62 Reserve Bank of India: Functions; Role and monetary policy management

62.1 Concept and Establishment

The Reserve Bank of India (RBI) is India’s central bank — the apex monetary authority of the country. It was established under the Reserve Bank of India Act, 1934 and commenced operations on 1 April 1935. Originally privately owned, the RBI was nationalised in 1949 under the RBI (Transfer of Public Ownership) Act 1948. The first Indian Governor was C.D. Deshmukh (1943-49). The recommendations of the Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926) were the immediate basis for its creation. RBI is headquartered in Mumbai (relocated from Calcutta in 1937), and headed by a Governor appointed by the Government of India for typically a three-year term.

62.2 Preamble of the RBI

The Preamble of RBI Act 1934 lays the rationale: “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”. In 2016 it was amended to add: “to maintain price stability while keeping in mind the objective of growth” — formalising the flexible inflation targeting framework.

62.3 Functions of RBI

RBI’s functions fall into three broad families: traditional, promotional and supervisory/regulatory.

Major Functions of RBI

Family	Functions
Traditional / Central-banking	Monopoly of note issue; banker to government; banker’s bank; lender of last resort; controller of credit; custodian of forex reserves
Promotional / Developmental	Promoting institutional structure (NABARD, EXIM, SIDBI), financial inclusion, agricultural and industrial finance
Supervisory / Regulatory	Regulation of commercial banks, NBFCs, payment systems; foreign-exchange management

62.3.1 Note Issue

RBI has monopoly on issue of currency notes of ₹2 and above. ₹1 notes and coins are issued by the Ministry of Finance but circulated through RBI. RBI follows the Minimum Reserve System since 1957 — at least ₹200 cr worth of gold and foreign securities must be held, of which ₹115 cr in gold.

62.3.2 Banker to Government

RBI acts as banker, agent and adviser to both Central and State Governments. It manages public debt, treasury operations, and Ways and Means Advances (WMA) for short-term financing.

62.3.3 Banker’s Bank and Lender of Last Resort

All scheduled commercial banks maintain accounts with RBI; CRR is held with RBI. As lender of last resort (LoLR), RBI provides liquidity to banks facing temporary cash-flow problems.

62.3.4 Forex Reserve Management

RBI manages India’s foreign-exchange reserves (now > USD 650 billion at peak), comprising foreign currency assets, gold, SDRs and IMF reserve position.

62.4 Monetary Policy

62.4.1 Monetary Policy Framework Agreement (2015)

In February 2015 the Government and RBI signed the Monetary Policy Framework Agreement making price stability (inflation targeting) the primary objective. The RBI Act was amended in 2016. Target inflation: 4 % CPI with a tolerance band of 2-6 %. Reviewed every 5 years.

62.4.2 Monetary Policy Committee (MPC)

Constituted under Sec 45ZB of the RBI (Amendment) Act 2016: - Six members: 3 from RBI (Governor — chair, Deputy Governor in charge of monetary policy, RBI nominee), 3 external members appointed by Government. - Meets at least six times a year (bi-monthly). - Decisions by majority; Governor has casting vote.

62.4.3 Quantitative Tools of Monetary Policy

Quantitative (Indirect) Monetary Tools

Tool	Working
CRR (Cash Reserve Ratio)	% of NDTL banks must keep in cash with RBI
SLR (Statutory Liquidity Ratio)	% of NDTL in cash/gold/approved securities
Repo rate	RBI lends to banks against G-sec
Reverse repo	RBI borrows from banks (now under SDF)
Standing Deposit Facility (SDF)	Banks deposit excess liquidity at fixed rate (since 2022)
Marginal Standing Facility (MSF)	Penal-rate overnight liquidity from RBI
Bank rate	Penal rate; rarely used now
Open Market Operations (OMO)	RBI buys/sells G-sec to manage liquidity
Market Stabilisation Scheme (MSS)	Sterilisation of forex inflows
Liquidity Adjustment Facility (LAF)	Repo + Reverse repo daily

The current policy corridor: Repo rate in the centre; SDF = Repo − 0.25 %, MSF = Repo + 0.25 %.

62.4.4 Qualitative Tools

Qualitative / Selective Credit Control

Margin requirements — for specific commodities.
Credit rationing — sector-wise ceilings.
Moral suasion — informal pressure on banks.
Direct action — penal action.
Selective credit control — for specific sensitive commodities.
Consumer credit regulation.
Publicity / Guidance.

62.5 Other Important RBI Functions

Other RBI Functions

Payment systems oversight — RTGS, NEFT, IMPS, UPI (via NPCI).
Foreign-exchange regulation under FEMA 1999.
Consumer protection — Banking Ombudsman; Integrated Ombudsman Scheme 2021.
Public debt management.
Currency management — Clean Note Policy.
Financial Stability — coordinates with other regulators via the Financial Stability and Development Council (FSDC).
Issue of regulations — Master Directions on KYC, NPA, IRACP, ECB, etc.

62.6 RBI’s Boards and Committees

Important RBI Bodies

Central Board — apex policy body; up to 21 members.
Local Boards — Mumbai, Calcutta, Chennai, Delhi.
Board for Financial Supervision (BFS) — 1994, supervises banks/NBFCs.
Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) — 2005.
Monetary Policy Committee (MPC) — 2016.

62.7 Major Indian Monetary Policy Committees

Committee Highlights

Chakravarty Committee 1985 — monetary system review; suggested money supply targeting.
Vaghul Working Group 1987 — money market development.
Goiporia Committee 1991 — customer service.
Narasimham Committee I 1991 — financial sector reform.
Tarapore Committee I 1997, II 2006 — capital account convertibility.
Y.V. Reddy Committee 2002 — fuller capital account convertibility.
Raghuram Rajan Committee 2008 — financial sector reforms.
Urjit Patel Committee 2014 — monetary policy framework (inflation targeting).

flowchart TB
  RBI[RBI] --> T[Traditional]
  RBI --> P[Promotional]
  RBI --> S[Supervisory]
  T --> N[Note Issue]
  T --> BG[Banker to Govt]
  T --> BB[Banker's Bank / LoLR]
  T --> CC[Credit Control]
  T --> FX[Forex Reserves]
  S --> SC[Banks / NBFCs / Payment Systems]
  S --> FEMA[FEMA admin]
  MPC[MPC<br/>6 members<br/>4% ±2% CPI target] -.-> RBI
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

Distractor warning

PYQ trap: India’s inflation target is 4 % CPI with band 2-6 %, not WPI. MPC has 6 members; Governor has casting vote.

62.8 Practice Questions

Q 01EstablishmentEasy

RBI commenced operations on:

A1 April 1935
B1 January 1949
C15 August 1947
D26 January 1950

View solution

Correct Option: A

**RBI Act 1934 → 1 April 1935**.

Q 02NationalisationEasy

RBI was nationalised in:

A1935
B1947
C1949
D1969

View solution

Correct Option: C

**1949** — RBI (Transfer of Public Ownership) Act 1948.

Q 03Hilton YoungMedium

The recommendation for India's central bank was made by:

AHilton Young Commission (1926)
BChakravarty Committee
CNarasimham Committee
DUrjit Patel Committee

View solution

Correct Option: A

**Hilton Young 1926** — Royal Commission on Indian Currency and Finance.

Q 04TargetMedium

India's flexible inflation target is:

A2 % CPI
B4 % CPI with band 2-6 %
C6 % WPI
DNo target

View solution

Correct Option: B

**4 % CPI ± 2 %** (2-6 %).

Q 05MPCMedium

The MPC has how many members?

View solution

Correct Option: B

**6 — 3 RBI + 3 external**; Governor has casting vote.

Q 06Reserve SystemMedium

RBI follows the **Minimum Reserve System** since:

A1935
B1949
C1957
D1969

View solution

Correct Option: C

**Minimum Reserve System since 1957** — ₹200 cr gold + foreign securities.

Q 07Urjit PatelMedium

Inflation targeting framework was recommended by:

AUrjit Patel Committee 2014
BNarasimham Committee
CChakravarty Committee
DY.V. Reddy Committee

View solution

Correct Option: A

**Urjit Patel 2014** — Expert Committee to revise monetary policy framework.

Q 08ToolsMedium

Which is **not** a quantitative tool of monetary policy?

ARepo rate
BCRR
CMoral suasion
DOMO

View solution

Correct Option: C

**Moral suasion** is qualitative; others are quantitative.

Q 09SDFHard

Standing Deposit Facility (SDF) was introduced in:

A2016
B2018
C2022
D2008

View solution

Correct Option: C

**SDF April 2022** — at Repo − 0.25 %; replaced fixed reverse repo as floor.

Q 10FEMAMedium

Forex regulation in India is administered under:

AFERA 1973
BFEMA 1999
CSEBI Act
DBR Act 1949

View solution

Correct Option: B

**FEMA 1999** replaced FERA 1973.

Q 11First GovernorMedium

First Indian Governor of RBI was:

AC.D. Deshmukh
BY.V. Reddy
CD. Subbarao
DRaghuram Rajan

View solution

Correct Option: A

**C.D. Deshmukh** — first Indian Governor (1943-49).

Q 12MSFMedium

Marginal Standing Facility (MSF) provides:

ARBI deposits with banks
BPenal-rate overnight liquidity from RBI to banks
CLong-term G-sec auction
DGovernment borrowing

View solution

Correct Option: B

**MSF = Repo + 0.25 %** — emergency overnight funding for banks.

Q 13BankerEasy

RBI acts as banker to:

AGovernment only
BBanks only
CBoth Government and Banks
DIndividuals

View solution

Correct Option: C

RBI = banker to Government **and** banker's bank.

Q 14LoLREasy

RBI acts as "Lender of Last Resort" for:

AGovernment
BBanks
CIndividuals
DForeign borrowers

View solution

Correct Option: B

**LoLR** for banks facing temporary liquidity crisis.

Q 15HQEasy

RBI is headquartered in:

ANew Delhi
BMumbai
CKolkata
DChennai

View solution

Correct Option: B

**Mumbai** since 1937 (Calcutta earlier).

Q 16FSDCHard

Financial Stability and Development Council (FSDC) is chaired by:

ARBI Governor
BUnion Finance Minister
CSEBI Chairman
DPM

View solution

Correct Option: B

**FSDC 2010** chaired by **Union FM**; coordinates RBI, SEBI, IRDAI, PFRDA.

Q 17OmbudsmanMedium

RBI's *Integrated Ombudsman Scheme* was launched in:

A2015
B2018
C2021
D2022

View solution

Correct Option: C

**Integrated Ombudsman Scheme — 12 November 2021**, merging earlier ombudsman schemes.

Q 18Note IssueMedium

In India, ₹1 currency note is issued by:

ARBI
BMinistry of Finance (Government of India)
CSBI
DNABARD

View solution

Correct Option: B

**₹1 notes and all coins issued by Government of India** (circulated through RBI).

Q 19BFSMedium

The Board for Financial Supervision (BFS) was established in:

A1991
B1994
C2005
D2016

View solution

Correct Option: B

**BFS 1994** — supervises banks, NBFCs, AIFIs.

Q 20Tools matchMedium

Match each tool with its purpose:

	Tool		Purpose
(i)	CRR	(a)	RBI lends to banks
(ii)	Repo	(b)	% of NDTL in cash with RBI
(iii)	OMO	(c)	Banks deposit excess liquidity with RBI
(iv)	SDF	(d)	RBI buys/sells G-sec

A(i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
C(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
D(i)-(d), (ii)-(b), (iii)-(c), (iv)-(a)

View solution

Correct Option: A

CRR — cash with RBI; Repo — RBI lends; OMO — G-sec; SDF — bank deposits with RBI.

62.9 Quick Recall

Quick recall

RBI Act 1934; operational 1 April 1935; nationalised 1949; headquartered Mumbai.
Hilton Young Commission 1926 recommended its creation. First Indian Governor — C.D. Deshmukh.
Preamble: monetary stability + (since 2016) price stability with growth.
Functions: Traditional (note issue, banker to govt, banker’s bank, LoLR, credit control, forex), Promotional, Supervisory.
Inflation target: 4 % CPI ± 2 % (2-6 %) since 2015/16.
MPC — 6 members (3 RBI + 3 external); meets ≥ 6 times/year; Governor casting vote; Sec 45ZB RBI Act 2016.
Quantitative tools: CRR, SLR, Repo, Reverse repo/SDF, MSF, Bank rate, OMO, MSS, LAF.
Corridor: SDF (Repo − 0.25) — Repo — MSF (Repo + 0.25).
Qualitative: moral suasion, margin requirements, credit rationing, direct action.
Minimum Reserve System since 1957 — ₹200 cr (₹115 cr gold).
FSDC — chaired by FM, coordinates regulators.
Integrated Ombudsman Scheme 2021.