Reserve Bank of India

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  • The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after the First World War.
  • The Reserve Bank of India was conceptualised based on the guidelines presented by the Central Legislative Assembly which passed these guidelines as the RBI Act 1934.
  • RBI was conceptualised as per the guidelines, working style and outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee – Its origin and its solution” and presented to the Hilton Young Commission.
  • The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the Hilton–Young Commission.
  • The Central Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay (now Mumbai) in 1937.
  • The RBI also acted as Burma's (now Myanmar) central bank until April 1947 (except during the years of Japanese occupation (1942–45)), even though Burma seceded from the Indian Union in 1937.
  • After the Partition of India in August 1947, the bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations.
  • RBI has monopoly of note issue.
1950–1960
  • In the 1950s, During Initial Plan Economy era, Banking Regulation Act, 1949 was passed to regulate and streamline the banking sector in India and power to regulate was vested with RBI
  • Furthermore, the central bank was ordered to support economic plan with loans. 1961–1968
  • As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system.
  • Meant to restore the trust in the national bank system, it was initialised on 7 December 1961.
  • The Indian government founded funds to promote the economy, and used the slogan "Developing Banking".
  • The government of India restructured the national bank market and nationalised a lot of institutes. As a result, the RBI had to play the central part in controlling and supporting this public banking sector.
1969–1984
  • In 1969, the Indira Gandhi-headed government nationalised 14 major commercial banks.
  • Upon Indira Gandhi's return to power in 1980, a further six banks were nationalised.
  • The regulation of the economy and especially the financial sector (Monetary Policy) was reinforced by the Government of India in the 1970s and 1980s.
  • The central bank became the central player and increased its policies a lot for various tasks like interests, reserve ratio and visible deposits.
  • Monetary Policy became prominent role
  • These measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agricultural business and small trade companies
  • But, since function of the Bank was of public nature, the RBI act of 1934 had provided the appointment of the Governor and two deputy Governors by the Central Government.
  • In 1949, the Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
  • RBI's business is overseen by Central Board of Directors, which delegates the functions to its committees and sub-committees.
  • Apart from Central Board RBI has four local Boards in Chennai, Mumbai, Calcutta and New Delhi
Preamble - The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
  • "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;
  • to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."  (Monetary policy committee formed).
Central Board – Reserve Bank of India
  • The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
  • Appointed/nominated for a period of four years
Constitution:
  • Official Directors (5)
    • Full-time: Governor and not more than four Deputy Governors
    • Tenure of 5 years or 62 years (which ever earlier)
  • Non-Official Directors (10+2 =12)
    • Nominated by Government: ten Directors from various fields and two government Official.
    • They are secretary of Department of Economic Affairs and Department of Financial Services.
  • Others: (4)
    • Four Directors - one each from four local boards of Chennai, Mumbai, Kolkata and New Delhi.
(Only few has voting power)
About
  • According to the RBI Act, the director of the RBI Board cannot be a salaried government official (except for the ones specifically nominated by the government),
  • be adjudicated as insolvent or have suspended payments to creditors,
  • an officer or employee of any bank (again, this does not include the government nominee), or, interestingly, “is found lunatic or becomes of unsound mind”.
  • The proposal for appointment to the Central Board is moved by the Department of Financial Services under the Finance Ministry and needs to be approved by the Appointments Committee of the Cabinet.
  • Generally, the government would want the RBI to be sensitised to the views of various stakeholders in the country’s socio-economic landscape such as businesses (within that, manufacturing, infrastructure and services sectors), cooperatives, self-help groups, academicians, economists, etc.
  • Given that RBI plays a much larger role than just that of a banking regulator, and that it is an apolitical institution, the government generally avoids appointing individuals with strong ideological or political views to the Central Board.
  • It basically reviews the statistics in RBI‟s weekly bulletin.
Voting
  • The Governor has to call a Board meeting at least six times in a year, and at least once each quarter.
  • The Act specifies that the deputy governors and the government nominees (6) may attend any or all meetings of the Central Board, but are not entitled to vote.
  • This means that in the current Board, the four deputy governors and the two secretaries from the Ministry of Finance cannot vote.
  • In the event of equality of votes, the Act states that the Governor has a second or casting vote.
  • A meeting can be called if a minimum of four Directors ask the Governor to call a meeting.
  • The Governor or, if for any reason unable to attend, the Deputy Governor authorised by the him to vote for him, presides the Board meetings. In the event of split votes, the Governor has a second, or deciding vote.
  • Two key sub-committees that are chaired by the Governor Are Board for Financial Supervision (BFS) – {Bank, Monetary Policy} and Board for Payment and Settlement Systems (BPSS) – {Payment Money transaction, UPI}
  • The BFS meets every month and includes deputy governors as ex-officio members and four other directors.
  • It undertakes supervision of banks, financial institutions and NBFCs.
  • The BPSS takes care of paper-based and electronic systems such as NEFT and RTGS. There are other sub-committees on information technology, building, audit and risk management, and HR management.
  • However recently simmering differences between the Reserve Bank of India (RBI) and the Central government over issues of public sector bank regulation, resolution of distressed assets and the central bank’s reserves, Transfer of Surplus, independent payments bank regulator, easing credit to small firms have raised questions about the independence of RBI.
Central Board – Reserve Bank of India- To play its role effectively, autonomy in its functioning is sine qua non for RBI. However, the independence of RBI has been challenged many times due to a continued tug of war for wresting more power between the bank and the govt.
The main reasons for this have been:
  1. RBI‟s failure to check the growth of Non-Performing Assets.
  2. Liquidity management, tight money vs cheap money
  3. Corrective measures taken by RBI to clean up the banking system which are not seen very positively by the government (Prompt Corrective Action and Capital Adequacy Ratio)
  4. Clash between short term populist agenda of the government and long term view for price stability taken by RBI.
  5. Regulation of Public Sector Banks: One important limitation is that the Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs) – such as asset divestiture, replacement of management and Board, license revocation, and resolution actions such as mergers or sales –– all of which it can and does deploy effectively in case of private banks.
  6. Erosion of statutory powers of the central bank through piece-meal legislative amendments that directly or indirectly eat at separation of the central bank from the government.
Reserve Bank of India – Section 7
(RBI act Independently, whenever Central government need give binding order to RBI)
  • Section 7 of the RBI Act has come into spotlight amid the war between the Central government and the Reserve Bank of India (RBI).
  • The provision in the RBI Act empowers the government to issue directions to the RBI.
  • The government has invoked Section 7 which has never been used before. Exercising powers under this section, the government has sent several letters to the RBI governor Urjit Patel.
  • The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government. This provision in the RBI Act is contained in its.
(Because of invoking Section 7 first time in 2019, So RBI governor Urjit Patel)
Section 7 which says:
  1. The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
  2. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank. (If section 7 is Invoked power of RBI Governor can be sent to RBI board. Board decision is Final).
  3. Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
Y V Reddy Suggestion on RBI Autonomy
  • On Day to Day Matter give Full autonomy
  • On Policy matter, Consult with Government.
  • On Structural Reforms RBI working on the advice of Government (Because Government is responsible to Board)

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