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RESERVE BANK OF INDIA


Overview

Since it began operations in 1935, the Reserve Bank of India has stood at the centre of India’s financial system, with a fundamental commitment to maintaining the nation’s monetary and financial stability. From ensuring stability of interest and exchange rates to providing liquidity and an adequate supply of currency and credit for the real sector; from ensuring bank penetration and safety of depositors’ funds to promoting and developing financial institutions and markets, and maintaining the stability of the financial system through continued macro-financial surveillance, the Reserve Bank plays a crucial role in the economy. Their decisions touch the daily life of all Indians and help chart the country’s current and future economic and financial course. Over the years, their specific roles and functions have evolved. However, there have been certain constants, such as the integrity and professionalism with which the Reserve Bank discharges its mandate.


Origin and History

The origin of the Reserve Bank can be traced to 1926, when the Royal Commission on Indian Currency and Finance—also known as the Hilton-Young Commission— recommended the creation of a central bank to separate the control of currency and credit from the government and to augment banking facilities throughout the country. The Reserve Bank of India Act of 1934 established the Reserve Bank as the banker to the central government and set in motion a series of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and functions have undergone numerous changes—as the nature of the Indian economy has changed.

1935 - Operations begin on April 1.
1949 - Nationalization of the Reserve Bank; Banking Regulation Act enacted.
1950 - India embarks on planned economic development. The Reserve Bank becomes active agent and participant.
1966 - Cooperative banks come under RBI regulation.
1969 - Nationalization of 14 major commercial banks (six more were nationalized in 1980).
1973 - RBI strengthens exchange controls by amending Foreign Exchange Regulation Act (FERA).
1974 - Introduction of priority sector lending targets.
1975 - Regional Rural Banks set up.
1985 - Financial market reforms begin with Sukhamoy Chakravarty and Vaghul Committee Reports.
1991 - India faces balance of payment crisis; pledges gold to shore up reserves. Rupee devalued.
1993 - Exchange rate becomes market determined.
1994 - Board for Financial Supervision set up.
1997 - Ad hoc treasury bills phased out ending automatic monetization.
1997 - Regulation of Non-Banking Finance Companies strengthened.
1998 - Multiple Indicator approach for monetary policy adopted.
2000 - Foreign Exchange Management Act replaces FERA.
2002 - Clearing Corporation of India Limited (CCIL) commences clearing and settlement in government securities.
2003 - Fiscal Responsibility and Budget Management Act enacted.
2004 - Transition to a full-fledged daily liquidity adjustment facility (LAF) completed. Market Stabilization Scheme (MSS) introduced to sterilize capital flows.
2004 - Real Time Gross Settlement System commences
2005 - Focus on financial inclusion and increasing the outreach of the banking sector.
2006 - RBI empowered to regulate money, forex, G-sec and gold related securities market.
2007 - RBI empowered to regulate Payment System
2008/9 - Pro-active efforts to minimize impact of global financial crisis
2010 - Year-long Platinum Jubilee celebrations
2011 - Positioning RBI as a knowledge institution


Structure, Organization and Governance

The Governor is the Reserve Bank’s chief executive. The Governor supervises and directs the affairs and business of the Reserve Bank. The management team also includes Deputy Governors and Executive Directors.


Governor - Deputy Governor - Executive Directors



The RBI is made up of:

  • 26 Departments: These focus on policy issues in the Reserve Bank’s functional areas and internal operations.
  • 28 Regional Offices and Branches: These are the Reserve Bank’s operational arms and customer interfaces, headed by Regional Directors. Smaller branches / sub-offices are headed by a General Manager / Deputy General Manager. 
  • Training centres: The Reserve Bank Staff College at Chennai addresses the training needs of RBI officers; the College of Agricultural Banking at Pune trains staff of co-operative and commercial banks, including regional rural banks. The Zonal Training Centres, located at regional offices, train non-executive staff.
  • Research institutes: RBI-funded institutions to advance training and research on banking issues, economic growth and banking technology, such as, National Institute of Bank Management (NIBM) at Pune, Indira Gandhi Institute of Development Research (IGIDR) at Mumbai, and Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad. 
  • Subsidiaries: Fully-owned subsidiaries include National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL). The Reserve Bank also has a majority stake in the National Bank for Agriculture and Rural Development (NABARD).


Departments of RBI:


Markets

  • Internal Debt Management Department
  • Department of External Investments and Operations 
  • Monetary Policy Department
  • Financial Markets Department 

Regulation, Supervision and Financial Stability

  • Department of Banking Supervision
  • Department of Banking Operations and Development 
  • Department of Non-Banking Supervision
  • Urban Banks Department
  • Rural Planning and Credit Department 
  • Foreign Exchange Department
  • Financial Stability Unit

Research

  • Department of Economic and Policy Research
  • Department of Statistics and Information Management 

Services

  • Department of Government and Bank Accounts
  • Department of Currency Management 
  • Department of Payment and Settlement System
  • Customer Service Department 

Support

  • Premises Department
  • Secretary’s Department 
  • Rajbhasha Department
  • Inspection Department 
  • Legal Department
  • Human Resource Management Department 
  • Department of Communication
  • Department of Information Technology 
  • Department of Expenditure and Budgetary Control 


Main Activities


I. Monetary Authority

Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal: achieving specific economic objectives, such as low and stable inflation and promoting growth.

Tools:


Direct Instruments:

  • Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank.
  • Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold.
  • Refinance facilities: Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect Instruments

  • Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral.
  • Repo/Reverse Repo Rate: These rates under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in other segments of the financial market and the real economy.
  • Open Market Operations (OMO): Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.
  • Marginal Standing Facility (MSF): was instituted under which scheduled commercial banks can borrow over night at their discretion up to one per cent of their respective NDTL at 100 basis points above the repo rate to provide a safety valve against unanticipated liquidity shocks
  • Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.
  • Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills. The mobilized cash is held in a separate government account with the Reserve Bank.

II. Issuer of Currency

The Reserve Bank is the nation’s sole note issuing authority. Along with the Government of India, we are responsible for the design and production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes. The Reserve Bank also makes sure there is an adequate supply of coins, produced by the government. In consultation with the government, we routinely address security issues and target ways to enhance security features to reduce the risk of counterfeiting or forgery.

Four printing presses actively print notes: Dewas in Madhya Pradesh, Nasik in Maharashtra, Mysore in Karnataka, and Salboni in West Bengal. The presses in Madhya Pradesh and Maharashtra are owned by the Security Printing and Minting Corporation of India (SPMCIL), a wholly owned company of the Government of India. The presses in Karnataka and West Bengal are set up by Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of the Reserve Bank. Coins are minted by the Government of India. RBI is the agent of the Government for distribution, issue and handling of coins. Four mints are in operation: Mumbai, Noida in Uttar Pradesh, Kolkata, and Hyderabad.

RBI’s Anti-counterfeiting Measures

  • Continual upgrades of bank note security features
  • Public awareness campaigns to educate citizens to help prevent circulation of forged or counterfeit notes
  • Installation of note sorting machines

RBI’s Clean Note Policy

  • Education campaign on preferred way to handle notes: no stapling, writing, excessive folding and the like.
  • Timely removal of soiled notes: use of currency verification and processing systems and sorting machines.
  • Exchange facility for torn, mutilated or defective notes: at currency chests of commercial banks and in Reserve Bank issue offices.

III. Banker and Debt Manager to Government

Managing the government’s banking transactions is a key RBI role. Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public. As a banker to the central government, the Reserve Bank maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds. We also act as the banker to those state governments that have entered into an agreement with us.

Tools:

At the end of each day, our electronic system automatically consolidates all of the government’s transactions to determine the net final position. If the balance in the government’s account shows a negative position, we extend a short-term, interest-bearing advance, called a Ways and Means Advance—WMA—the limit or amount for which is set at the beginning of each financial year in April.


The RBI’s Government Finance Operating Structure

The Reserve Bank’s Department of Government and Bank Accounts oversees governments’ banking related activities. This department encompasses:
  • Public accounts departments: manage the day-to-day aspects of Government’s banking operations. The Reserve Bank also appoints commercial banks as its agents and uses their branches for greater access to the government’s customers.
  • Public debt offices: provide depository services for government securities for banks, institutions and service government loans.
  • Central Accounts Section at Nagpur: consolidates the government’s banking transactions.

RBI as the Governments’ Debt Manager

In this role, we set policies, in consultation with the government and determine the operational aspects of raising money to help the government finance its requirements:
  • Determine the size, tenure and nature (fixed or floating rate) of the loan.
  • Define the issuing process including holding of auctions.
  • Inform the public and potential investors about upcoming government loan auctions.

IV. Banker to Banks

Like individual consumers, businesses and organizations of all kinds, banks need their own mechanism to transfer funds and settle inter-bank transactions—such as borrowing from and lending to other banks—and customer transactions. As the banker to banks, the Reserve Bank fulfills this role. In effect, all banks operating in the country have accounts with the Reserve Bank, just as individuals and businesses have accounts with their banks.

Tools:

  • Non-interest earning current accounts: Banks hold accounts with the Reserve Bank based on certain terms and conditions, such as, maintenance of minimum balances. They can hold accounts at each of our regional offices. Banks draw on these accounts to settle their obligations arising from inter-bank settlement systems. Banks can electronically transfer payments to other banks from this account, using the Real Time Gross Settlement System (RTGS).
  • Deposit Accounts Department: This department’s computerized central monitoring system helps banks manage their funds position in real time to maintain the optimum balance between surplus and deficit centres.
  • Remittance facilities: Banks and government departments can use these facilities to transfer funds.
  • Lender of the last resort: The Reserve Bank provides liquidity to banks unable to raise short-term liquid resources from the inter-bank market. Like other central banks, the Reserve Bank considers this a critical function because it protects the interests of depositors, which in turn, has a stabilizing impact on the financial system and on the economy as a whole.
  • Loans and advances: The Reserve Bank provides short-term loans and advances to banks / financial institutions, when necessary, to facilitate lending for specified purposes.

V. Regulator of the Banking System

Banks are fundamental to the nation’s financial system. The central bank has a critical role to play in ensuring the safety and soundness of the banking system—and in maintaining financial stability and public confidence in this system. As the regulator and supervisor of the banking system, the Reserve Bank protects the interests of depositors, ensures a framework for orderly development and conduct of banking operations conducive to customer interests and maintains overall financial stability through preventive and corrective measures.

Tools:

The Reserve Bank makes use of several supervisory tools:
  • On-site inspections
  • Off-site surveillance, making use of required reporting by the regulated entities
  • Thematic inspections, scrutiny and periodic meetings

The RBI’s Regulatory Role

As the nation’s financial regulator, the Reserve Bank handles a range of activities, including:
  • Licensing.
  • Prescribing capital requirements.
  • Monitoring governance.
  • Setting prudential regulations to ensure solvency and liquidity of the banks.
  • Prescribing lending to certain priority sectors of the economy.
  • Regulating interest rates in specific areas.
  • Setting appropriate regulatory norms related to income recognition, asset classification, provisioning, investment valuation, exposure limits and the like.
  • Initiating new regulation

VI. Manager of Foreign Exchange

With the transition to a market-based system for determining the external value of the Indian rupee, the foreign exchange market in India gained importance in the early reform period. In recent years, with increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market.

Tools:

The Reserve Bank is responsible for administration of the Foreign Exchange Management Act,1999 and regulates the market by issuing licenses to banks and other select institutions to act as Authorized Dealers in foreign exchange. The Foreign Exchange Department (FED) is responsible for the regulation and development of the market.
On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange arising from trade and capital transactions. The RBI’s Financial Markets Department (FMD) participates in the foreign exchange market by undertaking sales / purchases of foreign currency to ease volatility in periods of excess demand for/supply of foreign currency. The Department of External Investments and Operations (DEIO) invests the country’s foreign exchange reserves built up by purchase of foreign currency from the market. In investing its foreign assets, the Reserve Bank is guided by three principles: safety, liquidity and return.

VII. Maintaining Financial Stability

Pursuit of financial stability has emerged as a key critical policy objective for the central banks in the wake of the recent global financial crisis. Central banks have a critical role to play in achieving this objective. Though financial stability is not an explicit objective of the Reserve Bank in terms of the Reserve Bank of India Act, 1935, it has been an explicit objective of the Reserve Bank since the early 2000s.

Tools:

The Reserve Bank makes use of a variety of tools and techniques to assess the buildup of systemic risks in the economy and to provide critical inputs in this respect to its policy making departments. The tools include:
  • A Financial Stress Indicator - a contemporaneous indicator of conditions in financial markets and in the banking sector;
  • Systemic Liquidity Indicator for assessing stresses in availability of systemic liquidity;
  • A Fiscal Stress Indicator for assessing build up of risks from the fiscal;
  • A Network Model of the bilateral exposures in the financial system – for assessing the interconnectedness in the system;
  • A Banking Stability Indicator for assessing risk factors having a bearing on the stability of the banking sector; and
  • A series of Banking Stability Measures for assessing the systemic importance of individual banks.

VIII. Regulator and Supervisor of the Payment and Settlement Systems

Payment and settlement systems play an important role in improving overall economic efficiency. They consist of all the diverse arrangements that we use to systematically transfer money—currency, paper instruments such as cheques, and various electronic channels.

Tools:

The Reserve Bank has a two-tiered structure. The first tier provides the basic framework for our payment systems. The second tier focuses on supervision of this framework. As part of the basic framework, the Reserve Bank’s network of secure systems handles various types of payment and settlement activities. Most operate on the security platform of the INdian FInancial NETwork (INFINET), using digital signatures for further security of transactions. Here is an overview of the various systems used:
  • Retail payment systems: Facilitating cheque clearing, electronic funds transfer, through National Electronic Funds Transfer (NEFT), settlement of card payments and bulk payments, such as electronic clearing services. Operated through local clearing houses throughout the country.
  • Large value systems: Facilitating settlement of inter-bank transactions from financial markets. These include:
    - Real Time Gross Settlement System (RTGS): for funds transfers.
    - Securities Settlement System: for the government securities market.
    - Foreign Exchange Clearing: for transactions involving foreign currency.
  • Department of Payment and Settlement Systems: The Reserve Bank’s payment and settlement systems regulatory arm.
  • Department of Information Technology: Tech support for the payment systems and for the Reserve Bank’s internal IT systems.

IX. Developmental Role

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring credit availability to the productive sectors of the economy, establishing institutions designed to build the country’s financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.

Tools:

The Reserve Bank continues its developmental role, while specifically focusing on financial inclusion. Key tools in this on-going effort include:
  • Directed credit for lending to priority sector and weaker sections: The goal here is to facilitate/ enhance credit flow to employment intensive sectors such as agriculture, micro and small enterprises (MSE), as well as for affordable housing and education loans.
  • Lead Bank Scheme: A commercial bank is designated as a lead bank in each district in the country and this bank is responsible for ensuring banking development in the district through coordinated efforts between banks and government officials. The Reserve Bank has assigned a Lead District Manager for each district who acts as a catalytic force for promoting financial inclusion and smooth working between government and banks.
  • Sector specific refinance: The Reserve Bank makes available refinance to banks against their credit to the export sector. In exceptional circumstances, it can provide refinance against lending to other sectors.
  • Strengthening and supporting small local banks: This includes regional rural banks and cooperative banks.
  • Financial inclusion: Expanding access to finance and promoting financial literacy are a part of our outreach efforts.


For more details visit : http://www.rbi.org.in

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