnings, burgeoning valuations,
and continued productivity growth.
All these developments point to overall financial deepening but, once again, one has to
ask the question whether such performance extends to small and medium enterprises
also and, whether there has also been extension of financial intermediation for such
enterprises, raising issues of financial inclusion.
The high industrial and credit growth of recent years has also been supported by high
trade growth in both merchandise goods and services. Merchandise exports have
grown from 5.8 per cent of GDP in 1990-91 to about 13.1 per cent in 2005-06; and
gross invisible receipts have grown from 2.4 per cent to 11.5 per cent of GDP. If we take
gross trade, the sum of both current account receipts and payments, as a proportion of
GDP as an index of the openness of the economy, this has increased from 19.2 per
cent in 1990-91 to 49.5 per cent in 2005-06. Since all such receipts and payments pass
through the banking system, this increasing openness of the economy has also added
to financial deepening, while aiding the acceleration in economic growth (Annex Table
The high credit growth witnessed in recent years has, however, not been matched by
adequate deposit growth. The growth in deposits since 2001-02 has been far lower than
that required to support overall credit expansion (Graph 1). Banks have been financing
much of the incremental credit expansion by unwinding their surplus investments in
11. government securities. What deposit growth that has been observed is, moreover,
concentrated in the larger cities: presumably it has been helped by the high corporate
profitability leading to high corporate cash balances. The trend therefore indicates that
while banks may have been proactive in credit deployment, their focus on deposit
mobilisation may have been less than adequate. The indication that deposit growth in
non metro areas has been slow could also mean that financial inclusion may have
suffered. We also need to understand that if deposit growth does not match credit
growth, excess demand would inevitably lead to increases in real interest rates leading
to further possibility of financial exclusion.
The RBI performs various developmental and promotional activities to support national
The RBI has helped to set up a number of development financial institutions such
as the Industrial Development Bank of India(IDBI), the National Bank for Agriculture and
Rural Development (NABARD), the Industrial Reconstruction Bank of India(IRBI), the
National Housing Bank(NHB) and various other institutes. It also has helped in the
development of UTI, Discount and Finance House of India(DFHI) and the Securities
Trading Corporation of India(STCI) to promote and develop financial markets.
Another important developmental role that RBI carries out is that it has made
priority sector lending mandatory for both public and private sector banks.
RBI in its pursuit of developmental functions so far as banking sector is concerned
established a committee under the chairmanship of Mr. Narasimham to suggest the
future direction of banking sector. It suggested various reforms in two phases one in
1991 and another in 1998. The recommendations include deregulation of interest rate
structure, deregulation of the entry norms for private sector banks and foreign banks,
bringing NBFCs under the ambit of regulatory framework, capital adequacyetc.
The RBI has done commendable job as a monetary authority and regulator of the financial
system. It has adopted the best international practices in the dissemination of information and
rational of policies(i.e., the extent of information disclosed helps market to make its own
projections of interest rates). The bank intervened in markets where necessary and allowed the
market participation to build skills and gain maturity to accept the new system. It has adopted a
consultative and participative approach to introduce changes. The RBI has managed foreign
exchange resources effectively. The current level of foreign exchange reserves is enough and
adequate to meet the liabilities.