Reserve Bank of India (RBI): History, Objectives and Functions

"For monetary transmission to occur, lending rates have to be sensitive to the policy rate, it was observed that base rates based on marginal cost of funds are more sensitive to changes in the policy rates"- The RBI

 

Reserve Bank of India or RBI is the central bank of India. It is the one who is responsible for the issue and supply of the Indian rupee. When we talk of economics and banking, RBI is the supreme body. It is basically responsible for the circulation and legalization of any type of currency in India. It began its operation on the 1st of April,1935. However, after the independence of India in the year 1947, it was nationalized. 

 

Besides being the national bank for currency circulation, RBI has some other functions also. It makes rules and regulations for all the banks working in India and also works for the economic development of our country. So, after reading this you can realize that the Reserve Bank of India plays a vital role in the financial market.

 

So, here, we will discuss several things related to the Reserve Bank of India such as the history of RBI, its objectives, functions, list of governors of RBI, recent news, and many more. So, without any further delay let's start the blog with the history of the Reserve Bank of India.

 

History of Reserve Bank of India

 

In 1921, the Imperial Bank of India was set up to proceed as the national bank of India by the British Government. However, the Imperial Bank weakened to express its achievement sufficiently and didn't make any progress as the Central Bank. At that point, the Government asked the Hilton Young Commission in 1925 to see this matter. The commission presented their reports saying that one single association can't have the option to go about as two separate organizations, both credit and cash control. Thus, it's needed to set up a pristine national bank. In the first April 1935, the Reserve Bank of India was set up. In January 1949, RBI was nationalized.

 

Furthermore, a fascinating feature of the RBI was that at its very origin, the Bank was viewed as assuming a unique function with regards to advancement, particularly Agriculture. At the point when India initiated its plan attempts, the advancement function of the Bank came into the centre, particularly in the sixties when the Reserve Bank, from various perspectives, initiated the idea and practice of using finance to catalyze improvement.

 

The Bank was likewise instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, and so on to construct the monetary infrastructure of the nation. With advancement, the Bank's centre has moved back to core central banking purposes such as Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System.

 

List of Governors of RBI

 

British banker Osborn Smith was the first Governor of RBI, but C.D. Deshmukh was the first Indian Governor of RBI. At present, Shashikant Das is the Governor of the Reserve Bank of India. Since its establishment in 1935, by the British colonial government, 25 people have served as the Governor of the RBI so far. So, here we have provided you with the full list of all the Governors of the Reserve Bank of India.

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S.N.	Governor Name	Tenure	Background
1.	Osborne Smith	April 1, 1935, to June 30, 1937	Banker
2.	James Brend Taylor	July 1, 1937, to February 17, 1943	ICS Officer
3.	C. D. Deshmukh	August 11, 1943, to June 30, 1949	ICS Officer
4.	Benegal Rama Rao	July 1, 1949, to 14 January 1957	ICS Officer
5.	K. G. Ambegaonkar	January 14, 1957, to 28 February 1957	ICS Officer
6.	H. V. R. Iyengar	March 1, 1957, to February 28, 1962	ICS Officer
7.	P. C. Bhattacharya	March 1, 1962, to June 30, 1967	Indian Audit and Accounts Officer
8.	Lakshmi Kant Jha	July 1, 1967, to May 3, 1970	ICS Officer
9.	B. N. Adarkar	May 4, 1970, to June 15, 1970	Economists
10.	S. Jagannathan	June 16, 1970, to May 19, 1975	ICS Officer
11.	N. C. Sen Gupta	May 19, 1975, to 19th August 1975	ICS Officer
12.	K. R. Puri	August 20, 1975, to May 2, 1977	-
13.	M. Narasimham	May 3, 1977 to November 30, 1977	Career RBI Officer
14.	I.G. Patel	December 1, 1977, to 15 September 1982	Economist
15.	Manmohan Singh	September 16, 1982, to 14 January 1985	Economist
16.	Amitav Ghosh	January 15, 1985, to 4th February 1985	Banker
17.	R. N. Malhotra	February 4, 1985, to December 22, 1990	IAS Officer
18.	S. Venkatraman	December 22, 1990, to December 21, 1992	IAS officer
19.	C. Rangarajan	December 22, 1992, to November 21, 1997	Economists
20.	Bimal Jalan	November 22, 1997, to September 6, 2003	Economists
21.	Y. V. Reddy	September 6, 2003, to September 5, 2008	IAS officer
22.	D. Subbarao	September 5, 2008, to September 4, 2013	IAS officer
23.	Raghuram Rajan	September 4, 2013 to September 4, 2016	Economist
24.	Urjit Patel	September 4, 2016 to 11 Dec.2018	Economist
25.	Shaktikanta Das	From 12 December 2018	IAS Officer

Source: Wikipedia

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“Top 50 NBFCs Are Being Regularly Monitored By RBI; Have A Fairly Good Idea Of Vulnerable NBFCs. Won't Hesitate To Prevent Collapse Of Any Large NBFC” - Shaktikanta Das, RBI Governor

 

What are the Objectives of RBI?

 

Before jumping towards the objectives of the Reserve Bank of India, let's see what the preamble explains the objectives of RBI. The Preamble to the Reserve Bank of India Act, 1934 tells about the objectives of the Reserve Bank as “to regulate the issue of Banknotes and the keeping of reserves to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” Moreover, 

 

• The Reserve Bank of India was set up with the primary maxim of managing all the banks in India. The goal was to hold under control the reserves as well as the issue of banknotes. 

• Along these lines, it was done to make sure about the financial stability and in this way to work the credit system and currency of the nation for its potential benefit. (Related article: Digital currency and cryptocurrency)

• The essential objective for the Reserve Bank of India is to direct the different financial functions for India in the money market. Therefore, they concentrate especially on issuing new notes.

• Consequently, the RBI was set up with the point of being a banker's bank and similarly the bank for the government. It aimed to expand the economic progress of the nation through different structures and economic policies of the government. 

• In simple words, we can say that it's fundamental motive is to encourage the planned system of growth of the Indian economy. (Also read: How is India recovering from the economic slowdown?)

 

 

What are the Functions of RBI?

 

Now, let's move towards the functions of the Reserve Bank of India. The fundamental functions of the RBI are to manage the money supply in the nation. Similarly, it has been coordinated to deal with agriculture, industry, and many more. The RBI is likewise answerable for the support of the external value of the rupee. 

 

According to the RBI Act 1934, it performs 3 kinds of functions as that of some other central bank. So, here we will read in detail about these three types of functions.

 

1. Banking Functions

 

• Bank of Issue- The Reserve Bank has a different Issue Department which is empowered with the issue of currency notes. Under section 22 of the RBI Act, it has the exclusive right to issue currency notes of numerous groups except one rupee note as it is issued by the Ministry of Finance. The assets and liabilities of the Issue Department are kept separate from those other Banking Department.

 

• Banker to Government- Now, coming towards the second significant function of the Reserve Bank of India which is to work as a Government banker, agent, and adviser. It fulfils all the banking processes of the State and Central Government. It also tenders valuable suggestions to the government on topics related to economic and financial policy and even governs the public debt of the government.

 

• Bankers’ Bank- The Reserve Bank of India acts as the banker's bank and it lends money to all the commercial banks of the country. As indicated by the outlay of the Banking Companies Act of 1949, each scheduled bank was needed to keep up with the Reserve Bank a money balance equal to 5 % of its demand liabilities and 2 % of its time liabilities in India. In simple words, we can say that RBI fulfils the same functions for the other commercial banks as the other banks fulfil their clients.

 

• Controller of Credit- We can say that the RBI is the controller of credit as it can impact the volume of credit made by banks in India. It can do as such by changing the Bank rate or through open market tasks. RBI uses two techniques to prevent the extra flow of wealth in the economy that is quantitative and qualitative techniques.

 

• Custodian of Foreign Reserve- The Reserve bank must balance out the outer estimation of the public cash. The Reserve Bank keeps gold and foreign currencies as reserves against note issues and also meets the unfavourable offset of instalments with different regions. Also, it oversees foreign currencies by the controls forced by the administration.

 

 

2. Supervisory Functions

 

The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI vast powers of supervision and command over the business and co-operative banks, connecting to licensing and foundations, liquidity of their assets, recreation, and liquidation. The supervisory functions of the RBI have assisted a lot in expanding the standard of banking in India.

 

 

3. Promotional Functions

 

With monetary development accepting a new urgency since freedom, the scope of the Reserve Bank's functions has consistently broadened. The Bank now plays out an assortment of improvement and promotional functions, which, at once, were regarded as out of the typical scope of central banking. (Recommended blog: What is Personal Finance?)

 

Conclusion

 

Recently, former governor Subbarao said, “I believe the RBI under governor (Urjit) Patel first and then under (Shaktikanta) Das acted with extreme alacrity and haste to defuse the NBFC bubble and then to prevent the bubble from snowballing into a crisis”.

 

RBI or Reserve Bank of India has a great role in financial markets. You may not know that the Central Office of the Reserve Bank was originally founded in Kolkata but was permanently moved to Mumbai in 1937. So, after reading the blog you must have understood about Reserve Bank of India, how RBI functions, its objectives, interesting history, and several other facts related to Reserve Bank of India.