US Federal Reserve Bank and Bank of England Bank in America This is the main central bank of that country through which the currency of that country is printed and controlled. Reserve Bank of India It is the Central Bank of India which is responsible for printing and controlling the currency of India. Apart from currency control, the Reserve Bank of India controls all the financial activities that take place in India. The main objective of the Reserve Bank is to store and control the international currency.
Through this article, we will study all the aspects of the Reserve Bank, which works to handle the financial economy of India. From the inception of Reserve Bank of India till date, we will try to know how has been the journey of Reserve Bank of India and how important is the role of Governor. We will try to know how the Reserve Bank controls all the banking system of India and what is the reason.
Which bank, which was started on a private level in British India, was nationalized after India’s independence and re-established under the Reserve Bank of India Act to control all banks, with the Governor as the head of this institution? All rights are used to control the economy of India. The most important task in this is to keep inflation under control and balance the reserve of foreign exchange, this very important task has to be done by the Reserve Bank.
The Reserve Bank of India –
The Reserve Bank of India (RBI) is the central bank of India and is responsible for the regulation and supervision of the country’s financial system. It was established on April 1, 1935, under the Reserve Bank of India Act, 1934, as a privately-owned institution with a capital of Rs. 5 crore. In 1949, the Reserve Bank of India was nationalized and became fully owned by the Government of India.
The RBI performs various functions, including issuing currency notes, managing the country’s monetary policy, supervising and regulating banks and financial institutions, managing the country’s foreign exchange reserves, and promoting financial inclusion and development.
The RBI is governed by a central board of directors, which is appointed by the Government of India. The board is headed by the Governor of the RBI, who is the chief executive officer of the bank. The current Governor of the RBI is Shaktikanta Das, who assumed office in December 2018.
Reserve Bank of India Act –
The Reserve Bank of India (RBI) Act is the primary law that governs the establishment, functions, and operations of the Reserve Bank of India. The Act was first enacted in 1934 and has undergone several amendments over the years. The latest amendment to the RBI Act was made in 2016.
Some of the key provisions of the RBI Act are as follows:
- Establishment of the Reserve Bank of India: The Act provides for the establishment of the Reserve Bank of India as the central bank of the country.
- Management of monetary policy: The Act empowers the RBI to formulate and implement monetary policy in the country. This includes the regulation of the supply of money, credit, and interest rates, with the objective of maintaining price stability.
- Banking regulation: The Act gives the RBI the power to regulate and supervise the banking sector in India, including the licensing of banks, the regulation of their activities, and the supervision of their financial health.
- Issuance of currency: The Act authorizes the RBI to issue currency notes and coins in the country.
- Management of foreign exchange: The Act gives the RBI the power to manage the foreign exchange reserves of the country and to regulate foreign exchange transactions.
- Governance structure: The Act provides for the governance structure of the RBI, including the appointment of the Governor and the Deputy Governors, and the functioning of the Central Board of Directors.
- Audit and reporting: The Act requires the RBI to prepare and publish annual reports on its operations and to be subject to audit by the Comptroller and Auditor General of India.
The Reserve Bank of India Act is a crucial law that defines the mandate and powers of the central bank and is fundamental to the functioning of the Indian economy.
Functions of RESERVE BANK OF INDIA –
The Reserve Bank of India (RBI) performs a wide range of functions related to monetary policy, banking regulation, and financial stability. Some of its major functions are:
- Monetary Policy: The RBI formulates and implements the monetary policy of the country, which aims to achieve price stability and economic growth. The RBI uses various tools, such as open market operations, reserve requirements, and policy rates, to regulate the money supply in the economy.
- Regulation and Supervision of Banks: The RBI regulates and supervises banks and financial institutions in India to ensure their soundness and stability. It issues licenses to new banks, monitors their operations, and takes corrective action if necessary. It also regulates the payment and settlement systems in the country.
- Issuance of Currency: The RBI has the sole authority to issue currency notes and coins in India. It also manages the supply, distribution, and destruction of currency notes and coins.
- Management of Foreign Exchange Reserves: The RBI manages the country’s foreign exchange reserves, which are used to maintain the value of the Indian rupee and to finance the country’s international trade and payment obligations.
- Development of Financial Markets: The RBI promotes the development of financial markets in India by regulating and supervising various market segments, such as money, government securities, foreign exchange, and credit markets. It also provides liquidity support to financial institutions during times of stress.
- Financial Inclusion: The RBI promotes financial inclusion by implementing measures to ensure access to financial services for all sections of society, particularly the unbanked and underserved. It has introduced several initiatives such as the Pradhan Mantri Jan Dhan Yojana, which aims to provide universal access to basic banking services.
Background of RBI Formation
Before the establishment of the RBI, India’s monetary system was fragmented, with different currency systems in different regions, and there was no central bank to regulate the banking system. The British colonial government had set up the Imperial Bank of India in 1921 to act as a central bank, but it did not have the power to regulate the banking system.
The RBI was initially set up as a private shareholders’ bank, with a capital of Rs. 5 crore, of which the Government of India held Rs. 4,95,00,000, and the rest was held by private shareholders. The RBI was headed by a Governor and a board of directors, which included representatives of the Government of India and the private sector.
After India gained independence in 1947, the RBI was nationalized in 1949, and it became fully owned by the Government of India. Since then, the RBI has played a crucial role in shaping India’s monetary policy and regulating the banking and financial system, and has contributed significantly to the country’s economic growth and development.
RBI As per the Constitution of India –
The Reserve Bank of India (RBI) is mentioned in the Constitution of India under Article 246, which gives the power to make laws on various subjects to the Union Government and the State Governments. Under this article, the Union Government has the power to legislate on subjects related to banking, including the regulation of the banking sector and the operation of the Reserve Bank of India.
In addition, the Reserve Bank of India Act, 1934, which provides for the establishment, constitution, and functions of the RBI, is a law passed by the Indian Parliament under the powers given to it by the Constitution of India.
The Constitution of India also provides for the independence of the Reserve Bank of India in performing its functions. Article 300A of the Constitution prohibits the government from acquiring the property of the RBI, which ensures the autonomy of the central bank in the performance of its duties. This independence is considered essential for the effective functioning of the RBI in ensuring financial stability and promoting economic growth in the country
List of Governors from formation of RBI –
Here is the list of Governors of the Reserve Bank of India from its formation in 1935 to the present day:
- Sir Osborne Smith (1 April 1935 – 30 June 1937)
- Sir James Braid Taylor (1 July 1937 – 17 February 1943)
- Sir C. D. Deshmukh (11 August 1943 – 30 June 1949)
- Sir Benegal Rama Rau (1 July 1949 – 14 January 1957)
- K. G. Ambegaonkar (14 January 1957 – 28 February 1957) (Acting)
- H. V. R. Iyengar (1 March 1957 – 28 February 1962)
- P. C. Bhattacharya (1 March 1962 – 30 June 1967)
- L. K. Jha (1 July 1967 – 3 May 1970)
- B. N. Adarkar (4 May 1970 – 15 June 1970) (Acting)
- S. Jagannathan (16 June 1970 – 19 May 1975)
- N. C. Sen Gupta (19 May 1975 – 19 August 1975) (Acting)
- K. R. Puri (20 August 1975 – 2 May 1977)
- M. Narasimham (3 May 1977 – 30 November 1977) (Acting)
- I. G. Patel (1 December 1977 – 15 September 1982)
- Manmohan Singh (16 September 1982 – 14 January 1985)
- A. Ghosh (15 January 1985 – 4 February 1985) (Acting)
- R. N. Malhotra (4 February 1985 – 22 December 1990)
- S. Venkitaramanan (22 December 1990 – 21 December 1992)
- C. Rangarajan (22 December 1992 – 21 November 1997)
- Bimal Jalan (22 November 1997 – 6 September 2003)
- Y. V. Reddy (6 September 2003 – 5 September 2008)
- D. Subbarao (5 September 2008 – 4 September 2013)
- Raghuram Rajan (4 September 2013 – 4 September 2016)
- Urjit Patel (4 September 2016 – 11 December 2018)
- Shaktikanta Das (12 December 2018 – present)
Appointment process of RBI Governor –
The appointment process of the Governor of the Reserve Bank of India (RBI) is governed by the RBI Act, 1934. The Governor of the RBI is appointed by the Central Government in consultation with the Prime Minister of India. The appointment is made by the President of India based on the recommendations of the Prime Minister and the Union Cabinet.
The appointment of the Governor of the RBI is subject to certain qualifications and conditions as specified in the RBI Act, 1934. The person appointed as the Governor must have:
- experience in banking and financial matters; and
- an excellent track record in public service.
The term of the Governor of the RBI is typically for a period of three years. However, the term can be extended by the Central Government based on the recommendation of the Prime Minister.
It is important to note that the Governor of the RBI has considerable autonomy in the performance of his or her duties. The RBI Act, 1934 provides for the autonomy of the RBI in the performance of its functions, which includes the regulation of the banking sector, the management of the country’s monetary policy, and the maintenance of financial stability. The Governor of the RBI is responsible for the implementation of the RBI’s policies and for the day-to-day management of the central bank’s affairs.
Demonetization and RBI –
Demonetization is the act of stripping a currency unit of its status as legal tender. In India, the decision to demonetize certain high-value currency notes was announced by the government on November 8, 2016. This decision was aimed at curbing black money, counterfeit currency, and terrorism funding, among other reasons.
The Reserve Bank of India (RBI) played a key role in the demonetization process, as it is the institution responsible for the printing, issuance, and management of currency notes in India. The RBI was involved in the planning and execution of the demonetization process, including the withdrawal of the old notes from circulation and the replacement with new currency notes.
The RBI set up various guidelines and regulations for the demonetization process, including the submission of old notes to banks and the exchange of old notes for new ones. The RBI also coordinated with various stakeholders, such as commercial banks, to ensure the smooth implementation of the demonetization process.
However, the demonetization process was not without its challenges, and the RBI faced criticism for the way in which the process was implemented. The sudden withdrawal of high-value currency notes led to a cash shortage and disruption of economic activity, particularly in the informal sector. The RBI was also criticized for the slow pace of printing and distribution of the new currency notes, which led to long queues and inconvenience for the public.
In summary, the RBI played a crucial role in the demonetization process in India, but the process was not without its challenges and controversies.
In conclusion, the Reserve Bank of India (RBI) is the central bank of India and is responsible for formulating and implementing monetary policy, regulating and supervising the banking sector, and managing the country’s foreign exchange reserves. The RBI has played a crucial role in the Indian economy since its establishment in 1935.
The appointment of the Governor of the RBI is governed by the RBI Act, 1934 and is subject to certain qualifications and conditions. The Governor has considerable autonomy in the performance of his or her duties, which includes the implementation of the RBI’s policies and the day-to-day management of the central bank’s affairs.
The RBI was also involved in the planning and execution of the demonetization process in 2016, which aimed to curb black money, counterfeit currency, and terrorism funding, among other reasons. While the RBI played a key role in the demonetization process, there were also challenges and controversies associated with the process.
Overall, the RBI is a critical institution for the Indian economy, and its role and functions will continue to be important in the years to come.