flowchart LR R[Repo rate<br/>change] --> M[Money market<br/>rates] M --> L[Bank lending and<br/>deposit rates] L --> AD[Aggregate<br/>demand] AD --> I[Inflation and<br/>output] R --> AS[Asset prices and<br/>exchange rate] AS --> AD R --> EX[Expectations] EX --> AD style R fill:#FFEBEE,stroke:#C62828 style I fill:#E8F5E9,stroke:#2E7D32
61 Reserve Bank of India
61.1 Origin and Establishment
The Reserve Bank of India (RBI) was set up under the Reserve Bank of India Act, 1934, and commenced operations on 1 April 1935 with its central office at Calcutta (later moved to Bombay/Mumbai in 1937). It was established on the recommendations of the Hilton-Young Commission (Royal Commission on Indian Currency and Finance, 1926) (rbi2024?).
The RBI was nationalised on 1 January 1949 under the Reserve Bank (Transfer to Public Ownership) Act, 1948. It is not a member of the Government — it is a public-sector institution with operational autonomy.
61.2 Preamble — Objectives
The Preamble of the RBI Act 1934, as amended in 2016, states:
“to regulate the issue of bank notes and the 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; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy; to maintain price stability while keeping in mind the objective of growth.”
61.3 Organisation Structure
TipRBI Governance Structure
| Body | Role |
|---|---|
| Central Board of Directors | 21 members — Governor, up to 4 Deputy Governors, four directors from local boards, ten government-nominated, two government officials |
| Local Boards | Four — Western, Eastern, Northern, Southern |
| Monetary Policy Committee (MPC) | Six members (since 2016) — three RBI + three external; sets policy repo rate |
| Governor and Deputy Governors | Operational head and senior leadership |
The Governor is appointed by the Central Government for a term up to 5 years (renewable). The Monetary Policy Committee (six members) was created by the Finance Act, 2016, and meets at least four times a year.
61.4 Functions of RBI
TipMajor Functions of the RBI
| Function | Working content |
|---|---|
| Issue of currency | Sole authority for issuing currency notes (except ₹1 note, issued by the GoI). Uses Minimum Reserve System (since 1956): minimum reserves of ₹200 cr (₹115 cr in gold + ₹85 cr in foreign securities) |
| Banker to the Government | Maintains accounts of Centre and States; manages public debt |
| Banker’s bank | Accepts deposits, provides loans (LAF), and is the lender of last resort |
| Custodian of foreign-exchange reserves | Manages forex; intervenes in forex market |
| Monetary policy | Manages money supply, interest rates, inflation |
| Regulation and supervision | Of banks, NBFCs, payment systems, NBFC-MFIs |
| Developmental | Financial inclusion, payment systems, training |
61.5 Tools of Monetary Policy
TipRBI’s Monetary-Policy Toolkit
| Family | Tool | Working content |
|---|---|---|
| Quantitative | Repo rate | Rate at which RBI lends to banks against government securities (the policy rate) |
| Reverse repo rate | Rate at which RBI absorbs liquidity from banks | |
| Marginal Standing Facility (MSF) | Emergency lending rate, 25 bps above repo | |
| Bank rate | Standing rate at which RBI rediscounts bills of exchange | |
| Cash Reserve Ratio (CRR) | % of NDTL banks must keep as cash with RBI (currently 4.5 %) | |
| Statutory Liquidity Ratio (SLR) | % of NDTL banks must keep in liquid assets — cash, gold, government securities (currently 18 %) | |
| Open Market Operations (OMO) | RBI buys / sells G-Secs to manage liquidity | |
| Liquidity Adjustment Facility (LAF) | Daily repo / reverse-repo operations | |
| Qualitative / Selective | Margin requirements, moral suasion, credit rationing, direct action, consumer-credit regulation, prior approval |
The MPC targets flexible inflation targeting — Consumer Price Index (CPI) headline inflation of 4 per cent ± 2 per cent, set in 2016 and reaffirmed periodically.
61.6 Monetary-Policy Transmission
A change in the policy repo rate affects the economy through several channels:
The classical channels of transmission: interest-rate channel, credit channel, asset-price channel, exchange-rate channel, expectations channel.
61.7 Regulatory and Supervisory Functions
TipRBI Regulatory Framework
| Domain | Working content |
|---|---|
| Bank licensing | Under Sec. 22 of BR Act 1949 |
| Branch licensing | Sec. 23 |
| CRR and SLR | Sec. 42 of RBI Act, Sec. 24 of BR Act |
| NPA classification | Income recognition and asset classification (IRAC) norms; PCA (Prompt Corrective Action) framework |
| Capital adequacy | Basel III, CRAR (currently 9 % minimum + buffers) |
| Inspection | Annual financial inspection (AFI) of banks |
| NBFC regulation | Significant NBFCs (≥ ₹500 cr assets) regulated by RBI |
| Payment systems | Under the Payment and Settlement Systems Act, 2007 |
| Forex | Under FEMA 1999 |
61.8 Currency Management
RBI is the sole issuer of currency (except ₹1 notes and coins, issued by GoI under the Coinage Act 2011).
TipCurrency Notes in Circulation
| Denomination | Issued by |
|---|---|
| ₹1 note | Government of India (rare) |
| ₹2, ₹5 | Coins, GoI |
| ₹10, ₹20, ₹50, ₹100, ₹200, ₹500 | Issued by RBI |
| ₹1000 | Demonetised in 2016 |
| ₹2000 | Issued in 2016, withdrawn in 2023 |
The Mahatma Gandhi (New) Series of notes was introduced after demonetisation in November 2016. The e-Rupee — RBI’s Central Bank Digital Currency (CBDC) — entered pilot in 2022.
61.9 Recent Developments
- Bharat Bill Payment System (BBPS) for unified bill payment.
- Account Aggregator framework (2021) for consent-based data sharing.
- Digital Lending Guidelines (2022).
- e-Rupee CBDC pilot (2022).
- Master Direction on KYC, on Co-lending, on Digital Personal Loans.
61.10 Important Committees Set Up by / for RBI
TipMajor RBI / Banking Committees
| Committee | Year | Mandate |
|---|---|---|
| Hilton-Young Commission | 1926 | Established the case for a central bank |
| Narasimham Committee — I | 1991 | Banking-sector reforms |
| Narasimham Committee — II | 1998 | Strengthening banking sector |
| Khan Committee | 1998 | Universal banking |
| Vaghul Committee | 1985 | Money market |
| Tarapore Committees | 1997, 2006 | Capital-account convertibility |
| Urjit Patel Committee | 2014 | Monetary-policy framework — flexible inflation targeting |
| Nachiket Mor Committee | 2013 | Differentiated banks (SFBs, PBs) |
| Bimal Jalan Committee | 2019 | RBI’s economic capital framework |
61.11 Exam-Pattern MCQs
NoteEight-question set
Q1. The Reserve Bank of India was established on the recommendations of:
A. The Narasimham Committee B. The Hilton-Young Commission C. The Indian Banking Enquiry Committee D. The Tarapore Committee
Answer: B. RBI was set up on the recommendations of the Hilton-Young Commission (1926).
Q2. Match each RBI tool with the rate / ratio it sets:
| Tool | Working content | ||
|---|---|---|---|
| (i) | Repo rate | (a) | % of NDTL kept as cash with RBI |
| (ii) | CRR | (b) | RBI lends to banks against G-Secs (policy rate) |
| (iii) | SLR | (c) | RBI absorbs liquidity from banks |
| (iv) | Reverse repo rate | (d) | % of NDTL kept in liquid assets |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q3. The Monetary Policy Committee of the RBI consists of:
A. Three members B. Six members — three RBI + three external C. Twelve members D. Twenty-one members
Answer: B. Six members under the Finance Act 2016 — three RBI (Governor, Deputy Governor, Executive Director) plus three external members appointed by the Centre.
Q4. Match each Indian banking committee with its mandate:
| Committee | Mandate | ||
|---|---|---|---|
| (i) | Narasimham I (1991) | (a) | Differentiated banks |
| (ii) | Tarapore Committees | (b) | Banking-sector reforms |
| (iii) | Urjit Patel (2014) | (c) | Capital-account convertibility |
| (iv) | Nachiket Mor (2013) | (d) | Monetary-policy framework / flexible inflation targeting |
A. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(c), (iv)-(b)
Answer: A.
Q5. India’s flexible inflation targeting mandate is:
A. CPI = 2 % ± 1 % B. CPI = 4 % ± 2 % C. CPI = 6 % ± 1 % D. CPI = 5 %
Answer: B. CPI headline of 4 per cent within a band of ± 2 per cent.
Q6. Which of the following currency notes was withdrawn in 2023?
A. ₹500 B. ₹2000 C. ₹100 D. ₹50
Answer: B. The ₹2000 note, introduced in 2016, was withdrawn from circulation in 2023.
Q7. Arrange the following events in chronological order:
- MPC framework operationalised
- RBI nationalised
- RBI established
- Demonetisation
A. (iii), (ii), (i), (iv) B. (i), (ii), (iii), (iv) C. (ii), (iii), (iv), (i) D. (iii), (ii), (iv), (i)
Answer: D. RBI established 1935 → Nationalised 1949 → Demonetisation Nov 2016 → MPC framework Oct 2016 (almost simultaneous, but the MPC’s effective monetary policy operationalised in late 2016 alongside / after demonetisation).
Q8. RBI is the banker to the Government and provides which of the following services?
A. Maintains accounts of the Centre and States B. Manages public debt C. Acts as fiscal agent D. All of the above
Answer: D. RBI maintains accounts, manages public debt and acts as fiscal agent.
ImportantQuick recall
- RBI Act 1934; commenced operations 1 April 1935; nationalised 1 January 1949.
- Set up on Hilton-Young Commission (1926) recommendation.
- Central office: Mumbai (since 1937).
- Central Board: 21 members; MPC (Finance Act 2016) — 6 members, 3 RBI + 3 external; meets ≥ 4 times/year.
- Functions: issue of currency, banker to government, banker’s bank, forex custodian, monetary policy, regulation, development.
- Currency: Minimum Reserve System since 1956 — ₹200 cr (₹115 cr gold + ₹85 cr foreign securities). ₹1 note by GoI; rest by RBI.
- Quantitative tools: repo, reverse repo, MSF, bank rate, CRR (4.5 %), SLR (18 %), OMO, LAF.
- Qualitative tools: margin, moral suasion, credit rationing, direct action.
- Flexible inflation targeting: CPI 4 % ± 2 % (since 2016, on Urjit Patel framework).
- Channels of transmission: interest rate, credit, asset-price, exchange-rate, expectations.
- Notable committees: Hilton-Young 1926, Narasimham I 1991 / II 1998, Tarapore 1997/2006, Urjit Patel 2014, Nachiket Mor 2013, Bimal Jalan 2019.
- e-Rupee CBDC pilot since 2022; ₹2000 note withdrawn 2023.