Anupriya Chauhan and Vanshika Malik
The Reserve Bank of India (RBI) was established during the British rule in 1935. Its form was influenced by two different positions, but it was agreed that it should be independent of the government. British rulers were influenced by the prevailing currency orthodoxy. The function of collecting and using money is separated from the function of creating money, and nationalists want the Reserve Bank of India to be independent in order to protect it from interference by foreign authorities. This leaves several gray areas to explain the relationship between the government and the Reserve Bank of India. As a result, the executive branch has violated the autonomy of the Reserve Bank of India from the very beginning, as evidenced by the Indian government’s financial officers in the government formation elections. The Board of Governors of the Reserve Bank of India and its first governor, Sir Osborne Smith, were actually fired for obvious reasons. The reason was that there were differences on the issue of fixing interest rates. During World War II, the Reserve Bank of India’s monetary mission was further restricted because it was forced to implement a low interest rate policy initiated by the government to reduce the cost of war financing and increase the money supply by accumulating British pounds.
Evolution of RBI
The Reserve Bank of India is the main financial institution in the country’s currency system. The Reserve Bank of India (RBI) was established as the Central Bank of India on April 1, 1935 under the Reserve Bank of India Act 1934.
The depository financial institution of Asian nation is that the financial organisation of the country. Central banks are a comparatively recent innovation and most central banks, as we all know them today, were established round the early twentieth century.
The Reserve Bank of India was discovered on the premise of the recommendations of the Hilton Young Commission. The Federal Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, that commenced operations on Apr 1, 1935.
The Bank was entrenched to
- Regulate the difficulty of banknotes
- Maintain reserves with a read to securing financial stability and
- to control the credit and currency system of the country to its advantage.
The Bank began its operations by seizing from the govt the functions to date being performed by the Controller of Currency and from the Imperial Bank of India, the management of state accounts and public debt. the prevailing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, urban center and Cawnpore (Kanpur) became branches of the difficulty Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.
Asian country (Myanmar) seceded from the Asian nationn Union in 1937 however the depository financial institution continued to act because the financial organisation for Burma until Japanese Occupation of Burma and later upto April, 1947. once the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the banking concern of Pakistan commenced operations. The Bank, that was originally discovered as a shareholder’ bank, was nationalised in 1949.
a motivating feature of the Reserve Bank of India was that at its terribly inception, the Bank was seen as taking part in a special role within the context of development, particularly Agriculture. once Asian nation commenced its set up endeavours, the event role of the Bank came into focus, especially in the sixties when the Reserve Bank, in several ways, pioneered the idea and practise of victimization finance to catalyze development. The Bank was conjointly instrumental in institutional development and helped discovered insitutions just like the Deposit Insurance and Credit Guarantee Corporation of India, the unit investment trust of India, the commercial Development Bank of India, the commercial bank of Agriculture and Rural Development, the Discount and Finance House of Asian nation and so on to make the monetary infrastructure of the country.
With liberalisation, the Bank’ focus has shifted back to core central banking functions like financial Policy, Bank management and Regulation, and Overseeing the Payments System and onto developing the financial markets.
The country has tried many times to set up a central bank. The first attempt dates back to 1773 when the Governor of Bengal (later Governor) Warren Hastings believed the country needed a central bank and proposed the establishment of the General Bank of Bangladesh and Bihar.
The 1913 Chamberlain Committee report also raised the question of establishing a central bank in the country. Alongside this report, Professor JMKeynes also mentioned the first comprehensive plan by the Central Bank of India. until the outbreak of the First World War.
In 1921 the three presidential banks merged to form the Imperial Bank of India. Although still largely a commercial bank, it performed some of the functions of a central bank in particular before the Reserve Bank was formed. of India in 1935, the Imperial Bank served as the national banker and part of the bank. The Royal Monetary Commission and Finance of India again emphasized the establishment of a central bank in India. (Commonly known as the Hilton Young Committee) in 1926.The committee suggested naming the country’s central bank the Reserve Bank of India. In January 1927 a corresponding bill was submitted to the legislative assembly, but it was abandoned for constitutional reasons. In 1931, the Central Bank of India’s Commission of Inquiry strongly recommended the establishment of a reserve bank. After the publication of the “White Paper on Constitutional Reform in India”, it again attracted the country’s attention. The White Paper assumes that if a reserve bank is set up with no political influence, the UK will shift responsibility from the central government to the Indians. Finally, the new bill on the subject was presented and passed to the Indian Legislative Assembly on September 8, 1933, and approved by the Governor on March 6, 1934. Becomes the Reserve Bank of India Act 1934. The Reserve Bank of India was established in accordance with the Act and began operating on April 1, 1935.
From Private to Public Ownership:
The Reserve Bank was originally founded as a shareholder bank that mimicked a large foreign central bank. The bank back then. The bank’s authorized capital for full payment is 5 million rupees divided into fractions of rupees. 100,497,80,000 are signed by private shareholders or rupees. 2. The central government signed 20,000 shares to sell 2,200 shares at par to bank directors (including members of local councils) who sought a minimum rating on the shares. The bank’s share capital has not changed so far.
RBI and its Functions :-
- Monetary Authority:
It implements and monitors the monetary policy and ensures price stability while
keeping in mind the objective of growth. An amendment to RBI Act, 1934, was made in May 2016, providing the statutory basis for the implementation of the flexible inflation targeting framework. Section 45ZB of the amended RBI Act, 1934, also provides for an empowered sixmember Monetary Policy Committee (MPC) to be constituted by the Central Government by notification in the Official Gazette Monetary Policy Committee It was created in 2016. It was created to bring transparency and accountability in deciding monetary policy. MPC determines the policy interest rate required to achieve the inflation target. Committee comprises of six members where Governor RBI acts as an ex-officio chairman. Three members are from RBI and three are selected by government. Inflation target is to be set once in a five year. It is set by the Government of India, in consultation with the Reserve Bank. Current inflation target is pegged at 4% with -2/+2 tolerance till March 31, 2021.
- Regulator and Supervisor of the Financial System:
Prescribes broad parameters of banking operations within which the country’s banking and financial system functions such as issuing licenses, branch expansion, liquidity of assets, amalgamation of banks etc. Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services such as commercial banking, cooperative banking, to the public.
- Manager of Foreign Exchange:
Manages the Foreign Exchange reserves of India. It facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India. It also maintains external value of rupee.
- Issuer of Currency:
Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
- Developmental Role:
Performs a wide range of promotional functions to support national objectives such as making institutional arrangements for rural or agricultural finance. Commercial banks lend loans to small-scale industrial units as per the directives (Priority Sector Lending) issued by the Reserve Bank of India time to time.
- Financial Inclusion:
The Reserve Bank has selected a bank led model for financial inclusion in India. RBI has undertaken a series of policy measures. Some of the important ones are: No Frills Accounts – account either with nil or very low minimum balance as well as charges that would make such accounts accessible to vast sections of population. Use of Technology – devices such as ATMs, hand held devices to identify user accounts through a card and biometric identifier, Deposit taking machines and Internet banking and Mobile banking facility to provide the banking services to all sections of society with more ease.
- Related Functions:
Banker to the Government: performs merchant banking function for the central and the state governments. It is entrusted with central govt.’s money, remittances, exchange and manages its public debt as well. Banker to banks: maintains banking accounts of all scheduled banks. It also acts as lender of last resorts by providing fund to banks.
The central bank of India, RBI is also regarded as a bank of banks owing to the functions of RBI. It was established on April 1, 1935, under the Reserve Bank of India Act, 1934. In the beginning, the headquarters of RBI was established in Calcutta. However, soon after, in 1937, it was permanently shifted to Mumbai.
As of March 2021, the Governor of the Reserve Bank of India is Mr. Shaktikanta Das. He is the 25th RBI Governor and all the RBI functions are supervised by him.