Role of RBI in growth of Indian economy

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TERM PAPER
Role of RBI in growth of Indian economy
Course Title: Economics for Engineers
Course Code: ECO310
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Contents
 Introduction about RBI
 Evolving Role of RBI
 Organization Structure of RBI
 Acts governing specific functions
 Main functions of RBI
 Supervisory functions of RBI
 Role of RBI in economic development
 Concluding Remarks
 References & Bibliography

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Introduction
The Reserve Bank of India (RBI) is India's central banking institution.
It was established on 1 April 1935 during the British Raj in
accordance with the provisions of the Reserve Bank of India Act,
1934 after the recommendation from Hilton-Young commission.
The Reserve Bank of India was nationalized in 1949 under the
Reserve Bank (Transfer of Public Ownership) Act, 1948.
The headquarters of the Reserve Bank of India are located in
Mumbai. RBI has 19 regional offices most of them in state
capitals and 9 sub-offices.
It’s present Governor is Raghuram Rajan.
The basic functions of the Reserve Bank of India are to regulate
the issue of Bank notes and the keeping of reserves with a view
to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage
.(From the Preamble of the Reserve Bank of India Act, 1934)
Evolving Role of RBI
The Reserve Bank, established through the Reserve Bank of India Act,
1934 commenced its operations in 1935. It draws its powers and
responsibilities through other legislations also such as the Banking
Regulation Act, 1949. The RBI has over the years been responding to
changing economic circumstances and these organizational
developments have been documented in a recent Report on Currency

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and Finance for the year 2004-05, the theme of which was “The
Evolution of Central Banking in India”. Today, I would like to highlight
some recent developments and discuss certain issues of contemporary
relevance relating to the evolving role of RBI.
First, compared with several countries which introduced rapid
reforms in central banking law and governance in the last about two
decades, the Indian experience reflects an evolution or adaptation of
central banking to new economic realities. These changes were
brought about both through some legislative measures and changes in
operating procedures.
Second, this evolution has inter alia contributed to imparting some
autonomy to the central bank, de facto, particularly in the areas
of monetary management and financial regulation.
Third, in sharp contrast to the situation before 1991, since then, apart
from a transparent communications policy and a broad based
consultative approach to policy making, Governors’ speeches and
appearances on the electronic media and the press have been
substantial, having significant influence on markets and opinions. In
the process, the RBI has gained reputational bonus and public
credibility.
Fourth, thanks to related developments in the last 15 years, financial
and external sectors in India have also become relatively more efficient
and resilient.
Fifth, while the effectiveness of monetary policy has improved
significantly to meet the evolving demands, some constraints are
persisting, which impact the choice and effectiveness of our policy
framework.

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In reviewing the evolving role of RBI, it is necessary to distinguish
between an exclusive monetary authority and a generic central bank,
which performs not only monetary functions, but also other functions,
in particular, banking supervision. A recent survey by the Bank for
International Settlements (BIS) has shown that over sixty per cent of
central banks across developed and developing countries have banking
supervisor’s role exercised by a central bank. India has adopted a
middle path. Banking Supervision continues to be with RBI, but it
has been accorded a distinct semi-independent status. A Board for
Financial Supervision (BFS), a Committee of the Central Board of RBI,
was set up in 1994 and meets at least once a month to guide and
oversee the RBI's supervisory functions. The BFS includes four
independent members drawn from the Central Board of Directors
of RBI with relevant professional background and experience.
While it is true that globally the general tendency recently has been to
stress the independence or autonomy of central banks in general and
monetary management in particular, this has been brought about by
different countries in a variety of means: constitutional changes, legal
amendments, treaty, obligations, policy reorientation or by changes in
practices, procedures and overall environment of public policy.
Evolution, thus, does not exclude legislative changes to meet the
challenges of globalization and new economic realities, though in India
most changes have thus far been effected within the basic structure of
the original legislation in terms of mandate, governance procedures
and instruments. A notable legislative measure in the recent past
(The Reserve Bank of India Amendment Act, 2006) nevertheless
relates to greater flexibility to RBI in regard to cash reserve

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requirements, deployment of forex reserves, and clarity in regulation
over money, forex and government securities markets.
The independence of a central bank sometimes is rigidly associated
with a single objective, such as price stability. But, in practice, there are
many instances of dual or multiple objectives with equal or different
weights and there are many cases of hierarchy of objectives for a
central bank. In the overall context of its policy and operations, the RBI
in practice is subject to the current legal framework and operates as
a monetary authority with multiple objectives and multiple functions
assigned to it.
Within such a mandate, efforts are made to (a) articulate the hierarchy
of objectives in a given context; (b) impart transparency through
enhanced communication, emphasize participative nature of
decision making in its activities, including monetary management,
through advisory committees; and (c) move towards greater
autonomy in operations relating to monetary policy while ensuring
harmony in macro policies in coordination with the government.
ORGANIZATION STRUCTURE

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The Reserve Bank's affairs are governed by a central board of
directors . The board is appointed by the Government of India in
keeping with the Reserve Bank of India Act.
Central Board of Directors consist of 20 members. It is
constituted as follows-
a) One Governor
b) Four Deputy Governors
c) Fifteen Directors
Local Boards:

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One each for the four regions of the country in Mumbai,
Calcutta, Chennai and New Delhi consist of five members each &
appointed by the Central Government for a term of four years.
Acts governing specific functions
 Public Debt Act, 1944 /Government Securities Act (Proposed) :
Governs government debt market
 Securities Contract (Regulation) Act, 1956: Regulates
government securities market
 Indian Coinage Act, 1906: Governs currency and coins
 Foreign Exchange Regulation Act, 1973/Foreign Exchange
Management Act, 1999: Governs trade and foreign exchange
market
 Payment and Settlement Systems Act, 2007: Provides for
regulation and supervision of payment systems in India
 Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970/1980: Relates to nationalization of banks
Main Functions of the Reserve Bank
1) Monetary authority
2) Issuer of currency
3) Banker, Agent and Financial Advisor to the government
4) Banker to the Banks

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5) Regulation and supervision of the banking and financial
system
6) Management of Foreign Exchange
7) Regulation and Supervision of the Payment and Settlement
Systems
8) Developmental role
Monetary Authority
The main objectives of monetary policy are:
 Maintaining price stability
 Ensuring adequate flow of credit to the productive sectors of
the economy to support economic growth
 Financial stability
 RBI formulates, implements and monitors the monetary
policy
Issuer of Currency
 The Reserve Bank is the nation’s sole note issuing authority .
 Along with the Government of India, RBI is responsible for
the design and production and overall management of the
nation’s currency , with the goal of ensuring an adequate
supply of clean and genuine notes
 The Reserve Bank also makes sure there is an adequate
supply of coins, produced by the government and also
destroys currency and coins not fit for circulation.

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 It brings uniformity to note issue and keeps the public faith
in the paper currency alive .
Banker, Debt Manager & financial advisor to Government
 It keeps the banking accounts of the government.
 It advances short-term loans to the government and raises
loans from the public. It manages public debt.
 It purchases and sells through bills and currencies on behalf
to the government.
 It receives and makes payment on behalf of the government.
 It advises the government on economic matters like deficit
financing price stability, management of public debts. etc.
Banker to the Banks
 Enabling smooth, swift clearing and settlement of interbank
obligations.
 Providing an efficient means of funds transfer for banks.
 Enabling banks to maintain their accounts with RBI for purpose of
statutory reserve requirements and maintain transaction
balances.
 Acting as lender of the last resort.
Regulation of the Banking & financial System
 As the regulator and supervisor of the banking system, the
Reserve Bank protects the interests of depositors, ensures a
framework for orderly development and conduct of banking
operations .

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 RBI’s objectives are to maintain public confidence in the
system, protect depositors' interest and provide cost-effective
banking services to the public.
 RBI prescribes broad parameters of banking operations within
which the country’s banking and financial system functions .
Management of foreign exchange
 RBI regulates transactions related to the external sector and
facilitates the development of the foreign exchange market.
 RBI buys and sells foreign currency to maintain the exchange
rate of Indian Rupee v/s foreign currencies like dollar, euro
etc.
 The RBI is the custodian of the country’s foreign exchange
reserves, i.e ., it is vested with the responsibility of managing
the investment and utilization of the reserves in the most
advantageous manner .
 Managing the foreign currency assets and gold reserves of
the country .
Regulator and Supervisor of Payment and Settlement Systems
 The Payment and Settlement Systems Act of 2007 (PSS Act)
gives the Reserve Bank oversight authority, including
regulation and supervision, for the payment and settlement
systems in the country .
 In this role Reserve Bank focuses on the development and
functioning of safe , secure and efficient payment and
settlement mechanisms.
Credit control function

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 In modern times credit control is considered as the most
crucial and important functional of a Reserve Bank.
 The Reserve Bank regulates and controls the volume and
direction of credit by using quantitative and qualitative
controls .
 Quantitative controls include the bank rate policy, the open
market operations, and the variable reserve ratio .
 Qualitative or selective credit control, on the other hand
includes rationing of credit, margin requirements, direct
action, moral suasion publicity, etc.
Developmental Role
 This role includes the development of the quality of banking
system in India and ensuring that credit is available to the
productive sectors of the economy .
 RBI performs a wide range of promotional functions to
support national objectives.
 It also includes establishing institutions designed to build the
country’s financial infrastructure . E.g .: NABARD, IDBI etc.
 Expanding access to affordable financial services and
promoting financial education and literacy .
Supervisory Functions of RBI
 Granting license to banks & controlling the opening of new
branches
 Bank Inspection
 Control over Non-Bank Financial Institutions (NFBI): The Non-
Bank Financial Institutions are not influenced by the working

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of a monitory policy . RBI has a right to issue directives to
the NBFIs from time to time regarding their functioning .
 Implementation of the Deposit Insurance Scheme: In order to
protect the deposits of small depositors, RBI work to
implement the Deposit Insurance Scheme in case of a bank
failure . (For bank deposits below 1 Lakh.)
Role of RBI in economic development
 Development of banking system
 Development of financial institutions
 Development of backward areas
 Economic stability
 Economic growth
 Proper interest rate structure
 Miscellaneous

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Concluding Remarks
To conclude, the role of RBI has been redefined through gradual
evolution and adaptation, along with some statutory changes, and not
through any radical restructuring. Further, while assessing the
autonomy of the RBI, one should recognise that RBI is not a pure
monetary authority but is responsible for several other functions also,
as a central bank. The developments in the recent past lead one to
the conclusion that, de facto, there has been enhancement of the
autonomy of the RBI.
As regards monetary policy framework, the objectives remained the
same but the framework has been changed from time to time in
agradual fashion in response to the evolving circumstances.
Contextually, there are three important issues in the conduct of
monetary policy viz., the assessment of potential output, the
measurement of unemployment and appropriate measure of inflation.
While the policy tries to cope with these issues, a combination of
instruments is necessarily used in a flexible manner to meet these
complexities. Every effort has been made to improve the transmission
channels especially through the financial markets, and through
regulatory and institutional reforms. In addition, there are some
constraints in the conduct of monetary policy, in particular, the
fiscal impact, predominant public ownership, prevalence of
administered interest rate, etc. While these challenges and dilemmas
persist in the Indian context, every effort is made

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References & Bibliography
Reserve Bank of India. (2006). Report on Currency and Finance, 2004-
05.
Chandavarkar, A. (2005). “Towards an Independent Federal Reserve
Bank of India : A Political Economy Agenda for Reconstitution”.
Economic and Political Weekly, August 27.
Hansda, Sanjay and Patha Ray (2006). “Employment and Poverty in
India during the 1990s: Is There a Diverging Trend?” Economic and
Political Weekly, Vol. 41, No. 27 and 28, July 08 - July 21.
Rangarajan, C. (1997), “Dimensions of Monetary Policy’, Fifty Years of
Central Banking: Governors Speak”, Reserve Bank of India, Mumbai
Reddy, Y. V. (2001). Autonomy of the Central Bank: Changing Contours
in India, speech delivered at Indian Institute of Management, Indore.
Reddy, Y. V. (2002). Lectures on Economic and Financial Sector Reforms
in India, Oxford University Press, New Delhi.
Websites:
WWW.HINDUSTANBUSINESSLINE.COM
WWW.RBI.ORG.IN
WWW.CIA.GOV
WWW.NRIREALITYNEWS.COM