RBI

RBI: The Reserve Bank of India — Central Bank and Apex Regulator

The Reserve Bank of India is the central bank of the country — the institution at the apex of the Indian financial system. Established under the Reserve Bank of India Act, 1934 and commenced operations on 1 April 1935, the RBI was privately owned until its nationalisation on 1 January 1949. It is today wholly owned by the Government of India and functions as the banker to the government, the banker to the banks, the issuer of currency, the manager of monetary policy, the regulator of the banking system, and the custodian of the country's foreign exchange reserves. Few institutions exercise so pervasive an influence over the Indian economy.

Core Functions

The RBI's functions are numerous and consequential. Monetary authority: the RBI formulates, implements, and monitors monetary policy, using instruments such as the repo rate, the reverse repo rate, open-market operations, and the cash reserve ratio to manage liquidity, control inflation, and support growth. The monetary policy framework, since 2016, is governed by a Monetary Policy Committee that sets the policy rate to achieve an inflation target. Issuer of currency: the RBI has the sole right to issue banknotes in India (one-rupee notes and coins are issued by the Government), and it manages the design, printing, distribution, and withdrawal of currency. Banker and debt manager to the government: the RBI conducts the general banking business of the Central and State governments, manages the public debt, and issues government securities. Banker to the banks: every scheduled bank maintains a current account with the RBI, through which inter-bank settlement is effected; the RBI also acts as the lender of last resort.

Regulator and Supervisor

The RBI is the principal regulator and supervisor of the banking system, exercising its powers under the Banking Regulation Act, 1949 (for banks) and the RBI Act, 1934 (for non-banking financial companies and payment systems, in conjunction with other statutes). It licenses banks, prescribes capital and reserve requirements, conducts on-site inspections and off-site monitoring, issues binding directions through master circulars, and possesses enforcement powers ranging from monetary penalties to the supersession of boards and the resolution of failing banks. The RBI also regulates and supervises non-banking financial companies (NBFCs), payment and settlement systems (under the Payment and Settlement Systems Act, 2007), and the foreign exchange market (under the Foreign Exchange Management Act, 1999). Its role as the manager of foreign exchange reserves and the custodian of the country's external account gives it a central place in the management of the balance of payments and the exchange rate. The RBI's independence in the conduct of monetary policy, its insulation from short-term political pressures, and its institutional credibility are widely regarded as essential to the stability of the Indian financial system.

“The Reserve Bank is the keystone of the Indian financial arch — the bank that banks upon, the issuer of the nation's money, the steward of its reserves, the anchor of its monetary policy. Upon its judgments rest the value of the rupee, the stability of the banks, the cost of credit, and the confidence of the world in India's economy. Few institutions bear so heavy a burden.”