HISTORY

• Inspired by Dr. Ambedkar’s strategies outlined in “The Problem of the Rupee.”
• Establishment based on recommendations from the “Royal Commission on Indian Currency & Finance” (Hilton Young Commission) in 1926
• Nationalized in 1949, becoming a pivotal institution in India’s economic landscape.
• Became a member of the Asian Clearing Union, highlighting its international engagement.

CORE OBJECTIVES

• Sustain Public Confidence: Upholding trust in the financial system.
• Protect Depositors’ Interests: Safeguarding the funds of depositors.
• Provide Cost-Effective Banking: Facilitating accessible and affordable banking services, including cooperative and commercial banking.

COMPOSITION OF RBI

The Reserve Bank of India (RBI) is governed by a central board of directors appointed for a 4-year term by the Government of India as per the Reserve Bank of India Act

The composition of the Central Board:

• Governor: The executive head of RBI.
• 4 Deputy Governors: Assist the Governor in various responsibilities.
• 2 Finance Ministry Representatives: Represent the Ministry’s interests.
• 4 Directors for Local Boards: Represent local boards in Mumbai, Kolkata, Chennai, and New Delhi.

FACTS – KEY PERSONNEL

• First Governor: Sir Osborne Smith.
• First Indian Governor: C D Deshmukh.
• First Woman Deputy Governor: K J Udeshi.
• Only Prime Minister and Governor: Manmohan Singh.
• Current Governor: Shaktikanta Das.

ZONAL OFFICES AND REGIONAL PRESENCE

• Zonal Offices: New Delhi (North), Chennai (South), Kolkata (East), Mumbai (West).
• Regional Offices: 19 across India.
• Sub-offices: 11 to support regional operations.

TRAINING INSTITUTIONS

• Reserve Bank Staff College: Located in Chennai, for training RBI officers.
• College of Agricultural Banking: Situated in Pune, focuses on agricultural banking education

FUNCTIONS OF RBI

1. Monetary Authority:
   • Implements and monitors monetary policy for price stability and growth.
   • Amendment in May 2016 established the flexible inflation targeting framework.
   • Empowered six-member Monetary Policy Committee (MPC) decides policy interest rates.
   • Inflation target set once in five years by the Government of India, currently at 4% with a tolerance range of -2/+2 till March 31, 2021.
2. Regulator and Supervisor of the Financial System:
   • Prescribes banking operations parameters, issues licenses, oversees branch expansion, etc.
   • Objective: Maintain public confidence, protect depositors’ interests, and provide cost-effective banking services.
3. Manager of Foreign Exchange:
   • Manages India’s Foreign Exchange reserves.
   • Facilitates external trade and payments, promotes orderly foreign exchange market development.
   • Maintains the external value of the rupee.
4. Issuer of Currency:
   • Issues, exchanges, or destroys currency and coins.
   • Objective: Ensure an adequate supply of good-quality currency notes and coins to the public.
5. Developmental Role:
   • Supports national objectives through promotional functions, rural or agricultural finance arrangements.
   • Encourages commercial banks to lend to priority sectors like small-scale industries.
6. Financial Inclusion:
   • Adopts a bank-led model for financial inclusion.
   • Implements policies like No Frills Accounts, technology-driven banking services (ATMs, internet banking) for accessibility.
7. Related Functions:
   • Banker to the Government: Handles central and state government’s banking, public debt management.
   • Banker to Banks: Maintains banking accounts of all scheduled banks, acts as a lender of last resort.

ACTS ADMINISTERED BY RBI

• Primary Acts:
  • Reserve Bank of India Act, 1934.
  • Public Debt Act, 1944/Government Securities Act, 2006.
• Regulatory Acts:
  • Banking Regulation Act, 1949.
  • Foreign Exchange Management Act, 1999.
  • Credit Information Companies (Regulation) Act, 2005.
  • Payment and Settlement Systems Act, 2007.
• Additional Acts:
  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
  • Factoring Regulation Act, 2011

EVOLUTION OVER YEARS

• The Reforms of 1991
  • Triggered by an acute economic crisis in August 1990.
  • RBI’s actions included devaluing the rupee, allowing full convertibility on trade accounts, and deregulating interest rates.
  • Introduction of banking reforms and issuance of new private bank licenses.
• Manmohan & Pranab Era
  • Manmohan Singh’s tenure as RBI Governor saw strengthening of monetary policy and banking reforms.
  • Differences with Finance Minister Pranab Mukherjee over banking licenses.
  • Singh’s resignation threat due to disagreements on licensing foreign banks and other policy issues.
• Subbarao, Patel vs Govt
  • D Subbarao and Urjit Patel faced conflicts with the Finance Ministry during their tenures as Governors.
  • Subbarao mentioned disagreements with Finance Minister P Chidambaram.
  • Urjit Patel resigned due to a feud over surplus dividend income from the RBI.
• 2008 Crisis and After
  • Managed through prudent policies against capital inflows and rapid bank expansion pre-crisis.
  • Post-crisis, effective management strategies were implemented.
  • Raghuram Rajan introduced plans for internationalizing the rupee and boosting exports.
• Demonetisation of 2016
  • Government’s decision to demonetize high-value currency notes.
  • Resulted in liquidity shortage, economic disruptions, and challenges in remonetization.
  • RBI played a crucial role in managing the situation and maintaining credibility.
• MPC, Asset Quality Review
  • Creation of the Monetary Policy Committee (MPC) in 2016 for transparent and accountable monetary policy decisions.
  • Utilization of the Insolvency and Bankruptcy Code (IBC) to address debt issues.
  • MPC’s role in determining interest rates and maintaining asset quality.
• Covid-19 Pandemic
  • Impact on demand, production, and growth.
  • RBI’s accommodative monetary policy response to stimulate growth.
  • Focus on boosting digitization of payments, with the launch of UPI revolutionizing the payment ecosystem

CHALLENGES

RBI’s Autonomy Challenges

• Section 7 of RBI Act permits government directives post-consultation with the Governor.
• Absence of a clear legal mandate for RBI’s autonomy leads to concerns regarding external influence.
• Examples of government influence over RBI’s choices, particularly in monetary policy, regulations, and reserves management.

Inflation Failure:

• Inflation breached the 2-6 percent band for three consecutive quarters.
• Das promised a report explaining the inflation failure but its contents remain undisclosed.
• The RBI attributed the failure to global factors, which is only a partial explanation.

Acting Too Late:

• The RBI’s primary responsibility is price stability alongside growth.
• Delayed action on inflation indicates a failure in this primary responsibility.
• The central bank’s proactive stance on inflation came too late.

Crypto Conundrum:

• Crypto regulations posed challenges for the RBI.
• Supreme Court quashed the RBI’s ban on cryptocurrencies in 2018.
• Lack of regulatory clarity led to challenges in addressing crypto-related risks.

Writing Off Loans without Adequate Recovery:

• Banks reduced Gross Non-Performing Assets (GNPA) to a 10-year low of 3.9% by writing off loans, but this doesn’t address the root causes of NPAs.
• Concerns about transparency and financial reporting arise from loan write-offs without proper recovery efforts.

Financial Stability and Systemic Risks:

• Ensuring financial stability is a continuous challenge for the RBI due to rapid credit growth and interconnectedness among financial institutions.
• Vulnerabilities in segments like shadow banking highlight the need for enhanced oversight mechanisms.
• Recent crises involving institutions like YES Bank and Infrastructure Leasing & Financial Services Ltd underscore these risks.

Incomplete Transmission of Monetary Policy:

• Despite RBI’s policy rate cuts, lending rates by banks haven’t lowered proportionately, indicating incomplete transmission of monetary policy.
• Factors like banking system rigidities, liquidity conditions, and risk perceptions affect the effectiveness of policy transmission.

Digitalization and Cybersecurity:

• Rapid technological advancements in banking pose challenges in complying with evolving cybersecurity standards and consumer protection laws.
• The recent Paytm crisis and rising cyber threats like hacking and phishing highlight vulnerabilities in the financial infrastructure

WAY FORWARD

1. Strengthening Autonomy:
   • Advocate for a clear legal mandate that ensures the RBI’s autonomy from external influence, especially in critical areas like monetary policy and reserves management.
   • Enhance transparency in decision-making processes and communicate effectively with stakeholders to build trust and credibility.
2. Addressing Inflation Challenges:
   • Conduct a comprehensive review of factors contributing to inflation failure and formulate proactive strategies to achieve price stability within the target band.
   • Enhance data analytics and forecasting capabilities to anticipate inflationary pressures and take timely corrective measures.
3. Proactive Regulatory Framework for Cryptocurrencies:
   • Collaborate with regulatory bodies and policymakers to develop clear and comprehensive regulations for cryptocurrencies.
   • Strengthen oversight mechanisms to mitigate risks associated with crypto-assets, such as money laundering, fraud, and market manipulation.
4. NPA Management and Financial Stability:
   • Implement stricter guidelines for loan write-offs, emphasizing adequate recovery efforts to address underlying NPA issues effectively.
   • Enhance supervision of financial institutions, especially in segments like shadow banking, to mitigate systemic risks and ensure financial stability
   • The Raghuram Rajan committee (2008) on financial sector reforms first proposed the creation of the Financial Stability and Development Council (FSDC) to strengthen financial stability and coordination among regulators.
5. Effective Monetary Policy Transmission:
   • Work closely with banks to address barriers to policy rate transmission, such as banking system rigidities and liquidity conditions.
   • Improve coordination between monetary and fiscal policies to enhance the effectiveness of policy transmission mechanisms.
   • The Nachiket Mor Committee (2014) on Comprehensive Financial Services for Small Businesses and Low-Income Households recommended a phased approach towards achieving universal financial inclusion through innovative delivery mechanisms.
6. Cybersecurity and Digitalization:
   • Invest in robust cybersecurity infrastructure and capabilities to combat rising cyber threats and protect the integrity of the financial system.
   • Promote innovation in digital banking while ensuring compliance with evolving cybersecurity standards and data protection regulations.
7. Capacity Building and Training:
   • Continuously invest in training programs for RBI officials and stakeholders to enhance expertise in areas like regulatory compliance, risk management, and technological advancements.
   • Collaborate with educational institutions and industry experts to develop specialized courses and certifications relevant to the evolving banking and financial landscape
   • The Nachiket Mor Committee (2014) on Comprehensive Financial Services for Small Businesses and Low-Income Households recommended a phased approach towards achieving universal financial inclusion through innovative delivery mechanisms
8. Engage in International Cooperation:
   • Strengthen collaborations with international organizations, central banks, and regulatory bodies to exchange best practices, insights, and expertise on global financial trends and challenges.
   • Actively participate in forums and initiatives focused on global financial stability, sustainable development goals, and emerging technologies to stay abreast of global developments and contribute effectively.