RBI – Things Must Know About RBI | Complete Case Study

RBI stands for (Reserve bank of India). It is a Central bank of India that handles the total banking department purpose considering from loans to accounts, credit to debits, and monetizing to reimbursement.

RBI has four zonal offices in Mumbai, Kolkata, Delhi, and Chennai and has nineteen regional offices at Thiruvananthapuram, Patna, Nagpur, Lucknow, Mumbai, Kochi, Kolkata, Jammu, Kanpur, Chennai, Delhi, Guwahati, Bhubaneshwar, Bhopal, Hyderabad, Ahmedabad, Chandigarh, Jaipur, and Bangalore.

Historical Background

When RBI was formed as a Private Bank and it was Recommended by Hilton Young Commission or The Royal Commission on Indian Currency and Finance in 1926 which recommend the establishment of a central bank.

It was established on 1st April 1935 under the RBI Act of 1934 at Calcutta as the majority of trade of EIC (East India Company) was done from Calcutta which Later on shifted to then Bombay in 1937.

RBI was formed with an initial Paid Up capital of 5 Crore Rs. RBI was Nationalized in 1949.

Preamble of RBI

“To regulate the issue of Bank Notes and keeping of the reserves with a view of securing monetary stablilty in india and Generally to operate the currency and credit system of country to its advantage”

RBI – Organisation and Functions

Governors of RBI

No.	Governor of RBI	Year
First	Sir Osborne Smith	1935- 37
First Indian	C.V Deshmukh	1943- 49
Second	Benegal Rama Rau	1949- 57
Third	K. G. Ambegaonkar	1957
Fourth	H V R Iyengar	1957- 62
Fifth	P C Bhattacharya	1962- 67
Sixth	L K Jha	1967- 70
Seventh	B N Adarkar	1970
Eighth	S Jagannathan	1970- 75
Ninth	N C Sen Gupta	1975
Tenth	K R Puri	1975- 77
Eleventh	M Narasimham	1977
Twelveth	Dr. I G Patel	1977- 82
Thirteenth	Dr. Manmohan Singh	1982- 85
Fourteenth	A Ghosh	1985
Fifteenth	R N Malhotra	1985- 90
Sixteenth	S Venkataraman	1990- 92
seventeenth	Dr. C Rangarajan	1992- 97
eighteenth	Dr. Bimal Jalan	1997- 2003
nineteenth	Dr. Y V Reddy	2003- 08
twentieth	Dr. D. Subbarao	2008- 13
twenty-first	Dr. Raghuram Rajan	2013- 16
twenty-second	Dr. Urjit R. Patel	2016- 18
twenty-third	Shri Shaktikanta Das	2018- Till Date

Rbi’s financial year start’s from 1st July to 30th June

Structure of RBI

Official Directors	Governor + 4 Official Deputy Directors (from Central Govt)
Non-Official Directors	10 Directors + 2 Government Officers + 4 other Government Officials

Hierarchy in RBI

1. Governors
2. Deputy Governors
3. Executive Directors
4. Principal Chief General Managers
5. Chief General Manager
6. Deputy General Manager
7. Assistant General Manager
8. Managers
9. Assistant Manager
10. Supporting Staff

Function of RBI

1. Currency

Currency Issuing, Forfeiting, Re-Issuing, and Printing functions are completely looked after by RBI

2. Development Role

Development of the Indian Banking System and Structure is another role of RBI where it looks at the functions such as Maintaining the Cash Flow, Development of Banks, Helping the Government in issuing Bonds and Securities

3. Banker To Government

Maintaining the Account of the Government by keeping the track of Savings, and Expenses, Tracking the Assets of the Government.

Monitors the integration of Central and State Government systems with Reserve Bank’s core banking solution – e-Kuber – for direct collection of their e-receipts and making e-payments.

4. Bankers To Banks

RBI is also Known as Bankers to Banks as it provides Loans to the banks on interest decided by RBI called Repo Rate or Bank Rate (Depending on the tenure) or Keeps the Surplus at the Rate called Reverse Repo Rate.

5. Monetary Policy

To understand the monetary policy we need to understand the Inflation Concept.

Inflation

Definition: A General increase in rising and fall in the purchasing value of money is called Inflation

Inflation is considered by money supply and Demand. The amount of money supplied into the market for expense also increases the Demand for money in the economy so the Inflation is going to increase similarly if money supply and demand decrease Inflation will also be decreased

It is the role of RBI to maintain the Inflation in the Country between the range of 2% to 6% for which RBI uses the Monetary Policy Tools for maintaining price stability and sustainable growth.

The monetary policy includes the amount of currency inflow in an economy which can be directly or indirectly linked with macroeconomic factors like Inflation, liquidity, overall growth of an economy and etc.

RBI Act, 1934 also provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by its notification in the Official Gazette. The first such MPC was constituted on September 29, 2016.

There are 3 types of Monetary policy Stance

1. Accommodative stances

An Accommodative stance means the Central Bank or RBI wants to increase the Inflation so there will be a reduction in the Interest Rate. The Loose money policy will be implemented.

2. Neutral stances

A Neutral Stance means the Central Bank or RBI won’t make any changes and keep the growth in the same phase.

3. Hawkish stances

A hawkish stance means the Central Bank or RBI wants to reduce the Inflation so there will be an increase in the Interest Rate. The tight money policy will be implemented.

Credit Control Measures or Instruments of Monetary Policy

• CRR (Cash Reserve ratio)

CRR is a policy asked banks to deposit a certain percentage (3% – 15%) of the total amount towards RBI as a reserve. This rule is for every bank. Cause RBI provides a license to them for all transactions. The amount percentage is kept in the form of Cash Only and the Bank didn’t receive any profit from it

• SLR (Statutory liquidity ratio)

SLR is the second layer of security. Here the reservation kept of that term which is more into liquid form (easily useable) asset such as gold, cash, government-approved security.
SLR is a percentage of the total amount of deposit that banks need to keep for themself for security. But banks can generate profit or income through SLR, They can put that money as the government approves or paper gold approval which can get a refund through customer or investor.

• Liquidity Adjustment Facility

Recommended by Narasimhan Committee in 1998. LAF includes 2 types Repo Rate and Reverse Repo Rate. These Rates are been decided by the Monetary policy committee.

• Repo rate

The term repo represents reputation. The bank who have a high reputation in the market (which is RBI) provides a loan to other banks for a short-term period basically it is of 90 days was RBI charges a certain percentage on the total amount for that particular period keeping the G-Sec as collateral.

• Reverse repo rate

The term reverses repo rate is totally opposite from the Repo rate as its name. Here the bank provides a loan to RBI with a certain interest rate.

Why does RBI need to take a Loan?

To control the supply of money for economic causes RBI needs to control the inflation and maintain the economic growth which works on the simple Law of Demand and Supply.

• Marginal Standing Facility

To provide the Bank with Overnight Money due to the Cash Crunch RBI provides Overnight Loans to the Scheduled Commercial Banks at Intrest Rate known as MSF. Usually used to maintain SLR portfolio.

6. Fiscal Policy

RBI also plays an important role in deciding the Fiscal policy where its role is to decide the expenditure of the Government and Taxes

7. Foreign Reserve

RBI plays a crucial role in maintaining and Exchanging the Foreign Reserves.

8. Advisory Role

RBI is an Advisor not only to the Government but also to the Banks by advising them on Investments Avenues and Opportunities and also Cautions them.

“We are a democracy, we have the rule of law and India doesn’t have any expansionary ambitions. We don’t foresee sanctions but yes, it is something, going forward, now I think every country will start thinking about it.”

WORDS BY “SHAKTI KANT DAS (RBI GOVERNOR)”

Reports Released by RBI

• Annual Report (Annual)
• Report on Trend and Progress of Banking in India (Annual)
• Financial Stability Report (Half-Yearly)
• Monetary Policy Report (Half-Yearly)
• Report on Foreign Exchange Reserves (Half-Yearly)

Legal Frameworks of RBI

I. Acts administered by Reserve Bank of India

• Reserve Bank of India Act, 1934
• Public Debt Act, 1944/Government Securities Act, 2006
• Government Securities Regulations, 2007
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II)
• Credit Information Companies(Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007
  • Payment and Settlement Systems Act, 2007 As Amended up to 2019
  • Payment and Settlement Systems Regulations, 2008 As Amended up to 2022
• Factoring Regulation Act, 2011

II. Other relevant Acts

• Negotiable Instruments Act, 1881
• Bankers’ Books Evidence Act, 1891
• State Bank of India Act, 1955
• Companies Act, 1956/ Companies Act, 2013
• Securities Contract (Regulation) Act, 1956
• State Bank of India Subsidiary Banks) Act, 1959
• Deposit Insurance and Credit Guarantee Corporation Act, 1961
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
• Regional Rural Banks Act, 1976
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
• National Bank for Agriculture and Rural Development Act, 1981
• National Housing Bank Act, 1987
• Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• Competition Act, 2002
• Indian Coinage Act, 2011: Governs currency and coins
• Banking Secrecy Act
• The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
• The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993

Departments in RBI

RBI Recently started buying Gold let’s know Why?

Gold

RBI started buying gold steadily over the few past years. RBI wants to diversify its assets to hold foreign exchange reserves in another country. As the world knows the all foreign transaction takes place in US Dollar but India is thinking now of divers the foreign exchange by gold because

-Foreign exchange reserves are assets denominated in a foreign currency that is held by a nation’s central bank

-These may include foreign currencies, bonds, treasury, bills, and other government securities.

For example, Russia had kept their foreign exchange in different banks worldwide but due to their sanctions Russia’s financial reserve got frizz that they are not able to pay their bills hence they have to face crises due to over-dependent on foreign currency and exchanges therefore India trying to diversify.
In 2022 India added 65.11 tones of gold to their account
The reason you purchase is India trying to diversify its Investment. The largest gold was brought in the fiscal year 2010 from the international monetary fund (IMF) which was 200 tonnes.
Gold buying by the central bank surged in the first half of the year

1. Thailand – Thailand purchase 90.2 tons of gold
2. Hungary – Hungary purchase 62.0 tons of gold
3. Brazil- Brazil purchased 53.7 tons of gold
4. India- India purchase 29.0 tons of gold
5. Uzbekistan-Uzbekistan purchased 25.5 tons of gold
6. Turkey- Turkey purchased 13.5 tons of gold
7. Cambodia- Cambodia purchased 5.0 tons of gold
8. Poland- Poland purchased 3.1 tons of gold
9. Mongolia- Mongolia purchased 1.8 tons of gold
   Central banks across the world have been loading up on gold over the past several years.
   Reason

There are main four reasons why countries started buying gold

• Dependency
  Decrease the dependency on dollars and Euros so the country becomes more stable because other assets in such by they are using gold
• Safety (value)
  To increase the safety of foreign exchange and gold is more secure and stable than liquid funds
• Liquidity
  Easily convertible into cash and easy for exchange.
• Inflation
  When Inflation increases the value of money decreases so, in such a case if there will be saving in terms of gold it will be more secure and much more average to its original base price.