- Establishment of the Reserve Bank of India: The RBI was established on April 1, 1935, under the Reserve Bank of India Act, 1934. It is the central bank of India and is responsible for the formulation and implementation of monetary policy, the regulation of the banking system, and the management of the country’s foreign exchange reserves.
- Monopoly of note issue: The RBI has the sole right to issue bank notes in India. This means that no other entity, including the government, can issue bank notes.
- Centralizing functions of currency and credit: The RBI is responsible for managing the currency and credit system of the country. This includes issuing currency notes, managing the government’s debt, and regulating the banking system.
- Banking supervision: The RBI is responsible for the supervision of banks in India. This includes setting capital adequacy norms, liquidity requirements, and other prudential regulations.
- Foreign exchange management: The RBI is responsible for managing the country’s foreign exchange reserves. This includes buying and selling foreign exchange, and regulating the flow of foreign exchange into and out of the country.
- Payments and settlements: The RBI is responsible for the smooth functioning of the payments and settlements system in India. This includes operating the clearing houses, and developing and maintaining the payment infrastructure.
Some comments on the salient features of the RBI Act, 1934:
- The monopoly of note issue gives the RBI a lot of power over the money supply in the economy. This power can be used to manage inflation and interest rates.
- The centralization of currency and credit functions gives the RBI a comprehensive view of the financial system. This allows the RBI to take a holistic approach to financial regulation and supervision.
- The banking supervision function is important for ensuring the stability of the banking system. The RBI has a wide range of powers to supervise banks, including the power to issue directions, take over banks, and even revoke the licenses of banks.
- The foreign exchange management function is important for ensuring the stability of the foreign exchange market. The RBI has a wide range of powers to manage the foreign exchange market, including the power to buy and sell foreign exchange, and regulate the flow of foreign exchange into and out of the country.
- The payments and settlements function is important for ensuring the smooth functioning of the payments system in the economy. The RBI has a wide range of powers to develop and maintain the payments infrastructure, including the power to operate the clearing houses.
Questions and Answers
Q. What are the challenges faced by the RBI in implementing the provisions of the RBI Act, 1934?
The RBI faces a number of challenges in implementing the provisions of the RBI Act, 1934. These challenges include:
- The complexity of the financial system: The financial system has become increasingly complex in recent years. This makes it difficult for the RBI to keep track of all the different entities in the system and to ensure that they are complying with the regulations.
- The rapid pace of change: The financial system is constantly changing. This makes it difficult for the RBI to keep up with the latest developments and to ensure that the regulations are still relevant.
- The lack of cooperation from banks: Some banks are reluctant to cooperate with the RBI, especially when it comes to enforcing regulations. This can make it difficult for the RBI to achieve its objectives.
Q. What are the reforms that have been made to the RBI Act, 1934 in recent years?
The RBI Act, 1934 has been amended several times in recent years. These amendments have been made to address the challenges faced by the RBI and to improve the effectiveness of the RBI. Some of the key amendments include:
- The introduction of the Inflation Targeting Framework in 2016: This framework aims to keep inflation at a pre-specified level. The RBI uses a variety of monetary policy tools to achieve this objective.
- The establishment of the Financial Stability and Development Council (FSDC) in 2010: This council is responsible for monitoring and ensuring the stability of the financial system. The FSDC includes representatives from the government, the RBI, the financial sector, and the academia.
- The introduction of the Prompt Corrective Action (PCA) framework in 2014: This framework is designed to identify and address financial problems in banks early on. The PCA framework allows the RBI to take a variety of actions against banks, including imposing restrictions on their operations.