The central bank of the country is the Reserve Bank of India
(RBI). It was established in April 1935 with a share capital of Rs. 5 crores on
the basis of the recommendations of the Hilton Young Commission. The share
capital was divided into shares of Rs. 100 each fully paid which was entirely owned
by private shareholders in the begining. The Government held shares of nominal
value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The
general superintendence and direction of the Bank is entrusted to Central Board
of Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors by
the Government to give representation to important elements in the economic
life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata,
Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and
economic interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April
1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the
functioning of the Bank.
The Bank was constituted for the need of following:
·
To regulate the issue of banknotes
·
To maintain reserves with a view to securing
monetary stability and
·
To operate the credit and currency system of the
country to its advantage.
Functions of the
Reserve Bank of India
RBI formulates the monetary policy, thus regulating and
supervising the economy of India. RBI is the supreme banking authority in
India. It sets the guidelines according to which the banking operations and
financial systems within the country functions.
The RBI issues currency notes and coins of various
denominations. It destroys and exchanges soiled currencies to ensure that only
good ones are in circulation.
RBI is the banker to the Government of India. The Reserve
Bank performs merchant banking function for the central and the state
governments. Also, all major banks bank with the RBI. The RBI maintains banking
accounts of all scheduled banks in India.
As a regulator, RBI monitors the functioning of other banks;
it tries to protect depositors’ interests and provides cost-effective banking
services to the public. The Banking Ombudsman scheme setup by RBI, addresses
the grievances of banks’ customers.
The Reserve Bank of India acts as the bankers’ bank. On the
basis of eligible securities the scheduled banks can borrow money from the
Reserve Bank of India. At times of need or stringency, by re-discounting bills
of exchange, the banks can get financial accommodation from the RBI. Reserve
Bank becomes not only the banker’s bank but also the lender of the last resort.
In times of banking crisis, the Reserve Bank of India offers credit to the help
the commercial banks recover.
RBI controls the monetary policy of India by controlling
cash liquidity in the country. Frequent alteration of the values of financial
tools like Cash Reserve Ratio (CRR), Repo Rate, Reverse Repo Rate, and
Statutory Liquidity Ratio (SLR), restricts the cash flow within the country. As
an anti-inflationary measure, RBI limits huge foreign capital inflows to
stabilize the Rupee value.
RBI regulates the foreign exchange inflow and outflow, by
the Foreign Exchange Management Act, 1999 of RBI. All money transfer out of
India is subject to limits defined by the RBI. To maintain the exchange rate of
Indian Rupee versus foreign currencies like the US Dollar, Euro, Pound
sterling, and Japanese yen, RBI buys and sells foreign currencies.
The Reserve Bank of India has the power to influence the
volume of credit created by banks in India, which means that it is the
controller of credit. Carrying out open market operations or changing the Bank
rate helps RBI to achieve this. Through quantitative and qualitative measures,
it controls the credit operations of other banks.
The gold trade is also regulated by the Reserve Bank of
India.RBI has functioned as the backbone of the Indian financial system since
its inception. It has given stability to the Indian economy when most of the
other developing economies failed. With its prudent approach, RBI steered the
economy effectively through the recent financial crisis.
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