The Reserve Bank of India or RBI is the Central Bank of India which comes under the Finance Ministry of India. It was established in 1935 by the British government in accordance with the Reserve Bank of India Act, 1934, as a private central bank to British India, and was eventually nationalized by the independent Indian government in 1949 following the independence on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948, marking a significant turning point in India’s economic history. This blog provides a detailed outline of the objectives of RBI.
This transformation marked a shift in the RBI’s purpose, aligning it with the aspirations of an independent India. From being an instrument of colonial economic control, it became a guardian of India’s economic sovereignty. It serves as the apex regulatory body for Indian banking including commercial Banks and other financial sectors. RBI also serves as a maintainer and supplier of Indian Rupees along with controlling the supply of the currency.
The RBI is governed by a Central Board of Directors appointed by the Government of India. The Central Board includes the Governor, Deputy Governors, and Directors nominated by the government. The Governor and Deputy Governors serve five-year terms. The preamble of the RBI’s founding documents eloquently describes its role as the custodian of India’s financial stability and economic growth.
Objectives of RBI
Critical functions R.B.I is responsible for;-
Issue of Currency
One of the most visible roles of the RBI is its authority to issue currency notes in India. RBI is the sole body other than the Central Government of India that is authorized to issue currency or notes in India. It ensures banknotes have adequate public supply along with the maintenance of currency. The Bharatiya Reserve Bank Note Mudran (BRBNMPL), owned by the RBI, is responsible for printing banknotes and coins.
RBI are also responsible for preventing counterfeiting of the currency as, well as discarding currency which is either no longer in use, like ₹ 1000 note which were no longer legal tender as well as currency not physically fit for circulation. This also helps boost confidence in the Indian rupees.
Maintaining Foreign exchange reserves
Reserve Bank of India maintains foreign exchange reserves which is used for international obligations, external trade and procurements. RBI maintains reserves of forex, gold, foreign currencies, and other assets. It also helps in dealing with undesired economic shocks.
Another function of RBI is to manage the foreign exchange rate and to keep it stable. Foreign exchange is used in foreign trade and meeting international obligations. RBI intervenes in the foreign exchange market so as to prevent excessive changes in the currency.
Maintaining Monetary stability
Though RBI since the creation of the Monetary Policy Committee in 2016 doesn’t retain full control of India’s monetary system, the committee still requires 3 out of 6 members to be officials from RBI. Their function is to control money supply and inflation, which are controlled by setting up various policy interest rates, like Repo and reverse Repo rates. Constant price is essential for sustainable economic growth as inflation can lead to the value of currency and savings decreasing which can lead to lower purchasing power of individuals; and deflation can lead to the real value of debts increasing.
Regulating the finance system
A major function of the Reserve Bank of India is to supervise and regulate the finance sector of India. This comprises of wide range of institutions, like Commercial Banks, cooperative Banks, etc.
They also conduct regular onsite inspections, scrutiny, and meetings to supervise new bank licenses and regulate interest rates.
RBI is the institution responsible for setting, prudential norms, consumer and stock market protection laws, and taking corrective action when they are deemed necessary. RBI also controls indicators like the Gross domestic product of India.
This oversight is vital to protect the interests of depositors and investors and to ensure the overall health of the financial sector.
Payment and Settlement Systems
By the Payment and Settlement Systems Act of 2007, RBI has been given authority to regulate and supervise, payments and settlements carried out in the country.
With this, the RBI can focus on the development and functioning of safe and secure; payment and settlement mechanisms. Two payment systems developed are National Electronic and Funds Transfer(NEFT) and Real-Time Gross Settlement (RTGS) allow individuals, companies, and firms to transfer funds to another bank. However, these facilities can only be used for transferring money within the country.
Serving as Banker and Debt manager to the government
RBI is responsible for maintaining the government’s accounts and finances and is also responsible for payments made in and out of these accounts. RBI also helps the government to raise money from the general public via issuing bonds and securities. The RBI’s role as a banker to the government is critical in maintaining financial stability.
Data Collection and Research
RBI is responsible for the collection of data involving various financial and economic data, also RBI is responsible for publishing reports and research to better understand the Indian economy and finance system. These also help economists and other policymakers to make better informed economic discussions.
Serving as Banker to other banks or Bankers bank
RBI also serves as the central bank for commercial and other banks where they can deposit money. These help create Credit and RBI has a duty to control credit through CRR, repo rates, and other operations. RBI also helps in inter-bank payments and transfers of funds. They also serve as lenders on an emergency basis to other banks.
Implementation of government policies
The RBI collaborates with the government to implement various economic and financial policies. This includes fiscal and monetary coordination to achieve common economic objectives and promote sustainable growth. For example, the Government of India initiated the Pradhan Mantri Jan Dhan Yojana (PMJDY) as a flagship financial inclusion program. It aims to provide financial services to every household in the country, particularly those in underserved and remote areas. The RBI plays a crucial role in implementing this policy as it formulates the policies, regulations, and guidelines, and carries out the implementation along with reporting.
Conclusion
In conclusion, the Reserve Bank of India stands as a pillar of India’s financial system, overseeing and facilitating key aspects of the nation’s economy. Its evolution from a colonial-era institution to a guardian of economic sovereignty underscores its significance. The RBI’s multifaceted roles in currency issuance, monetary stability, financial sector regulation, and more contribute to India’s economic well-being.
The Reserve Bank of India continues to adapt to the evolving financial landscape, making it a crucial player in shaping India’s economic future. As it upholds its commitment to economic stability, inclusive growth, consumer protection, and financial sector resilience, the RBI remains at the forefront of India’s journey towards a prosperous and robust economy.
All of these reflect the objectives and commitment of the Reserve Bank of India and its various duties in maintaining economic stability, fostering inclusive growth, protecting consumers, and ensuring the resilience and competitiveness of India’s financial system. These approaches are instrumental in shaping India’s economic future.
This blog is written by Aditya Sahijpal.
