Reserve Bank of India and the Indian Banking System
This domain examines the RBI as central bank and regulator, its monetary-policy tools, and how the Indian banking system is supervised.
Establishment and status
The RBI was created by the RBI Act, 1934, began operations on 1 April 1935 and was nationalised in 1949. Its headquarters is in Mumbai. It is the monetary authority, regulator of banks and custodian of foreign exchange reserves.
Functions
The RBI issues currency (except ₹1 notes and coins, which are issued by the Government of India), acts as banker to government, banker to banks, lender of last resort, and manager of the payments system.
Policy tools
The repo rate is the rate at which the RBI lends short-term funds to banks against securities; the reverse repo absorbs liquidity. CRR is the cash reserve kept with the RBI and earns no interest. SLR is held in approved securities such as government securities. Other tools are the bank rate, open market operations and the marginal standing facility. The Monetary Policy Committee, set up in 2016, has six members and a flexible inflation target of 4% with a band of plus or minus 2%.
Regulation
Banks are regulated under the Banking Regulation Act, 1949 and the RBI Act. Deposit insurance is provided by DICGC up to ₹5 lakh per depositor per bank.
Worked example
If net demand and time liabilities are ₹500 crore, CRR at 4% requires ₹20 crore with the RBI, and SLR at 18% requires ₹90 crore in approved securities. The CRR amount earns no interest; the SLR securities earn a return.
Traps
Repo injects liquidity while reverse repo absorbs it. CRR is not held in government securities. The RBI does not issue coins. DICGC cover is limited, not unlimited.