Reserve Bank of India

The Reserve Bank of India (RBI) is the central bank of India, established in 1935 by the Reserve Bank of India Act (1934). Originally privately owned, the RBI was nationalized in 1949. The bank is headquartered in Mumbai and maintains offices throughout the country.

The RBI plays a central role in regulating India’s financial system and economy. Through its diverse functions—which include issuing currency notes, supervising banks and financial institutions, managing currency and foreign exchange reserves, and setting monetary policy—the central bank helps maintain confidence in India’s currency, credit, and banking systems.

A major objective of the RBI is to preserve financial stability, which is considered essential for sustainable economic growth and public confidence in financial institutions. The RBI monitors risks in the banking and financial sectors, manages liquidity during periods of market stress, and coordinates with the government and other regulators to strengthen the resilience of the financial system.

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Banknotes of all denominations (except the one-rupee note) of the Indian rupee, such as this 100-rupee banknote, display the portrait of Indian nationalist leader Mahatma Gandhi.

Courtesy of Ron Wise

The RBI formulates and implements the government’s monetary policy to maintain price stability and control inflation, with the broader aim of enabling economic growth. To keep inflation stable, it can adjust key policy rates such as repo and reverse repo rates (the interest rates at which the central bank lends to and borrows from other banks, respectively).

If inflation rises beyond desired levels, the RBI might increase interest rates. Banks then tend to borrow and lend less while holding more funds with the RBI, reducing liquidity in the economy and helping slow inflation. On the other hand, the central bank might lower interest rates to encourage borrowing, investment, and consumption when inflation is below its target. Although the RBI is responsible for monetary policy, the government can also influence inflation through fiscal measures such as taxation and public spending.

The RBI also manages the country’s international payments and its foreign exchange market under the Foreign Exchange Management Act (FEMA) of 1999. Its aim is to support international trade and payment and foster the orderly development and maintenance of the foreign exchange market in India. It does so by regulating foreign exchange transactions, authorizing banks and other entities to deal in foreign currency, and managing the country’s foreign exchange reserves. The RBI may also intervene in the foreign exchange market to reduce excessive fluctuations in the exchange rate of the rupee, often by buying or selling foreign currencies, to maintain orderly market conditions.

The RBI uses tools such as the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) to influence liquidity and credit conditions in the banking system. The CRR is the share of a bank’s deposits that must be kept with the RBI as cash, while the SLR is the share that must be maintained in liquid assets such as cash, gold, or government securities. By changing these requirements, the RBI can affect how much money banks have available to lend to the public.

Other instruments include the bank rate, also called the discount rate, which is the rate at which the RBI lends to banks over the longer term. By increasing this rate, the RBI can discourage borrowing and spending, helping to control inflation, while lowering it can encourage borrowing and investment.

The central bank buys or sells government securities, which include treasury bills and dated securities, to inject or absorb money from the financial system through open market operations (OMOs). To reduce liquidity or money supply in the market, the RBI sells government securities in the market and buys them to increase the available currency. Commercial banks create money by extending loans, creating new deposits in the banking system.

By changing interest rates, reserve requirements, and using other monetary policy tools, the RBI influences how much banks can lend and, therefore, the rate at which money and credit are created in the economy. The RBI can also use margin requirements (“haircuts”) to determine how much money commercial banks can borrow against assets pledged as collateral and influence the availability of credit.

The RBI regulates and supervises commercial banks, non-banking financial companies (NBFCs), and payment systems. It issues regulations, conducts audits and inspections, and monitors financial institutions to reduce systemic risks and protect depositors. It also monitors whether banks maintain required cash reserves and requires banks to meet lending targets for priority sectors such as agriculture, small-scale industries, and other underserved borrowers. Banks are also required to regularly report their lending activities to the RBI.

With digital transactions increasing, the RBI oversees the adoption of digital payment methods with a view to encourage such payment avenues. It also issues guidelines to banks, financial institutions, and the general public about security measures. The popular RBI campaign “RBI Kehta Hai” (“RBI says”), with the slogan “RBI Kehta Hai ... Jaankar Baniye, Satark Rahiye!” (“RBI says be informed, stay alert!”), was launched to keep people informed with an emphasis on financial safety.

The RBI manages banking transactions for the central and state governments and serves as their banker, debt manager, and financial adviser, performing some functions similar to those of an investment bank. It also serves as the government’s agent and financial adviser. It helps manage public debt, oversees the issuance of government securities and treasury bills, and provides advice on key economic and financial policies, including fiscal management, exchange-rate policy, and external trade.

As the banker to banks, the RBI maintains the accounts of, and extends credit to, commercial banks. It facilitates transactions between banks, including funds transfers, providing liquidity support when required. As the lender of last resort, it can extend emergency financial assistance to banks facing a temporary liquidity shortage.

The RBI is responsible for issuing and managing banknotes and managing the circulation of coins. It oversees the printing, distribution, circulation, and replacement of currency notes and works to ensure the availability of adequate currency across the country. The RBI manages the circulation of currency through its issue offices and a network of currency chests operated by scheduled banks. Newly printed banknotes are supplied by currency printing presses to these offices and chests, then distributed across the country. The central government chooses the design and material of the currency in consultation with the RBI.

A central board of directors headed by a governor oversees the bank. In addition, four local boards (headquartered in Mumbai, Kolkata, Chennai, and New Delhi) advise the central board on regional issues and represent the interests of regional banks. All members of the central and local boards are appointed by the government for terms of four years.

The Government of India’s six-member Monetary Policy Committee (MPC) includes the RBI governor, the deputy governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the government.

British banker Osborne Smith, who had decades of experience with various banks such as the Bank of New South Wales and the Imperial Bank of India, was the first governor of the RBI. The first Indian governor, Chintaman Dwarkanath Deshmukh, was appointed in 1943. An Indian Civil Service (ICS) officer, he had served the RBI in other capacities before becoming the governor. During his tenure, India attained independence from British rule, and he had to oversee the division of the RBI’s assets and liabilities between India and Pakistan after the partition of the country.

Since then, the central bank has been led by a series of highly competent and visionary governors, each contributing to its legacy. Benegal Rama Rau was the longest-serving governor with a tenure of over seven years. The fifteenth governor, Manmohan Singh, went on to become the prime minister of India.

RBI governors have had a significant impact on the country’s economic progress. For example, Yaga Venugopal Reddy steered India through the period leading up to the global financial crisis of 2007–08. Governor Urjit Patel had to oversee and shepherd India through one of the most significant and debated economic moves in the country within a few months of assuming office. In November 2016, the Government of India, led by Prime Minister Narendra Modi, demonetized 500-rupee and 1,000-rupee currency notes, banning them as legal tender. Patel maneuvered demonetization and its effects, and focused on bolstering the monetary policy framework that had been introduced during the tenure of his predecessor Raghuram Rajan. Shaktikanta Das, who had the second-longest term as an RBI governor, guided India through the economic challenges of the COVID-19 pandemic by introducing supportive monetary policies.