Reserve Bank of India (RBI) – structure, functions, subsidiaries, related issues

Reserve Bank of India

  • Central Bank – apex monetary authority in India. Also known as the Mint Street.
  • Established by Reserve Bank of India Act, 1934.
  • Fully owned by the Government of India.

Functions and Powers:

  • Financial Supervision and regulation of commercial banks, financial institutions, and non-bank finance companies (NBFCs).
    • The Banking Regulation Act 1949 empowers RBI to supervise banks and inspect their books, and take action against erring officials (removing top managerial personnel in case of private banks) and financial institutions.
  • Issue of currency
    • Currency notes are printed by the RBI, and coins are minted by the Government of India. However, only the RBI has the sole right to issue currency in India, including both coins and currency notes.
  • Management of exchange control.
  • Conduct banking affairs of central government and manage public debt.

Structure of RBI:

Central Board of Directors

Central Board of Directors is the main committee of RBI. It has 21 members consisting of:

  • the Governor
  • 4 Deputy Governors
  • 2 Finance Ministry representatives
  • 10 government nominated directors
  • 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi

Appointment and tenure of the Governor and Deputy governors of RBI

The Governor and Deputy Governors of the RBI are appointed by the government under the provisions of Section 8 of the RBI Act 1934. Their tenure is fixed at the time of appointment, typically at 3 years and not exceeding 5 years at a time; reappointment and extension of tenure is allowed.

Monetary Policy Committee (MPC)

  • MPC is the committee of RBI responsible for fixing the benchmark interest rate in India, also called ‘base rate’.
  • It has six members – 
    • 3 officials of RBI, one of them being the Governor – who is also the chairperson of the MPC.
    • 3 external members (4 year term) nominated by the Government of India.
  • Decisions in the MPC are taken by a majority. Governor has the casting vote in case of a tie.
  • It was created in 2016, on recommendation of Urjit Patel Committee. Before MPC, a Technical Advisory Committee on monetary policy used to advise the governor, but the governor’s decision was final. TAC was only advisory. MPC was established to reform the TAC system and to reduce the discretionary powers in the hands of one person (RBI governor).

Subsidiaries of RBI:

  • NHB – National Housing Bank
    • An apex level institution (development bank) for housing, set up under NHB Act 1987.
    • Earlier it was wholly owned by RBI. In March 2019, RBI sold its entire stake in NHB and NABARD to Government of India.
  • NABARD – National Bank for Agriculture and Rural Development
    • Development bank for agriculture, handicrafts and small industries, etc.
    • Owned by Government of India.
  • BRBNMPL – Bharatiya Reserve Bank Note Mudran Private Limited
    • A company wholly owned by RBI. It produces bank notes.
  • DICGC – Deposit Insurance and Credit Guarantee Corporation
    • DICGC insures deposits (savings, fixed deposits, etc.) with eligible banks – upto 1 lakh per depositor. Insurance premium is paid by the banks themselves.
    • It was set up under DICGC Act 1961. It is wholly owned by RBI.
    • The FRDI Bill 2017 seeks to replace DICGC by a Financial Resolution Corporation. The bill was withdrawn by the government from the parliament in August 2018 to pacify public anxieties.

Credit Control measures of RBI

RBI uses credit control measures to ensure economic stability by increasing or decreasing liquidity in the economy. These instruments are:

  • Bank Rate Policy. Bank rate is the rate charged by RBI for lending funds to commercial banks.
  • Open Market Operations – direct sale and purchase of securities (G-Secs)
    • Repo – RBI repurchases G-Secs from banks and lends funds to them at the repo rate. This increases liquidity in the economy.
    • Reverse Repo – RBI sells G-Secs to the banks and borrows money from them at reverse-repo rate. This reduces the liquidity in the economy.
  • Open Market Operations are short term measures. Long term Measures are the CRR, SLR.
  • Cash Reserve Ratio (CRR): It is the share of a bank’s total deposit that is mandated to be kept with the Reserve Bank of India in the form of liquid cash.
  • Statutory Liquidity Ratio (SLR): It is the reserve requirement that the banks are required to maintain in the form of cash, gold reserves and RBI approved securities.

More related information:

Accountability vs Independence – Is the Reserve Bank of India free from the Government ?

Measures of Money – Currency in Circulation, Reserve Money, Money Supply

Prompt Corrective Action (PCA) Framework

PCA framework is a supervisory tool for monitoring and is aimed at facilitating the banks to take corrective steps to restore their financial health. It does not intend to constrain normal operations of the banks for the general public. This framework is triggered when banks breach certain regulatory requirements (kicks in when NPAs rise above 10% and banks post losses for two consecutive years).

RBI also publishes the Financial Stability Report on Indian Economy on the lines of Global Financial Stability Report published by IMF.

Legal tenders in India:

  • A legal tender refers to a coin or currency note that cannot be refused as a payment.
  • Rupee notes are unlimited legal tender. Coins are limited legal tender – 50p coins are legal tender till Rs. 10. Cheques and commercial bills are not legal tender.
  • It means that after you have eaten at a restaurant, the restaurant can refuse to accept payment in 50 paise coins beyond Rupees 10, but they also cannot refuse the payment until Rupees 10.

In India, only the RBI or the central government can issue and accept promissory notes that are payable on demand. However, cheque, that are payable on demand, can be issued by anyone.

FBIL – Financial Benchmarks India Pvt Ltd

  • An independent Benchmark administrator, setup in 2015 – to overcome possible conflicts of interest in the current governance structure of benchmark administration.
  • It is to take over administration of foreign exchange benchmarks and other Indian Rupee interest rate benchmarks over a period of time, from FIMMDA and FEDAI.
  • It is jointly formed by FIMMDA (Fixed Income Money Market and Derivative Association of India), FEDAI (Foreign Exchange Deals Association of India) and IBA (Indian Banks’ Association) on the recommendations of RBI Committee on Financial Benchmarking headed by Vijaya Bhaskar.
  • Overnight MIBOR (Mumbai Interbank Offer Rate) and Term MIBOR – benchmark interest rate for one day duration unsecured loans – is announced by FBIL since 2015. In 2018, the FBIL has also assumed the responsibility for administering valuation of G-Secs (government securities).

National Institute of Bank Management (NIBM) is an autonomous think-tank and research institution for the banking system. It was established by RBI in the year 1969, and is headquartered at Pune, Maharashtra. The Governor or RBI is the ex-officio chairman of NIBM.

RBI is also a member of the Asian Clearing Union (ACU) and the Alliance for Financial Inclusion. The Asian Clearing Union is headquartered at Tehran, Iran. It was established at the initiative of UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific) for regional cooperation in settlement of monetary transactions.
Alliance for Financial Inclusion is a network of financial inclusion policymakers who encourage the adoption of inclusive financial policies in developing countries.

1 thought on “Reserve Bank of India (RBI) – structure, functions, subsidiaries, related issues

  1. Pingback: Accountability vs Independence – Is the Reserve Bank of India free from the Government ? | broadgk

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