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Origin, History and Functions Of RBI

The Reserve Bank of India is also known as the Nation’s Central Bank. According to the bank dossiers, it began operations on April 01, 1935. In the following section, we will know more about how the bank came into being. We will also see the historic acts and the decisions that the bank has been a part of. Finally, we will summarise by listing the functions of the Reserve Bank Of India. Let us also see the history of the history of RBI.

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Origin & History Of The Reserve Bank Of India

Origin Timeline

1926: The Royal Commission on Indian Currency and Finance recommended the creation of a central bank for India.

1927: A bill to give effect to the above recommendation was introduced in the Legislative Assembly. But it was later withdrawn due to lack of agreement among various sections of people.

1933: The White Paper on Indian Constitutional Reforms recommended the creation of a Reserve Bank. A fresh bill was introduced in the Legislative Assembly.

1934: The Bill was passed and received the Governor General’s assent

1935: The Reserve Bank commenced operations as India’s central bank on April 1 as a private shareholders’ bank with a paid up capital of rupees five crores (rupees fifty million).

1942: The Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar).

1947: The Reserve Bank stopped acting as banker to the Government of Burma.

1948: The Reserve Bank stopped rendering central banking services to Pakistan.

1949: The Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.

Currently, the Bank’s Central Office, located at Mumbai, has twenty-seven departments. (Box No.3) These departments frame policies in their respective work areas. They are headed by senior officers in the rank of Chief General Manager.

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Historic Details

History of RBI

The origins of the Reserve Bank of India can be traced to 1926 when the Royal Commission on Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the creation of a central bank for India to separate the control of currency and credit from the Government and to augment banking facilities throughout the country. The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and functions have undergone numerous changes, as the nature of the Indian economy and financial sector changed.

There were several causes for the creation of a central bank. Though the rupee was the common currency, there were several species of rupee coins of different values in circulation. The authorities, however, endeavored to evolve a standard coin. For many years, the Sicca of Murshidabad was, in theory, the standard coin, and the rates of exchange of the various rupees in terms of the Sicca rupee varied, the discount being called the batta.

The Government received enquiries from the Collectors as to the batta they should charge on the different species they received from zamindars and farmers. The proposed bank was to fix the value, in Sicca rupees, of the bills it had to issue in return for the money received from the Collectors, on the basis of the same batta. Thus, the bank was expected to assist in stabilizing inland exchange and in enforcing the Sicca coin as the standard coin of the Provinces.

Functions Of The Reserve Bank Of India

The Preamble to the Reserve Bank of India Act, 1934 (the Act), under which it was constituted, specifies its objective as “to regulate the issue of Bank notes and the 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”.

The functions of the Reserve Bank today can be categorized as follows:

  • Monetary policy
  • Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
  • Regulation of money, forex and government securities markets as also certain financial derivatives
  • Debt and cash management for Central and State Governments.
  • Management of foreign exchange reserves.
  • Foreign exchange management—current and capital account management
  • Banker to banks.
  • Banker to the Central and State Governments.
  • Oversight of the payment and settlement systems.
  • Currency management.
  • Developmental role.
  • Research and statistics.

While rising global integration has its advantages in terms of expanding the scope and scale of growth of the Indian economy, it also exposes India to global shocks. Hence, maintaining financial stability became an important mandate for the Reserve Bank.

Practice Questions:

Q 1: Following are the functions of the Reserve Bank Of India except:

A) Regulation and supervision of the banking and non-banking financial institutions, including credit information companies.

B) Regulation of money, forex and government securities markets as also certain financial derivatives.

C) Maintaining a uniform rate of interest throughout the country.

D) Foreign exchange management—current and capital account management.

Ans: C) Maintaining a uniform rate of interest throughout the country.

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