The Reserve Bank of India (RBI) is considered the apex financial institution of the Indian financial system. The RBI was established in 1935, as per the RBI Act of 1934. Read more!
Overview of the RBI Act
The Reserve Bank of India (RBI) is the financial institution of India that has an impact on the management of commercial banks in more than one manner, such as through the formation of numerous policies, rules, regulations, and directions. A country’s overall economy and steadiness are based on the payment and settlement mechanisms operating in that nation.
Consequently, several regulators in India are revising their policies and operating models to confirm and run the advancement of the payment mechanism at the central level. Any country’s central bank must guarantee and develop the appropriate payment mechanism at the national level. This responsibility in India is entrusted to the RBI.
Objectives of the RBI Act
Some of the main objectives of RBI Act include the following:
Primary Objectives of the RBI Act
As per the RBI Act 1934, the following are the primary objectives of the RBI:
- To govern the issue of bank notes.
- The central bank maintains reserves intending to secure monetary stability in the country.
- To run the currency and credit systems of the nation to its benefit.
Free From Political Influence
Another objective of the RBI Act is to keep itself free from any political impact and engage in effective activities to maintain financial stability or credit.
Fundamental Objectives
The fundamental objectives of the RBI Act are to perform central banking functions purely in the Indian financial market, which means to act as
- Banker’s bank
- Note-issuing authority
- Banker to government
Encourage Growth
the RBI aims to promote the growth of the economy of the country within the framework of the usual economic policy of the government, as per the requirement of maintaining price stability.
Advancement of the Economy of India
A major objective of the RBI is to support the planned advancement of the country’s economy. Apart from the conventional functions of the central bank, with the introduction of the five-year programmes in the nation, the RBI is shifting ahead in executing a host of development and promotional activities that are usually beyond the purview of conventional banking functions.
Overall, the main emphasis of the RBI is to monitor and make rules and regulations for the financial sector that includes financial organisations, commercial banks, and non-banking financial organisations. Some comprehensive and important influences of the RBI are to restructure the bank inspection process and stimulate the auditor’s role in the banking sector.
Establishment and Incorporation of the RBI
The RBI was established in 1935, as per the RBI Act of 1934. It is located in Mumbai and is owned and regulated by the government of India. The directors of the Central Bank are engaged in regulating the operations of the RBI, which includes 21 members recruited through the Indian Government.
The directors of the central board include both official and non-official directors. The official director will be the governor, recruited for a period of four years, along with four additional deputy directors. Further, in the non-official directorship, ten directors are selected from distinct fields in addition to two government officials.
Establishment
A bank to be recognised by the RBI should be formed to take over the management of the currency from the government and run the banking operations as per the provisions of the RBI Act 1934.
Body Corporate
The RBI is formed as a body corporate, possessing perpetual succession and a common seal. It shall sue or be sued by the said name.
Offices and Branches
The RBI shall set up offices in Delhi, Kolkata, Madras, and Mumbai and may establish offices or branches at any other place in the country with the prior approval of the central government.
Functions of the RBI
The main function of the RBI under numerous authorities is as follows:
Supervisory and Regulatory Authority
- The function to govern and supervise has been provided to the RBI as per the provisions stated under the Banking Regulation Act of 1949.
- To safeguard the interest of every investor and offer economic and cost-efficient services to the public.
- To establish particular parameters for the country’s banks, which will comprise financial activities within which the banking system is to run?
- To carry out periodic inspections of banks or to call for returns and essential information from them. Therefore, it can be said that the supervisory functions of the RBI have significantly contributed to the improvement of standard banking in the country.
Monetary Authority
- To create and apply the monetary policies of India.
- To keep price stability around entire sectors along with the growth objectives.
Currency Authority
- To introduce, exchange, or destroy currency that is not suitable for circulation.
- To offer sufficient currency notes and coins of the prescribed quality to the people
Foreign Exchange Management
- To monitor the Foreign Exchange Management Act of 1999.
- To support the external trade and advancement of the foreign exchange market in India.
- Implement a penalty for the contravention of the Foreign Exchange Management Act 1999.
- To provide authorisation to any person engaged in dealing in foreign exchange or foreign securities as an authorised dealer, off-shore banking unit, or in any other way that seems suitable.
- To cancel an authorisation issued to an authorised dealer in the interest of the public or if there is any failure by the authorised person to comply with the situation and terms subject to which authorisation is provided.
Banker to Government
- It is one of the significant functions of the RBI, which means it acts as a government banker, agent, and advisor.
- The RBI is the agent of India’s state and central governments.
Other Functions
To support national banking and other financial goals, the RBI shall promote and execute promotional activities.
To provide banking solutions to the state and central governments of the country.
To perform activities as a banker for the state and central governments of the country.
To be the main banker for each bank around the nation and keep all the banking accounts of each scheduled bank.
Regulating the Issue of Banknotes
A fundamental objective of the SBI is to regulate the issuance of banknotes. By effectively managing the currency in circulation, the bank ensures the stability and integrity of the monetary system, fostering trust in the financial transactions of the nation.
Securing Monetary Stability
The SBI is committed to maintaining monetary stability within the country. This objective involves implementing measures to control inflation, manage interest rates, and create an environment conducive to sustainable economic growth. By doing so, the SBI contributes to fostering economic stability and investor confidence.
Modernising Monetary Policy Framework:
To address evolving economic challenges, the SBI focuses on modernising the monetary policy framework. By adopting innovative strategies and leveraging advanced financial tools, the bank aims to proactively respond to economic fluctuations, ensuring adaptability and resilience in the face of dynamic financial scenarios.
Supervising and Initiating Financial Sector Reforms:
The SBI takes a leadership role in supervising and initiating reforms within the financial sector. This encompasses overseeing financial institutions, commercial banks, and non-banking financial companies. The SBI actively engages in restructuring bank inspections and reinforcing the role of statutory auditors in the banking system to enhance transparency and accountability.
Undertaking Initiatives for Economic Challenges:
As part of its objectives, the SBI takes initiatives to address economic challenges head-on. This involves devising and implementing strategic measures to navigate uncertainties and promote sustained economic development. The bank’s proactive stance positions it as a key player in steering the financial sector towards growth and stability.
Functions of the RBI
Supervisory and Regulatory Authority:
The RBI exercises a vigilant supervisory role, setting specific parameters for banks nationwide. This includes defining the financial operations framework within which the banking and financial systems operate. The overarching goal is to protect the interests of investors and ensure the delivery of economic and cost-efficient banking services to the public.
Monetary Authority:
As the principal architect of monetary policies, the RBI formulates and implements strategies that govern the nation’s monetary dynamics. These policies are crafted to maintain stability in prices across all sectors, fostering both economic growth and stability.
Currency Authority:
The RBI holds the pivotal responsibility of issuing, exchanging, or eliminating currency that is unfit for circulation. Ensuring an adequate supply of currency notes and coins of standardised quality to the public is integral to its role as the Currency Authority.
Foreign Exchange Management:
Overseeing the Foreign Exchange Management Act, 1999, the RBI plays a crucial role in facilitating external trade and nurturing the development of the foreign exchange market within the country. This function is paramount in enhancing India’s global economic presence.
Other Functions:
Beyond its regulatory and monetary functions, the RBI actively promotes and performs functions to support national banking and other financial objectives. Serving as the banker for the Central and State Governments, the RBI also acts as the Chief Banker for every scheduled bank in the country, maintaining all their banking accounts.
FAQs
What are the main functions of RBI?
The main functions of the Reserve Bank of India (RBI) include formulating and implementing monetary policies, issuing currency, regulating and supervising banks, managing foreign exchange, and promoting financial stability and economic growth.
What is the primary objective of RBI's monetary policy to maintain?
The primary objective of RBI's monetary policy is to maintain price stability in the economy, ensuring control over inflation and fostering sustainable economic growth.
What are the objectives of a bank?
The objectives of a bank include facilitating economic development, providing a safe and secure place for depositors, offering loans, promoting financial stability, and contributing to the overall growth of the economy.
What are the 10 functions of RBI?
The ten functions of RBI encompass issuing currency, formulating monetary policies, regulating and supervising banks, managing foreign exchange, acting as the banker to the government, promoting financial stability, developing the money and forex markets, and undertaking developmental activities.
What is the objective of the role of RBI in control of credit?
The objective of RBI's role in controlling credit is to regulate and manage the credit flow in the economy, ensuring stability and preventing excessive credit expansion that may lead to inflation or financial instability.
What are the powers of RBI?
The powers of RBI include the authority to issue currency, formulate monetary policies, regulate and supervise banks, manage foreign exchange, and act as the lender of last resort to ensure the stability of the financial system.
What are the objectives of money?
The objectives of money include acting as a medium of exchange, unit of account, store of value, and standard of deferred payment, facilitating economic transactions, and contributing to overall economic stability.
What are the three objectives of monetary policy?
The three main objectives of monetary policy are price stability, full employment, and economic growth. Central banks, including the RBI, use various tools to achieve these goals and maintain overall economic stability.
What are the tools of RBI?
The tools of RBI include open market operations, reserve requirements (CRR and SLR), the repo rate, reverse repo rate, and qualitative measures. These tools are employed to regulate money supply, interest rates, and inflation.
What are the objectives of bank resolution?
The objectives of bank resolution include safeguarding depositors' interests, maintaining financial stability, and minimising the impact of a failing bank on the broader economy. Resolution mechanisms aim to restructure or wind down distressed banks in an orderly manner.
What is RBI and functions of RBI?
The Reserve Bank of India (RBI) is the central banking institution. Its functions include issuing currency, formulating and implementing monetary policies, regulating banks, managing foreign exchange, and promoting the stability and development of the financial system.
What is the function of RBI 5 points?
The functions of RBI in five points include issuing and managing currency, formulating monetary policies, regulating and supervising banks, managing foreign exchange, and acting as the banker to the government.
What is CRR and SLR?
CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are reserve requirements set by the RBI. CRR mandates banks to keep a certain percentage of their deposits in cash with the central bank, while SLR requires them to maintain a portion of deposits in specified liquid assets like government securities.
What is the RBI Act short note?
The RBI Act is a legislative framework that establishes the Reserve Bank of India. Enacted in 1934, it outlines the central bank's constitution, powers, and functions, providing the legal foundation for its role in the Indian financial system.
Conclusion
RBI is the central bank of India and influences the management of banks by formulating a number of policies, rules, and regulations and through its overall direction. The role of the RBI in bank management is very unique. The primary objective of the RBI Act is to maintain financial stability in India. For more information about the objectives of RBI, connect with Vakilsearch.
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