Top 10 Facts About the Reserve Bank of India

The Reserve Bank of India was established in 1935.

Functions of RBI

Issuing of the currency; controlling the money supply through methods like bank rates and reserve ratios;

• Banker to the government.
• Banker of banks (Other banks retain their deposits with the RBI; The Reserve Bank of India lends funds to the commercial banks in times of need; The Reserve Bank of India advises the commercial banks on monetary matters)
• Lender of last resort (RBI offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse).
• Custodians of foreign exchange reserves.

Governor of RBI

• Appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary.
• According to Section 8 (4) of the RBI Act, the Governor and Deputy Governors shall hold office for such term not exceeding 3 years as the Central Government may fix when appointing them.
• They are eligible for re-appointment.
• The Governor of the Reserve Bank of India draws his power from the RBI Act 1934
• The Reserve Bank of India Act does not provide for any specific qualification for the governor.
• The governor can be removed by the central government.
• According to Section 7 of Reserve Bank of India ACT 1934, The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider it necessary in the public interest. There is no such provision in the constitution of India.

Minimum Reserve System of Reserve Bank of India:

With a minimum value of government-held gold of ₹200 crores (₹115 cr rupee should be in the form of Gold or gold bullion and rest ₹85 cr should be in the form of foreign currencies)
and the remaining is backed by the government securities issued and held by Reserve Bank of India.

Publications of RBI

• Report on Trend and Progress of Banking in India Annually
• Financial stability report- Half yearly
• Monetary policy report- Half yearly
• Report on foreign exchange reserves- Half yearly
• Bi-monthly Policy Statement
• Industrial Outlook Survey of the Manufacturing Sector (Quarterly)
• Consumer Confidence Survey (Quarterly)
• Report on Financial Review

Various Committee Recommendations

• Usha Thorat Committee (2004): RBI should maintain 18% of its total assets as reserves.
• Malegam Committee (2014): Should transfer all entire net profits annually to RBI
• Bimal Jalan Committee (2019): The Committee has stated that the surplus distribution policy must take into the account the total realized equity. Only if realized equity is above its requirement (6.5 per cent to 5.5 per cent), the entire net income should be transferable to the Government.

The central bank’s currency, known as high-powered money or reserve money, serves as a basis for credit creation.

Also Read: Why is Demand and Supply of Money Important?

Money Supply

Money supply is a stock variable that represents the total amount of money in circulation among the public at a specific time.

• M1= currency (notes plus coins) held by the public ‘net’ demand deposits held by commercial banks. ‘net’ implies that only deposits of the public held by the banks are to be included in the money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply.
• M2= M1 + Savings deposits with Post Office savings banks
• M3= M1 + Net time deposits of commercial banks
• M4 =M3+Total deposits with Post Office savings organizations (excluding National Savings Certificates)
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money.
• M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.
• Currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.
• Sequence of these assets in the decreasing order of liquidity: Currency > Demand deposits with the banks > Savings deposits with the banks > Time deposits with the bank.

FAQs Reserve Bank of India

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