En r ol l me n t No. 1 5 0 8 9 4 9 0 ( 5 3PH D6 6 4 0 0 2 )
Abst ract
The Reser ve Bank o f I ndia ( RBI) was est ablished in t he year 1935 in a ccordance
wit h t he Reser ve Bank o f I ndia Act , 1934. The Reser ve Bank o f I ndia is t he
cent ral Bank o f I ndia ent rust ed wit h t he mult idimensio nal ro le. It perfor ms
import ant monet ar y funct ions fro m issue of currency not e to maint enance o f
mo net ar y st abilit y in t he count r y. I nit ially t he Reser ve Bank o f I ndia was a
pr ivat e shar e ho lder‟s co mpany which was nat ionalized in 1949. It s affairs ar e
gover ned by t he Cent ral Board o f Directors appo int ed by t he Gover nment o f
India. S ince it s incept io n t he Reser ve Bank o f I ndia had played an import ant
role in t he eco no mic development and monet ar y st abilit y in t he count r y. T his
paper is an at t empt explor e int o t he role, funct io ns, and cont r ibut io n o f RBI in
Indian Eco no my.
1. Introduction
The Reser ve Bank o f India (RBI) was est ablished in t he year 1935 in accordance
wit h t he Reser ve Bank o f I ndia Act , 1934. The Reser ve Bank o f I ndia is t he
cent ral Bank o f I ndia ent rust ed wit h t he mult idimensio nal ro le. It perfor ms
import ant monet ar y funct ions fro m issue of currency not e to maint enance o f
mo net ar y st abilit y in t he count r y. I nit ially t he Reser ve Bank o f I ndia was a
pr ivat e shar e ho lder‟s co mpany which was nat ionalized in 1949. It s affairs ar e
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International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
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gover ned by t he Cent ral Board o f Directors appo int ed by t he Gover nment o f
India. S ince it s incept io n t he Reser ve Bank o f I ndia had played an import ant
role in t he econo mic development and mo net ar y st abilit y in t he count r y.
Evolution of RB I
The Ro yal Co mmissio n o n Indian Currency and Finance appo int ed on August 25,
1925 has suggest ed t he es t ablishment o f t he Cent ral Bank in I ndia, lat er t he
Indian Cent ral Bank ing Enquir y Co mmit t ee, 1931 st ressed t he est ablishment o f
t he Cent ral Bank in I ndia. T he Reser ve of Bank was est ablished on Apr il 1,
1935 under t he Reser ve Bank o f I ndia Act , 1934.The m ain object of Reser ve o f
India is, “t o regulat e t he issue o f Bank not es and t he keeping o f reser ves wit h a
view t o secur ing mo net ar y st abilit y in India and gener ally t o operat e t he
currency any credit syst e m o f t he count r y to it s advant age”
The Reserve Bank o f I ndia was est ablished as a pr ivat e shar e ho lder ‟s bank. The
Cent ral o ffice of Reser ve Bank o f I ndia was init ia lly locat ed in Calcut t a whic h
was lat er shift ed t o Bombay. T he Reserve Bank o f I ndia issued fir st of it s
currency not es in Januar y 1938 in de no minat io n o f Rs.5 and Rs.10 and lat er in
t he same year deno minat io n of Rs.100, Rs.1000 and Rs.10000 were issued
Post Indep endence T he Reser ve Bank of I ndia was nat ionalized in t he year
1949 t hrough t he Reser ve Bank (Transfer of Public Owner ship) Act , 1948 and
all shares were t ransferred t o Cent ral Go vernment . T he Reser ve bank o f India is
const it ut ed for t he management of currency and for carr ying t he business o f
banking in accordance wit h provis io ns of t he Act . It is a body corporat e having
perpet ual succe ssio n, co mmo n seal and can be sued or sue in it s name. T he
general super visio n and direct ion o f t he affairs o f t he Reser ve Bank is ent rust ed
wit h Cent ral Board of Direct ors.
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International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017),
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The Cent ral Board co nsist s o f Gover nor, deput y Gove r nor, Ten Direct or
no minat ed by t he Cent ral Gover nment and t wo Gover nment official no minat ed
by t he Cent ral Gover nment . T he deput y Gover nor and Direct or are eligible t o
att end meet ing o f t he Cent ral Board but are not ent it led t o vot e. The Gover nor
and deput y Gover nor ho ld o ffice for t er m of five year s and are ent it led for a re -
appo int ment . The Dir ect ors are appo int ed for a t er m o f four and ho ld o ffice
dur ing t he pleasure o f t he president . The meet ing of t he Cent ral Board is
convened at least six t imes in a year.
A lo cal board is for med in each fo ur zones consist ing o f five me mber s which ar e
appo int ed by t he Cent ral Go ver nment . There is Chairperson o f t he Board who is
elect ed amo ng t he member. The me mber s of t he Board have a ho ld o f fice for a
t erm o f four year s and elig ible for reappoint ment . The Local Board advice o n
mat t ers referred t o it by t he Cent ral Board and per for ms dut ies delegat ed t o it by
t he Cent ral Board.
Objectives of study:
Research Methodology
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problem area. Moreover, many secondar y sources do not clear ly descr ibe issues
such as t he purpose o f a st udy, how t he dat a has been gat hered, analysed and
int erpret ed making it difficult for t he researcher t o assess t heir usefulness. I n
order to address t his problem I have t r ied t o t riangulat e t he secondar y dat a by
using numerous independent sources.
Banker to Government
The Reser ve Bank o f I ndia accept s and makes payment on behalf o f Cent ra l
Gover nment . It carr ies out it s exchange, remit t ance, management of public debt
and ot her banking funct io n of t he Cent ral Government . The Cent ral Gover nment
ent rust s it s money, remit t ance, exchange an d banking t ransact ions in I ndia wit h
t he Reser ve Bank o f I ndia. It deals in repo or rever se repo.
The Reser ve Bank of I ndia has t he so le right to issue bank not es in I ndia. The
bank not es are legal t ender guarant eed by t he Cent ral Gover nment . T he issue o f
bank not e is conduct ed by a separat e depart ment called issue depart ment . The
Cent ral Go ver nment on t he reco mmendat ion o f Cent ral Board specifies
deno minat io n o f bank not es including dis cont inuance o f bank not es. The Cent ral
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Gover nment approves design, for m and mat er ial o f Bank not es on considerat io n
of reco mmendat io ns of t he Cent ral Board.
A pet it ion was filed under Art icle 226 of t he Const it ut io n, challenging t he
const it ut ional va lidit y o f sect io n 22 o f t he Banking Co mpanies Act , 1949.
Sect ion 22 empower s, Reser ve Bank o f India to grant license t o Banks and banks
which were a lr eady in exist ence on t he commence ment of t he Act have t o appl y
for license before t he expir y o f six mont hs fro m co mmence. T he pet it io ner
cont ended t hat t he sect io n 22 o f t he Banking Regulat ing Act , 1949 is in rest raint
of t rade and business hence unconst it ut ional. T he wr it was dis missed and t he
High Court declared sect ion 22 o f t he Banking Regulat ing Act , 1949 as
const it ut ionally valid and cher ished t he role o f Reser ve Bank o f I ndia in t he
econo mic development o f t he count r y. The Madr as High Court met iculousl y
said,
“T he Reser ve Bank o f I ndia was est ablished wit h a view t o fost er ing t he banking
bu siness and not for impeding t he growth o f such business. The powers vest ed
in it under Sect io n 22 are not one invest ed wit h a mere o fficer o f t he Bank. The
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st andards for t he exercise o f t he power have been laid down in Sect io n 22 it self.
The Reser ve Bank is a non-po lit ical body concer ned wit h t he finances of t he
count r y. When a power is given t o such a body under a st at ut e which prescr ibe s
t he regulat ions o f a Banking Co mpany, it can be assumed t hat such power would
be exercised so t hat genuine: banking con cer ns could be allowed t o funct ion as a
bank, while inst it ut io ns masquerading as banks or t hose run on unsound lines or
which would affect t he int erest s o f t he public could be weeded out.”
Banker’s Bank
The banks list ed in second schedule and no n schedule banks shall ma int ain a
cash reser ve rat io wit h t he Reser ve bank of India wit h a view t o secur ing t he
mo net ar y st abilit y in t he count r y. It provides loans and advances in for eign
currency t o scheduled Banks and t o ot her financial inst it ut io n. It purchases,
sells or discount any bill o f exchange or promissor y not e or makes a lo an or
advances to schedule bank.
The Reser ve Bank of I ndia has co nst it ut ed a fund called “Deposit or Educat ion
and Awareness Fund.” T he fund is ut ilized for t he promot io n of deposit ors‟
int erest and ot her purposes in t he int erest of t he deposit or.
The Reser ve Bank o f India is e mpowered to regulat e, prohibit , and rest r ict
dealing in foreign exchange. It issues lic ense t o banks and ot her inst it ut ion t o
act as t he aut hor ized agency in t he foreign exchange market
The funct io ns o f t he Reser ve Bank t oday can be cat egor ised as fo llows:
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i. Fu ll Emp loyment : Full emp lo yment has been ranked amo ng t he foremo st
object ives o f mo net ar y po lic y. It is an import ant goal not only because
unemplo yment leads t o wast age of pot ent ia l out put , but also because o f
t he loss of social st anding and self-respect .
ii. Price Stabi lity: One of t he po lic y obje ct ives o f mo net ar y po licy is t o
st abilise t he pr ice level. Bot h econo mist s and laymen favour t his po lic y
because fluct uat io ns in pr ices br ing uncert aint y and inst abilit y t o t he
econo my.
iii. Economic G rowth : One o f t he mo st import ant object ives o f mo net ar y
polic y in recent year s has been t he rapid econo mic growt h of an eco no my.
Econo mic growt h is defined as “t he process whereby t he real per capit a
inco me o f a count r y incr eases over a lo ng per iod of t ime. ”
iv. Balance of Payment s: Anot her object ive of mo net ar y po lic y since t he
1950s has been t o maint ain equilibr ium in t he balance of payment s.
The Quant it at ive I nst rument s are also known as t he Gener al Tools o f mo net ar y
polic y. These t ools are relat ed t o t he Quant it y or Volume o f t he mo ney. The
Quant it at ive Tools of credit cont ro l are also called as General Tools for credit
co nt rol. They ar e designed t o regulat e or cont rol t he t ot al vo lume o f bank credit
in t he eco no my. T hese t ools are indir ect in nat ure and are emplo yed for
influencing t he quant it y o f cr edit in t he count r y. T he general t ool o f credit
cont rol co mpr ises of fo llo w ing inst rument s.
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The Bank Rat e Po lic y (BRP) is a ver y import ant t echnique used in t he mo net ar y
polic y for influencing t he vo lume or t he quant it y o f t he cred it in a count r y. The
bank rat e refer s t o rat e at which t he cent ral bank ( i. e RBI) rediscount s bills and
prepares o f co mmercial banks or provides advance t o commercia l banks against
approved secur it ies. It is "t he st andard r at e at which t he bank is prepared t o buy
or rediscount bills o f exchange or ot her commer cial paper eligi ble for pur chase
under t he RBI Act ". The Bank Rat e affect s t he act ual ava ilabilit y and t he cost of
t he credit . Any change in t he bank rat e necessar ily br ings out a result ant change
in t he cost of cred it available t o commercial banks. I f t he RBI incr eases t he
bank rat e t han it r educe t he vo lume o f co mmercia l banks borrowing fro m t he
RBI. It det ers banks fro m furt her credit expansio n as it beco mes a more cost ly
affair. E ven wit h incr eased bank rat e t he act ual int erest rat es for a short t er m
lending go up chec king t he credit expansio n. On t he ot her hand, if t he RBI
reduces t he bank r at e, borrowing for co mmercia l banks will be easy and
cheaper. This will boost t he credit creat ion. Thus any change in t he bank rat e is
nor mally associat ed wit h t he result ing changes in t he lending rat e and in t he
market rat e of int erest . However, t he efficiency o f t he bank rat e as a t ool o f
mo net ar y po licy depends on exist ing banking net work, int erest elast icit y o f
invest ment demand, size and st rengt h o f t he mo ne y market , int ernat io n al flow o f
funds, et c.
The open mar ket operat ion r efers t o t he purchase and/or sale o f short t er m and
lo ng t er m secur it ies by t he RBI in t he open market . This is ver y effect ive and
popular inst rument of t he mo net ar y po lic y. T he OMO is used t o wipe out
short age of money in t he mo ney market , to influence t he t er m and st ruct ure of
t he int erest rat e and t o st abilize t he market for gover nment secur it ies, et c. It is
import ant to underst and t he working o f t he OMO. I f t he RBI sells s ecur it ies in
an open market , commerc ial banks and pr ivat e individuals buy it . This reduces
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t he exist ing mo ney supply as mo ney get s transferred fro m co mmercia l banks t o
t he RBI. Cont rar y t o t his when t he RBI buys t he secur it ies fro m co mmer cial
banks in t he open market , co mmer cial banks sell it and get back t he mo ne y t he y
had invest ed in t hem. Obviously t he st ock of mo ne y in t he eco no my incr eases.
This way when t he RBI ent ers in t he OMO t ransact io ns, t he act ual st ock of
mo ney get s changed. Nor mally dur ing t he inflat io n per iod in order t o reduce t he
purchasing power, t he RBI sells secur it ies and dur ing t he recessio n or
depressio n phase she buys secur it ies and makes more mo ney available in t he
econo my t hrough t he banking syst em. Thus under OMO t her e is co nt inuou s
buying and selling o f secur it ies t aking place leading t o changes in t he
availabilit y o f credit in an eco no my.
However t here are cert ain limit at io ns t hat affect OMO viz; underdeveloped
secur it ies market , excess r eser ves wit h co mmerc ial banks, indebt edness o f
co mmercia l banks, et c.
The Co mmer cial Banks have t o keep a cert ain proport ion o f t he ir t ot al asset s in
t he for m o f Cash Reser ves. So me part of t hese cash reser ves are t heir t ot al
asset s in t he for m o f cash. Ap art of t hese cash reser ves are also t o be kept wit h
t he RBI for t he purpose o f maint aining liquid it y and cont rolling credit in an
econo my. T hese reser ve rat ios are named as Cash Reser ve Rat io (CRR) and a
St at utory Liquid it y Rat io (SLR). T he CRR r efers t o s ome percent age o f
co mmercia l bank's net demand and t ime liabilit ies which co mmer cial banks have
to maint ain wit h t he cent ral bank and SLR refers t o some percent o f reser ves t o
be maint ained in t he for m o f go ld or foreign secur it ies. In I ndia t he CRR by law
remains in bet ween 3 -15 percent while t he SLR rema ins in bet ween 25 -4 0
percent of bank reser ves. Any change in t he VRR ( i.e. CRR + S LR) br ings out a
change in co mmer cial banks reser ves posit io ns. T hus by var ying VRR
co mmercia l banks lending capacit y can b e affect ed. Changes in t he VRR helps
in br inging changes in t he cash r eser ves of co mmercia l banks and t hus it ca n
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affect t he banks credit creat ion mult ip lier. RBI incr eases VRR dur ing t he
inflat io n t o reduce t he pur chasing power and credit creat io n. But du r ing t he
recessio n or depressio n it lo wers t he VRR making more cash reser ves available
for credit expansio n.
The Qualit at ive I nst rument s ar e also known as t he Select ive Tools o f mo net ar y
polic y. T hese t ools are not direct ed t owards t he qualit y o f cred it or t he use o f
t he credit . They are used for discr iminat ing bet ween different uses of credit . It
can be discr iminat io n favor ing export over import or essent ial o ver no n -
essent ial credit supply. This met hod can have influence over t he lender and
borrower of t he credit . The Select ive Tools of credit cont rol co mpr ises o f
fo llo wing inst rument s.
Under t his met hod, consumer credit supply is regulat ed t hrough hir e -purchase
and inst allment sale o f co nsu mer goods. Under t his met hod t he down payment ,
inst allment amo unt , loan durat ion, et c is fixed in advance. This can help in
checking t he credit use and t hen inflat io n in a count r y.
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This is yet anot her met hod of select ive credit cont rol. Through it Cent ral Bank
(RBI) publishes var ious report s st at ing wh at is good and what is bad in t he
syst em. This published infor mat ion can help co mmercia l banks t o dir ect credit
supply in t he desir ed sect ors. Through it s weekly and mo nt hly bullet ins, t he
infor mat io n is made public and banks can use it for at t aining goals o f mo net ar y
polic y.
Cent ral Bank fixes credit amount to be grant ed. Credit is rat io ned by limit ing
t he amount available for each co mmer cial bank. This met hod cont rols even bil l
rediscount ing. For cert ain purpose, upper limit o f credit can be fixed and banks
are t old t o st ick t o t his limit . T his can help in lower ing banks cr edit expoursur e
to unwant ed sect ors.
v. Moral Suasion
It imp lies t o pressur e exert ed by t he RBI on t he ind ian banking syst em wit hout
any st r ict act ion for compliance of t he rules. It is a suggest ion t o banks. It helps
in r est raining credit dur ing inflat ionar y per iods. Co mmerc ial banks ar e infor med
about t he expect at io ns o f t he cent ral bank t hrough a mo net ar y po licy. Under
moral suasio n cent ral banks can issue dir ect iv es, guidelines and suggest ions for
co mmercia l banks regarding reducing cr edit supply for speculat ive purposes.
Under t his met hod t he cent ral bank issue frequent direct ives to commercia l
banks. T hese dir ect ives guide co mmercia l banks in fr aming t heir lending po licy.
Through a direct ive t he cent ral bank can influence credit st ruct ures, supply o f
credit t o cert ain limit for a specific purpose. The RBI issues direct ives t o
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co mmercia l banks for not lending loans t o speculat ive sect or such as secur it ies,
et c beyo nd a cert ain limit .
Under t his met hod t he RBI can impose an act io n against a bank. I f cert ain banks
are not adher ing t o t he RBI 's direct ives, t he RBI may refuse t o rediscount t heir
bills and secur it ies. S econdly, RBI may refuse credit supply t o t hose banks
whose borrowings are in excess t o t heir capit al. Cent ral bank can penalize a
bank by changing so me rat es. At last it can even put a ban o n a part icular bank
if it dose not fo llow it s direct ives and work against t he object ives o f t he
mo net ar y po lic y.
5. Conclusion
The Reser ve Bank o f India was est ablishe d wit h a view t o fost er ing t he banking
business and not for impeding t he growth o f such business. The powers vest ed
in it under Sect io n 22 are not one inve st ed wit h a mere o fficer o f t he Bank. The
st andards for t he exercise o f t he power have been laid down in Sect io n 22 it self.
The Reser ve Bank is a non-po lit ical body concer ned wit h t he finances of t he
count r y. When a power is given t o such a body under a st at ut e which prescr ibe s
t he regulat ions o f a Banking Co mpany, it can be assumed t hat such power would
be exercised so t hat genuine: banking concer ns could be allowed t o funct ion as a
bank, while inst it ut io ns masquerading as banks or t hose run on unsound lin es or
which would affect t he int erest s o f t he public could be weeded out.
The Reser ve Bank‟s development al ro le inc ludes ensur ing credit to product ive
sect ors of t he econo my, cr eat ing inst it ut io ns t o build financia l infrast ruct ure,
and expanding access t o affordable financial ser vices. It also plays an act ive
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role in encouraging effic ient cust omer service t hroughout t he banking indust r y,
as well as ext ensio n o f banking ser vice to all, t hrough t he t hrust on financia l
inc lusio n.
These are var ious select ive inst rument s of t he mo net ar y po lic y. However t he
success o f t hese t ools is limit ed by t he availabilit y o f alt er nat ive sources o f
credit in econo my, working o f t he Non - Banking Financial I nst it ut ions (NBFI s),
profit mot ive o f co mmerc ial banks and undemocrat ic nat ure o ff t hese t ools. But
a r ight mix o f bot h t he general and select ive t ools o f mo net ar y po lic y can give
t he desir ed result s.
6. References
2. Baner jee Abhijit & Duflo Est her (2004) “what do banks ( not ) do?”;
Massachuset t s Inst it ut e of t echno logy; (Sept ember 11, 2004)
(www. fedral.co. in)
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6. Hyde Dr. Anukool Manish (2007) “A st udy o f Lear ned Opt imis m in
Nat ionalized Banks and Pr ivat e Banks” BVIMR Management Edge
(Vol 3 No. 2, Jan- June 2007) (Pg:26-32)
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