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A. ESTABLISHMENT
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934 on the recommendations of John Hilton Young Commission
1826 called Royal Commission on Indian currency & finance under Share Holders’
management. Later on nationalised w.e.f 01.01.1949. Its central office was established initially in
Kolkata but shifted to Mumbai in 1937.
B. The Bank was constituted to
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."

• Regulate the issue of banknotes

• Maintain reserves with a view to securing monetary stability and
• To operate the credit and currency system of the country to its advantage.

C. The Bank began its operations initially by

1. Taking over from the Government the functions so far being performed by the
Controller of Currency and from the Imperial Bank of India,
2. Management of Government accounts and public debt.
3. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore
and Cawnpore (Kanpur) became branches of the Issue Department.
4. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi
and Rangoon.
5. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued
to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto
April, 1947.
6. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto
June 1948 when the State Bank of Pakistan commenced operations.
7. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was
seen as playing a special role in the context of development, especially Agriculture. When
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India commenced its plan endeavours, the development role of the Bank came into focus,
especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise
of using finance to catalyse development.

D. CENTRAL BOARD
The Reserve Bank's affairs are governed by a central board of directors.
The board is appointed by the Government of India in keeping with the
Reserve Bank of India Act.
• With 4 Local Boards at Mumbai, kolkata Chennai and Delhi
• One Governor, 4 Dy Governors & 15 other directors for 4 years.
• Nominated:
10 Directors from various fields
1 government Official
4 Directors - one each from four local boards Mumbai,
Kolkata Chennai and Delhi
Functions of Local Boards:
To advise the Central Board on local matters and to represent territorial and
economic interests of local cooperative and indigenous banks; to perform
such other functions as delegated by Central Board from time to time.

RBI Has 22 regional offices, most of them in state capitals.

TRAINING ESTABLISHMENTS
Have 6 training establishments
• Three, namely, College of Agricultural Banking, Bankers Training
College and Reserve Bank of India Staff College are part of the
Reserve Bank
• Others are autonomous, such as, National Institute for Bank
Management, Indira Gandhi Institute for Development Research
(IGIDR), Institute for Development and Research in Banking
Technology (IDRBT)
.

SUBSIDIARIES
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Fully owned:
National Housing Bank(NHB),
Deposit Insurance and Credit Guarantee Corporation of India(DICGC),
Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)

MAJORITY STAKE:
National Bank for Agriculture and Rural Development (NABARD)
The Reserve Bank of India has recently divested its stake in State Bank of
India to the Government of India.

E. Developmental work:
The bank was also instrumental in institutional development to build the
financial infrastructure of the country and helped to set up institutions
through Acts governing individual institutions:
DICGC UTI IDBI

IFCI NABARD DFHI

F. LEGAL FRAMEWORK (UMBRELLA ACTS)

• Reserve Bank of India Act, 1934: governs the Reserve Bank functions
• Banking Regulation Act, 1949: governs the financial sector
• Companies Act, 1956:Governs banks as companies
• Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970/1980: Relates to nationalisation of banks
• Bankers' Books Evidence Act
• Banking Secrecy Act
• Negotiable Instruments Act, 1881
G. MAIN FUNCTIONS OF RBI
CURRENT FOCUS
• Supervision of financial institutions
• Consolidated accounting
• Legal issues in bank frauds
• Divergence in assessments of non-performing assets and
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• Supervisory rating model for banks.

What ever the function is, the objective of RBI is economic development,
price stability and availability of sufficient liquidity in the system to ensure
availability of due share of funds to all sectors of the economy of the country,
Transparency in the financial system and accordingly formulation of policies,
implementation and ensure compliance thereof. The objective is achieved
through:
1. Monetary Authority:
• Formulates implements and monitors the monetary policy and issues
broader guidelines in April and October and subsequently issued
the detailed guidelines through circulars.
• Objective: maintaining price stability and ensuring adequate flow of
credit to productive sectors.
2. REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM:
• Prescribes broad parameters of banking operations within which the
country's banking and financial system functions.

• (THINK GLOBLE AND ACT LOCAL)

• Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the
public.
Capital adequacy Risk Weightage narrow banking universal banking
norms
inspection Payment and merger of weak Cost
through on site settlements banks in strong effectiveness
and off site system banks to safe through
methods guard the outsourcing
depositors
rationalising the charges for a particular type of service rendered by the bank
like ATM operations free of cost

3. MANAGER OF FOREIGN EXCHANGE

• Manages the Foreign Exchange Management Act, 1999.
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• Objective: to facilitate external trade and payment and promote

orderly development and maintenance of foreign exchange market in
India.
4. ISSUER OF CURRENCY: (u/s 22 of RBI Act)
• Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality. Coins and One rupee
notes are issued by Govt of India
• (Since discontinued-printing of two rupee & five rupee notes)
• U/S 33 of RBI Act total reserves in gold, bullion & foreign
currency 200 crore out of which 115 crore in gold & Bullion
• U/S 31 of RBI no person other than RBI or Central Govt , can issue
demand promissory note/ bill of exchange payable to bearer on
demand.
• Issues and exchanges or destroys currency and coins not fit for
circulation.
• Installation of coin machines at metros specific centres.
• ISSUE OF NOTES IS BEING DONE BY ISSUE DEPPTT OF RBI U/S
23 OF RBI ACT

5. BANKER TO THE GOVERNMENT: performs merchant banking function

for the central Govt (U/s 20 OF RBA ACT) and the state governments
(u/s 21A-OF RBI ACT); also acts as their banker. And where it does not
have its office, SBI or any public sector Bank is appointed for the
purpose.
6. BANKER TO BANKS & LENDERS TO LAST RESORT: maintains
banking accounts of all scheduled banks and lends through rediscounting
of bills, and Refinance U/S 17(2) & 17(3) of RBI Act & U/S 18 ON
LIBERAL TERMS. PNB & ICICI case
7. CONTROLLER OF BANKS: U/S 22 of BR ACT Issues license to carry
banking business; inclusion in 2nd schedule of RBI act, Issues directions;
carries inspection on site and off site through statements.
8. CONTROLLER OF CREDIT: under various sections of BR Act, through
fixing Bank Rate (6% u/s 49 of RBI act, SCC (Selective Credit Control)
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CRR (5% u/s 18 of BR ACT BUT TO BE KEPT WITH RBI U/S 42 OF

RBI ACT and empowers to fix the rate), SLR (24%U/S24 OF BR
ACT ) , Repo Rate (4.75%) Reverse Repo Rate (3.25%), Open market
operation through sale and purchase of securities, Margins on
securities against which bank can finance etc.

9. Collection of information: (U/S 45 C) of RBI Act collect information on

borrowers and share with other banks U/S 45D.and unclaimed deposits
lying with the banks for more than 10 years, Suit filed accounts , will full
defaulters etc.

FUNCTIONS OF BOARD FOR FINANCIAL SUPERVISION

It came into existence under RBI regulations 1994 u/s 58 of RBI act
w.e.f. November 16, 1994 with RBI Governor being ex-officio chairman.
Some of the initiatives taken by BFS include:
i. Restructuring of the system of bank inspections
ii. Introduction of off-site surveillance through (DSB) returns which are
submitted on quarterly basis.
iii. Strengthening of the role of statutory auditors and
iv. Strengthening of the internal defences of supervised institutions.
The Audit Sub-committee of BFS has reviewed the current system of
concurrent audit, norms of empanelment and appointment of statutory
auditors, the quality and coverage of statutory audit reports, and the
important issue of greater transparency and disclosure in the published
accounts of supervised institutions
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I. Multiple Choices:
1. Bankers are not only dealers of money but also leaders in
a) Economic development b) Trade development
c) Industry development d) Service development
2. A bank, which occupies a central position in the monetary and banking
system of the country and has a superior financial authority, is
a) Central Bank b) Commercial Bank
c) Exchange Bank d) Co-operative bank.
3. When money is deposited for a fixed period it s called
a) Fixed deposit b) Savings deposit
c) Recurring deposit d) Current deposit
4. Bankers are called as manufacturers of
a) money b) loans c) deposits d) overdrafts

Answers: 1. a 2. a 3. a 4. a

II. Fill in the blanks:

1. Banks are necessary for the effective implementation of ___________
policy.
2. Banks accept deposits and ___________ money.
3. ___________ Banks deal in foreign exchange and specialize in foreign
trade.
4. ___________ Banks are included in the second schedule of RBI.
Answers:
1. Monetary policy 2. Lends 3. Exchange 4.Scheduled

Questions on Reserve Bank functions :

1. List the main functions of the Reserve of India -
.....................................................................................................................
...........
.....................................................................................................................
...........
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.....................................................................................................................
...........

2. State which of the following statements are True and which are False.
i) The Reserve Bank of India is the Central Bank of India.
ii) Right from the day the RBI was set up, it has been a public sector
organisation.
iii) The RBI has the sole right to issue currency notes in India.
iv) The currency notes issued by the RBI are legal tender throughout
the world.
v) The RBI is a banker to both Central and State Governments.
vi) The Treasury Bills are sold by the RBI for raising its working
capital.
vii) The RBI is a bankers' bank.
viii) All commercial banks, including those owned by the Government,
need a licence from the RBI to do banking business.
ix) The exchange control in India is managed by the Central
Government independently.
x) The developmental and promotional functions which the RBI has
performed are the same as the, Bank of England has performed in
the UK.

3. State the two methods of note issue which have been adopted in this
country from the time the RBI was set up in 1935.
……………………………………………………………………………………
………..
……………………………………………………………………………………
………..

4. State which of the following statements are True and which are False.
i) The RBI conducts its note issue through the Issue
Department and the Banking Department.
ii) The Banking Department is liable for all the currency notes
put into circulation.
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iii) The issue of currency notes is backed by the eligible

assets.
iv) The function of putting the currency into actual circulation is
performed by the Issue Department.
v) For exchanging currency notes with coins or notes of one
denomination for another, the Issue Department deals with the
public directly.
vi) When the RBI was set up, the minimum reserve system of
note issue was adopted.
vii) When proportional reserve system of note issue was
adopted in this country, the, amount of reserve held in gold and
foreign securities had to be at least 40% of the total assets.
viii) The proportional reserve system put a check on inflationary
expansion of currency notes.
ix) The minimum reserve system of note issue follows the
principle of flexibility in currency issue.
x) Presently the minimum gold reserve backing the note issue
in India has to be of not less than Rs.515 crore.

5. State the three quantitative techniques of credit control operated by the

RBI.
i) ...............................................................................................
...........................
ii) ...............................................................................................
...........................
iii) ……………………………………………………………………
……………………

6. List the three methods of selective credit control operated by the RBI.
i) ...............................................................................................
...........................
ii) ...............................................................................................
...........................
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iii) ……………………………………………………………………
……………………

7. State which of the following statements are True and which are False.
i) Monetary Policy refers to the policy of the central bank with regard
to issue of currency notes.
ii) The RBI's monetary policy is often characterized as the policy of
controlled expansion.
iii) Bank rate is the rate of interest charged by the central bank from
the commercial banks on advances given to them.
iv) Bank rate policy is relatively ineffective technique of credit control
in India.
v) Open market operations refer to buying and selling of government
securities by the central bank in the open market.
vi) Open market operations are quite effective in India.
vii) Cash reserve ratio and statutory liquidity ratio when used by the
RBI can prove to be effective for credit regulations.
viii) Since the money market in India is less developed, selective credit
controls have no relevance in this country.
ix) Backed by the vast powers of direct regulation, the RBI has found
the technique of moral suasion quite useful.

8. State the monetary policy of the RBI in one sentence.

……………………………………………………………………………………
………..
……………………………………………………………………………………
………..

ANSWERS :

2. i) True ii) False iii) True iv) False v) True

vi) False vii) True viii) False ix) False x) False

3. i) The Proportional Reserve System

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ii) The Minimum Reserve System

4. i) TNC ii) False iii) True iv) False v) True

vi) False vii) True viii) True ix) True x) False

5. i) Bank Rate Policy

ii) Open Market Operations
iii) Reserve Ratio Changes

6. i) Margin Requirements Changes

ii) Ceilings on Levels of Credit
iii) Charging of Minimum Rate of Interest on Certain Advances

7. i) False ii) True iii) True iv)'True v) True vi) False vii) True viii) False ix)
True

8. The monetary policy of the RBI can be characterised as the policy of

controIled expansion.