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Unit 14: Financial Regulations

14.3 Reserve Bank of India Notes

RBI is the Central Bank of India and controls the entire money issue, circulation and control by
its monetary policies and lending policies by periodical updates or corrections to discipline the
economy. It acts as an advisor to the Govt. of India and States Government, implement Forex
polices; it works in tandem with the Govt. of India in promoting trade and as the account holder
of foreign currency transactions and the Balance of Payment (BOP). It is also known as the bank
of last resort.

14.3.1 Organisation and Management of RBI

The Reserve Bank of India was established on April 1, 1935, under the Reserve Bank of India Act,
1934. The main functions of the Bank are to act as the note-issuing authority. Banker's Bank,
Banker to the government and to promote the growth of the economy within the framework of
the general economic policy of the government, consistent with the need to maintain price
stability. The Bank also performs a wide range of promotional functions to support the pace of
economic development. The Reserve Bank is the controller of foreign exchange. It is the watchdog
of the entire financial system. The Bank is the sponsor bank of a wide variety of top ranking
banks and institutions such as SBI, IDBI, NABARD and NHB.
The Bank sits on the board of all banks and it counsels the Central and State Government and all
public sector institutions on monetary and money matters. No central bank, even in the developed
world, is saddled with such onerous responsibilities and functions. The RBI, as the central bank
of the country, is the center of the Indian Financial and Monetary System. As the apex institution,
it has been guiding, monitoring, regulating, controlling, and promoting the destiny of the IFS
since its inception. It is quite young compared with such central banks as the Bank of England,
Risk bank of Sweden, and the Federal Reserve Board of the US.

However, it is perhaps the oldest among the central banks in the developing countries. It started
functioning from April 1, 1935 on the terms of the Reserve Bank of India Act, 1934. It was a
private shareholders' institution till January 1949, after which it became a state-owned institution
under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the
central government, in consultation with the Governor of the Bank, to issue such directions to it,
as they might consider necessary in the public interest. Further, the Governor and all the Deputy
Governors of the Bank are appointed by the Central Government.
The Bank is managed by a Central Board of Directors, four Local Boards of Directors, and a
committee of the Central Board of Directors. The functions of the Local Boards are to advise the
Central Board on matters referred to them; they are also required to perform duties as are
delegated to them. The final control of the Bank vests in the Central Board, which comprises the
Governor, four Deputy Governors, and fifteen Directors nominated by the central government.
The committee of the Central Board consists of the Governor, the Deputy Governors, and such
other Directors as may be present at a given meeting. The internal organisational set-up of the
Bank has been modified and expanded from time to time in order to cope with the increasing
volume and range of the Bank's activities. The underlying principle of the internal organization
is functional specialisation with adequate coordination.
In order to perform its various functions, the Bank has been divided and sub-divided into a large
number of departments. The pattern of central banking in India was initially based on the Bank
of England. England had a highly developed banking system in which the functioning of the
central bank as a banker's bank and their regulation of money supply set the pattern. The central
bank's function as 'a lender of last resort' was on the condition that the banks maintain stable

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