Role and Functions of the Reserve Bank of India (RBI) – UGC NET Notes

Stuti Mishra

5 months ago

The Reserve Bank of India (RBI), established in 1935, serves as the apex monetary authority of the country, playing a pivotal role in regulating the financial and banking sectors. As the custodian of the Indian economy, the RBI is entrusted with responsibilities such as formulating monetary policies, issuing currency, and maintaining financial stability. For UGC NET Commerce aspirants, understanding the functions of the Reserve Bank of India is crucial to grasp the dynamics of India’s monetary system and its impact on economic growth.

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What is Reserve Bank of India (RBI)?

The Reserve Bank of India (RBI) is India’s central bank, established on 1st April 1935 under the RBI Act 1934, following recommendations from the Hilton Young Commission.
RBI was nationalized on 1st January 1949 to enhance its role in the Indian economy.
The concept of RBI is rooted in Dr. Ambedkar’s work, The Problem of the Rupee – Its Origin and Its Solution.
RBI oversees India’s credit and currency system, ensuring monetary stability and economic growth.
The primary objectives of the RBI include maintaining public confidence, safeguarding depositor interests, and promoting cost-effective banking through cooperative and commercial banks.
Known as the “Banker’s Bank,” RBI formulates and implements monetary policy for the Indian rupee.
It ensures financial stability by managing currency, supervising the payment systems, and regulating monetary operations.

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Composition of Reserve Bank of India (RBI)

The composition of the Reserve Bank of India (RBI) is designed to ensure balanced decision-making and efficient management of monetary and financial policies. The executive head of Reserve Bank of India (RBI) is Governor. The key elements of its structure are:

1. Central Board of Directors

It is RBI’s highest decision-making authority, comprising:
- Governor
- Deputy Governors
- 2 Finance Ministry representatives
- 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai, and New Delhi
The board of directors are generally appointed/nominated for a period of 4 years.

2. Governor

The Governor is the chief executive officer of the RBI, responsible for implementing its policies and managing day-to-day operations.

3. Deputy Governors

Up to four Deputy Governors assist the Governor in specialized areas like monetary policy, banking supervision, and financial markets.

4. Local Boards

Four Local Boards are established for different regions: Northern, Southern, Eastern, and Western zones.
They advise the Central Board on regional matters and provide localized insights into economic and financial issues.

5. Departments and Divisions

The RBI is organized into departments, each responsible for specific functions such as monetary policy, banking regulation, currency management, and financial inclusion.

Offices of Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) has a well-established network of offices across the country to effectively manage its diverse responsibilities. The offices are classified into Central, Regional, and Sub-offices.

Central Office or Headquarters of RBI

Headquarters of RBI: Mumbai, Maharashtra.
The headquarters of the RBI houses the Governor’s office and key departments like Monetary Policy, Banking Regulation, Financial Inclusion, and Currency Management.

Zonal Offices of RBI

RBI has 4 zonal offices:

New Delhi for North
Chennai for South
Kolkata for East
Mumbai for West

Regional Offices of RBI

The RBI operates 31 regional offices across India, with most located in state capitals.
These offices handle various functions like currency distribution, banking supervision, and grievance redressal.
Major regional offices of RBI: Delhi, Kolkata, Chennai, and Bengaluru.

Sub-Offices of RBI

Sub-offices of RBI are located in smaller cities and focus on localized operations, providing support to nearby regions.

Training and Research Institutes

Reserve Bank Staff College at Chennai
Indira Gandhi Institute of Development Research (Mumbai)

Functions of the Reserve Bank of India (RBI)

Here’s a crisp and engaging breakdown of the RBI’s key roles:

Currency Manager

RBI is the sole authority for issuing and managing Indian currency, ensuring an adequate supply of clean notes.

Banker to the Government

Acts as a banker, debt manager, and financial advisor to both the Central and State Governments.

Monetary Policy Maker

Formulates and implements monetary policy to control inflation, manage liquidity, and ensure economic stability.

Regulator of Banks and NBFCs

Supervises and regulates commercial banks, cooperative banks, and NBFCs to maintain financial stability.

Foreign Exchange Manager

Manages India’s foreign exchange reserves and ensures stability in the currency exchange market under the FEMA Act.

Developmental Role

Promotes financial inclusion, supports rural banking, and fosters credit availability for agriculture and small industries.

Payment System Overseer

Develops and regulates secure, efficient, and modern payment systems like UPI, NEFT, and RTGS.

Banker’s Bank

Provides funds and guidance to other banks, acting as a lender of last resort during financial crises.

Custodian of Public Confidence

Ensures depositor safety and maintains trust in the banking and financial systems.

Roles of the Reserve Bank of India (RBI)

Economic Stabilizer: RBI ensures financial stability by managing inflation, interest rates, and economic growth through effective policy interventions.
Financial Advisor: Advises the government on economic policies, public debt management, and financial reforms.
Crisis Manager: It acts as a “lender of last resort” during financial crises to safeguard the banking system and the economy.
Innovator in Payment Systems: Drives digital payment innovations like UPI, Bharat QR, and FASTag, fostering cashless transactions.
Global Collaborator: Represents India in global financial forums like the International Monetary Fund (IMF) and G20 for policy alignment and cooperation.
Research and Development Leader: RBI conducts in-depth research on economic, financial, and banking trends to guide national policy and reforms.
Promoter of Financial Literacy: Reserve Bank leads initiatives to educate the public on financial products, savings, and digital banking.

Subsidiaries of Reserve Bank of India

There are 5 subsidiaries of Reserve Bank of India (RBI):

Deposit Insurance and Credit Guarantee Corporation (DICGC)
Bharatiya Reserve Bank Note Mudran (BRBNM)
Reserve Bank Information Technology Pvt. Ltd
Indian Financial Technology and Allied Services (IFTAS)
Reserve Bank Innovation Hub (RBIH)

Deposit Insurance and Credit Guarantee Corporation (DICGC)

DICGC is a specialized division of RBI which is under jurisdiction of the Ministry of Finance that ensures the money of the bank deposit holders if the bank fails to pay.
Establishment: 15th July 1978 under Deposit Insurance and Credit Guarantee Corporation Act (DICGC Act), 1961.
Banks that are included in DICGC:
- All commercial banks including branches of a foreign bank in India, local area bank and Regional Rural Bank (RRB).
- Note: NBFC and primary cooperative society are not insured by RBI.
Headquarters of DICGC: Mumbai

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

BRBNMPL is another subsidiary of Reserve Bank of India that mints Indian bank notes and coins.
It was initially registered as a Private Limited Company under the Companies Act of 1956
Establishment date: 3 February 1995
Headquarters of Bharatiya Reserve Bank Note Mudran (BRBNM): Bangalore, Karnataka.

Reserve Bank Information Technology Pvt Ltd (ReBIT)

ReBIT is set up by Reserve Bank of India (RBI) to take care of the IT requirements, like cyber security.
Establishment Year: 2016
Headquarters of ReBIT: Mumbai, Maharashtra

Indian Financial Technology and Allied Services (IFTAS)

Indian Financial Technology and Allied Services (IFTAS) provides IT-related services to the RBI, banks, and other financial institutions.
It was initially incorporated as a Not-for-profit company, under Section 8 of Indian Companies Act, 2013 and was wholly acquired by RBI in March 2019
Established: February 2015
Headquarters of IFTAS: Mumbai, Maharashtra

Reserve Bank Innovation Hub (RBIH)

RBIH was registered as a section 8 company under Companies Act 2013 with an initial capital contribution of Rs. 100 crores and is a wholly owned subsidiary of the RBI.
Its aim is to promotes and facilitate an environment that accelerates innovation across the financial sector by leveraging on technology and creating an environment that would facilitate and foster innovation.
Headquarters of RBIH: Bengaluru, Karnataka

Reserve Bank of India (RBI) Conclusion

The Reserve Bank of India (RBI) is the backbone of India’s financial system, balancing its roles as a regulator, policymaker, and innovator. With key functions like currency management, monetary policy implementation, and banking supervision, it ensures economic stability. Through its subsidiaries, RBI drives financial inclusion and development, cementing its position as a pivotal institution for India’s economic growth and resilience.