Banking and the Reserve Bank of India
Overview
The Reserve Bank of India (RBI), established on 1 April 1935 under the RBI Act 1934, is India's central bank and monetary authority. It regulates currency issuance, manages foreign exchange, supervises commercial banks, and formulates monetary policy. Understanding RBI's structure, functions, and key banking concepts is essential for UPSC and BPSC aspirants, as questions regularly appear on monetary policy tools, banking types, and landmark financial reforms.
Typed Notes
Structure and Establishment of RBI
The Reserve Bank of India was established on 1 April 1935 based on the recommendations of the Hilton Young Commission (1926). Initially privately owned, it was nationalised on 1 January 1949. The RBI is governed by a Central Board of Directors headed by the Governor. There are four Deputy Governors. The central office (headquarters) was originally in Kolkata but shifted permanently to Mumbai in 1937. RBI is India's banker, banker to the government, and lender of last resort. The RBI Act 1934 and Banking Regulation Act 1949 are its two primary legislative pillars.
Monetary Policy Tools and MPC
RBI uses quantitative and qualitative tools to control money supply. Quantitative tools include: (1) Repo Rate – rate at which RBI lends short-term funds to banks against securities; (2) Reverse Repo Rate – rate at which RBI absorbs liquidity from banks; (3) CRR – percentage of net demand and time liabilities (NDTL) banks must keep with RBI as cash; (4) SLR – percentage of NDTL banks must maintain in gold, cash, or approved securities; (5) Open Market Operations (OMO). The Monetary Policy Committee (MPC), formed in 2016, has 3 RBI members and 3 government-appointed external members. It meets bi-monthly and targets CPI inflation at 4% (±2% band).
Types of Banks and Banking Reforms
India's banking system includes: Scheduled Commercial Banks (SCBs) listed in RBI's Second Schedule; Public Sector Banks (PSBs) like SBI; Private Banks; Regional Rural Banks (RRBs) established under RRB Act 1976; Co-operative Banks; Small Finance Banks; and Payment Banks. Key reforms: Bank nationalisation occurred in two phases – 14 banks in 1969 (under Indira Gandhi) and 6 more in 1980. The Narasimham Committee Reports (1991 and 1998) recommended banking sector liberalisation, introduction of CAMELS rating, and reduction of SLR/CRR. SARFAESI Act 2002 empowers banks to recover NPAs without court intervention.
RBI's Key Functions and Financial Inclusion
RBI performs multiple roles: (1) Issue of currency – monopoly on issuing notes except ₹1 note (issued by Ministry of Finance); (2) Banker to the Government – manages public debt and government accounts; (3) Banker's Bank – provides refinance and acts as lender of last resort; (4) Foreign Exchange Management – administers FEMA 1999; (5) Developmental role – promotes financial inclusion through schemes like Jan Dhan Yojana (launched 28 August 2014), Priority Sector Lending (PSL) norms (40% of ANBC for commercial banks). NABARD (1982) handles agricultural and rural credit. SIDBI (1990) supports small industries.
Key Concepts
Revision ke liye ek nazar — exam se pehle yahi padhna hai.
- 01RBI was nationalised on 1 January 1949; its headquarters is in Mumbai (shifted from Kolkata in 1937).
- 02The Minimum Reserve System (MRS) governs currency issuance: RBI must maintain a minimum gold/foreign-exchange reserve of ₹200 crore (gold ≥ ₹115 crore).
- 03CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are quantitative credit-control tools; RBI sets both under the RBI Act and Banking Regulation Act 1949.
- 04Repo Rate is the rate at which RBI lends to commercial banks; Reverse Repo Rate is the rate at which RBI borrows from commercial banks.
- 05The Monetary Policy Committee (MPC), constituted under RBI Act Section 45ZB, has 6 members and targets inflation (CPI) at 4% ± 2%.
Questions & Solutions
Pehle khud try karo — phir solution kholo. Yahi tariqa topper banata hai.
What is the Minimum Reserve System followed by RBI for currency issuance, and why was it adopted?
Distinguish between CRR and SLR. How do they act as instruments of monetary control?
What were the major recommendations of the Narasimham Committee on banking sector reforms?
Explain the composition and mandate of the Monetary Policy Committee (MPC) of RBI.
Which banks were nationalised in 1969 and what was the constitutional/legal basis for bank nationalisation?
RBI, India's central bank since 1935 (nationalised 1949), regulates monetary policy via tools like Repo Rate, CRR, and SLR. The 6-member MPC targets 4% CPI inflation. Banking reforms include 1969/1980 nationalisations and Narasimham Committee recommendations. RBI issues all currency except ₹1 notes, manages forex under FEMA 1999, and promotes financial inclusion. NABARD and SIDBI are key development finance institutions under RBI's supervisory umbrella.
Chapter-end quiz
4 MCQsOption tap karo — turant pata chalega sahi ya galat, explanation ke saath.
Q1.The ₹1 note in India is issued by which authority?
Q2.Which committee recommended the establishment of Regional Rural Banks (RRBs) in India?
Q3.Under which Act does RBI manage foreign exchange in India?
Q4.What is the inflation target set for the Monetary Policy Committee (MPC) of India?
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