 The Reserve Bank of India was established on April

1, 1935 in accordance with the provisions of

the Reserve Bank of India Act, 1934.

 The Central Office of the Reserve Bank was initially

established in Calcutta but was permanently moved
to Mumbai in 1937. The Central Office is where the
Governor sits and where policies are formulated.

 Though originally privately owned, since

nationalization in 1949, the Reserve Bank is fully
owned by the Government of India.
 To regulate the issue of Bank notes and 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.
 The Reserve Bank's affairs are governed by a central board
of directors. The board is appointed by the Government of
India in keeping with the Reserve Bank of India Act.
 The directors are appointed/nominated for a period of
four years.
Constitution
 Official Directors (central board of directors)
› Full-time: Governor and not more than four Deputy Governors
 Non-Official Directors
› Nominated by Government: ten Directors from various fields and
two government Official
› Others: four Directors - one each from four local boards
(regional)
 1. Monetary Authority:
 2. Regulator and Supervisor of the Financial
System:
 3. Manager of Foreign Exchange:
 4. Issuer of Currency:
 5. Developmental Role:
 6. Financial Inclusion:
 Banker to the Government: performs merchant
banking function for the central and the state
governments.
 It is entrusted with central govt.’s money,
remittances, exchange and manages its public
debt as well.
 Banker to banks: maintains banking accounts
of all scheduled banks. It also acts as lender of
last resorts by providing fund to banks.
 Under section 7 of the RBI Act, the central government may from
time to time give such directions to the RBI as it may, after
consultation with the Governor of the Bank, consider necessary
in the public interest. Moreover, there is no legal act
mandating autonomy of the RBI.
 Yet, RBI has always been looked upon as an autonomous body
which has under its umbrella all commercial banks, be it PSBs or
private banks or foreign banks.
 It is not only vested with the powers to formulate the monetary
policy but also to monitor the functioning of all banks.
 To play its role effectively, autonomy in its functioning is sine qua
non for RBI.
 Financial Stability Report
 Monetary Policy Report
 Report on Financial Review
 The RBI’s reputation as a regulator has been
affected by the unusually large number of
instances of fraud in the financial sector.

 Besides, the slowing of the economy

suggests that the central bank’s stance on
inflation may have impacted growth.
 However, the independence of RBI has been challenged many
times due to a continued tug of war for wresting more power
between the bank and the govt.
 The main reasons for this have been : RBI’s failure to check the
growth of Non Performing Assets.
 Reduced liquidity in the economy due to tight monetary policy
followed by RBI.
 Corrective measures taken by RBI to clean up the banking
system which are not seen very positively by the government
 Clash between short term populist agenda of the government
and long term view for price stability taken by RBI
 Regulation of Public Sector Banks: One important
limitation is that the Reserve Bank is statutorily limited
in undertaking the full scope of actions against public
sector banks (PSBs) – such as asset divestiture,
replacement of management and Board, license
revocation, and resolution actions such as mergers or
sales –– all of which it can and does deploy
effectively in case of private banks.
 Erosion of statutory powers of the central bank
through piece-meal legislative amendments that
directly or indirectly eat at separation of the central
bank from the government.
 It is unanticipated inflation that is the problem for
producers, as it has the potential to derail their profit
calculations.
 However, inflation, even when fully anticipated, can harm
holders of financial assets yielding fixed incomes by
eroding their wealth.
 Borrowers on the other hand are better off with inflation as
the real value of their outstanding loans are now less.
 While the problem of inflation can in principle be tackled
through inflation-indexation, the practice is not
widespread.
 This leaves owners of financial wealth averse to inflation.
 It was created in 2016.
 It was created to bring transparency and accountability in
deciding monetary policy.
 MPC determines the policy interest rate required to achieve the
inflation target.
 Committee comprises of six members where Governor RBI acts
as an ex-officio chairman. Three members are from RBI and
three are selected by government.
 Inflation target is to be set once in a five year. It is set by the
Government of India, in consultation with the Reserve Bank.
 Current inflation target is pegged at 4% with -2/+2 tolerance till
March 31, 2021.
 Major Factors Affecting India’s Growth
 Consumption: Private consumption, which contributes
nearly 55-60% to India’s GDP, has been slowing down.

› While the reduced income growth of households has reduced

urban consumption, drought/near-drought conditions in three of
the past five years coupled with the collapse of food prices have
taken a heavy toll on rural consumption.
 Savings: Savings by household sector – which are used to
extend loans for investment -- have gone down from 35%
(FY12) to 17.2% (FY18).

› Households, including MSMEs, make 23.6% of the total savings in

the GDP.
 Investment: Gross Fixed Capital Formation (GFCF), a
metric to gauge investment in the economy, too has
declined from 34.3 per cent in 2011 to 28.8 per cent
in 2018, government data show. Similarly, in the
private sector, it has declined from 26.9% in 2011 to
21.4% in 2018.

 NBFC crisis triggered by IL&FS default led to a liquidity

crunch in the economy.

 RBI’s Annual report highlighted that there are

still structural issues in land, labour, agricultural
marketing and the like that need to be addressed
 India is undergoing an economic slowdown. Its GDP grew
at 5% in the first quarter of FY20, marking the slowest
growth since the fourth quarter of FY13.
 In its annual report for 2018-19 released on 29th August,
the Reserve Bank of India (RBI) had said that the slowdown
was cyclical, rather than structural, which would have
required deeper reforms.
 However, some experts believe that the current slowdown
is more than a cyclical one and of the structural type
which is evident from the fact that the successive rate cuts
by the Central Bank have not yielded the desired results
 It has been concluded by economists that the threshold values
of inflation in developing countries are higher than in developed
countries.
 Many economists find the inflation-growth relationship as being
“significantly negative” if inflation is above the threshold value
(i.e. if inflation increases beyond the limit, growth would be on
decreasing trend), and “insignificant or significantly positive” if it
is below the threshold value (i.e. if the inflation is within the limit,
growth might be unchanged or on increasing trend).
 In the Indian context, the empirical analysis is based on WPI
inflation data, using the data for the period 1996-97 to 2010-11,
concluded that threshold for India falls in the 4% to 5.5% inflation
range, above which inflation retards growth rate of GDP, and
below the threshold level, there is a “statistically significant
positive relationship” between inflation rate and growth.
 Subsequent rate cuts by RBI to lower the interest rate.The
RBI has cut the repo rate by 110 basis points so far in 2019
to 5.4% – its lowest level since 2010.
 Stimulus package announced by the government along
with other measures may propel demand and thus help to
recover the economy.
 Surplus transfer by the RBI to the government can help
boost planned-spending of the government without
compromising fiscal deficit targets. It would also help in
Recapitalising Public sector Banks to tackle the NPA crisis.
 Merger of Public sector Banks would enhance the credit
culture and thus spur investment in the economy.
 Wide Band
Authorities will need to decide whether the inflation target
band of 2 percent to 6 percent is too wide, Roy said. “The
current targeting regime -- a rather uniquely broad range
of 400 basis points within which the RBI has sanction to
operate -- should become a little more disciplined,” he
said.
A decision should also be made on what interest rate is
required to keep inflation in the middle of the band.
 The Reserve Bank of India (RBI) will need to
gradually tighten monetary policy further due
to rising inflation, driven mainly by higher oil
prices and a falling rupee, the International
Monetary Fund said on Wednesday. The
central bank raised the repo rate for the
second straight meeting last week by 25 basis
points to 6.5 per cent, while warning about the
inflationary pressures. The average inflation is
likely to rise to 5.2 per cent in 2018/19 from a
17-year low of 3.6 per cent in the previous fiscal
year, the IMF said.