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Economy: Reserve Bank of India

Economy: Reserve Bank of India

1) Establishment of RBI:
The Reserve Bank of India (RBI) was established on April 1, 1935as per the provisions of the Reserve Bank of India Act, 1934. Initially the Central Office of the Reserve Bank was established in Kolkata which was permanently shifted to Mumbai in the year 1937. The Central Office is the office where the Governor of RBI sits and where policies are laid down. Although initially it was privately owned, since the nationalization of RBI in the year 1949, it is wholly owned by the Government of India.
2) RBI's Preface:
The Reserve Bank of India's preamble describes the basic functions of the bank as follows:

“To regulate the issue of banknotes and to maintain reserves with a view to achieving monetary stability in India and for the country in general. To operate the currency and credit system in the best interest of India, to have a modern monetary policy framework to meet the challenges of a highly complex economy, to maintain price stability with the objective of growth in mind”

3) Central Board :
The functioning of the Reserve Bank is governed by the Central Board of Directors. According to the Reserve Bank of India Act of the Government of India, this board is appointed / nominated for a period of four years. The constitution of the Central Board is as follows: -

   Official Director:

 b) Non-official Director

Full-time: Governor and up to four deputy governors

Nominated by the government: ten directors and two government officials from different regions

Others: Four directors – one each from the four local boards

4) Major Functions:

Monetary Authority: -
RBI prepares, implements and monitors monetary policy. Objective: To maintain price stability keeping in mind the objective of development. The Reserve Bank does this work as per the guidelines of the Board for Financial Supervision (BFS). The Board was set up in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
Regulator and Supervisor of the Financial System:-
Sets out detailed parameters for banking operations under which the country's banking and financial system operates. Objective: To maintain public confidence in the system, protect the interest of depositors and provide affordable banking services to the general public.
Manager of Foreign Exchange: -
Manages the Foreign Exchange Management Act, 1999. Objective: To facilitate foreign trade and payments and to develop and maintain the orderly development of the foreign exchange market in India.
Issuer of Currency: -
It issues and exchanges currency or destroys currency and coins if it is not fit for circulation. Objective: To make available sufficient quantity of good quality currency notes and coins to the general public.
Developmental Role: -
To do promotional work on a large scale to support the national objectives.
Related work:
i) Banker to the Government: It plays the role of a merchant bank for the central and state governments; He also serves as their banker.
ii) Banker to Banks: Maintains bank accounts of all scheduled banks.

5) Annual Report:

The Annual Report is the Statutory Report of the Reserve Bank and is released in August every year. This is the report of the Central Board of Directors of the Reserve Bank to the Government of India and consists of; Estimation and prospects of the Indian economy; review of the state of the economy; Functions of the Reserve Bank during the year; Reserve Bank's vision and agenda for the coming year; and Annual Accounts of the Reserve Bank (July-June)

6) Report on Trend and Progress of Banking in India:

This is also a Statutory Publication presented by the Central Bank. This document, presented annually, is a review of financial sector policies and performance for the past year. Covering the period from April to March, this publication is usually released in November/December. Since December 2014 this publication is being published as a part of the Financial Stability Report.

7) Autonomy of the Reserve Bank:

Under Section 7(1) of the RBI Act, the Central Government, in consultation with the Governor of the Reserve Bank, can give such directions to the bank as may be necessary in the interest of the public. Subsequent to any such direction under section 7(2), the work of the Bank shall be delegated to a Central Board of Directors. This Board of Directors can exercise all the powers of the Bank and perform all the functions to be carried out by the Reserve Bank.
The Central Board of Directors shall have the powers of general superintendence and direction of the general affairs and business of the Bank, even in the absence of the Governor of the Reserve Bank and in his absence the Deputy Governor nominated by him under section 7(3). He will be able to exercise all the powers which are with the bank. However, there is no legal provision mandating the autonomy of RBI.
However, the RBI has always been viewed as an autonomous body, a composite body for all commercial banks – be it PSBs or private banks or foreign banks. It vests not only the powers to formulate monetary policy, but also the powers to oversee the working of all banks. For some time now, there has been a conflict between the Reserve Bank and the central government over the issue of autonomy of the central bank.
The main reasons for this are: RBI’s failure to check non-performing assets, the problem of lack of liquidity in the economy due to strict monetary policy, the corrective measures taken by the RBI to reform the banking system, which were not considered very positive by the government.

8) What is Monetary Policy Committee?

The Monetary Policy Committee (MPC), constituted by the Central Government under section 45ZB, determines the policy interest rate required to achieve the inflation target. Earlier this work was done by the Governor of the Reserve Bank. The Monetary Policy Department of the Reserve Bank assists this Committee in monetary policy formulation and contributes to the decision-making process on the policy repo rate, taking into account the views of all stakeholders in the economy and the analytical work of the Reserve Bank.

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