Topic 01 of 6 · Chapter 05 · Indian Economy
RBI — Establishment, Structure & Functions
RBI established 1935, nationalised 1949, Governor, functions — banker’s bank, lender of last resort, currency issuer.
1. Establishment of RBI
The Reserve Bank of India (RBI) was established on April 1, 1935 under the Reserve Bank of India Act, 1934. It was initially a private shareholders’ bank. It was nationalised on January 1, 1949.
⭐ Key Facts:
• Established: April 1, 1935
• Nationalised: January 1, 1949
• Headquarters: Mumbai (shifted from Kolkata in 1937)
• First Governor: Sir Osborne Smith (British)
• First Indian Governor: C.D. Deshmukh (1943)
• Established: April 1, 1935
• Nationalised: January 1, 1949
• Headquarters: Mumbai (shifted from Kolkata in 1937)
• First Governor: Sir Osborne Smith (British)
• First Indian Governor: C.D. Deshmukh (1943)
2. Structure of RBI
- Governor: Head of RBI; appointed by Central Government for 3-year term (renewable)
- Deputy Governors: 4 Deputy Governors
- Central Board of Directors: 21 members including Governor, Deputy Governors, government nominees, and directors
- Local Boards: In Mumbai, Kolkata, Chennai, New Delhi
- Monetary Policy Committee (MPC): 6-member committee that decides repo rate
💡 Monetary Policy Committee (MPC): Established in 2016. Has 6 members — 3 from RBI (Governor + 2 Deputy Governors) and 3 external members appointed by government. Decides repo rate by majority vote. Governor has casting vote in case of tie.
3. Functions of RBI
| Function | Details |
|---|---|
| Issue of Currency | Sole authority to issue currency notes (except ₹1 note issued by Ministry of Finance). Maintains minimum reserve of gold and foreign securities. |
| Banker to Government | Manages government accounts, provides short-term loans to government, manages public debt |
| Banker’s Bank | Provides loans to commercial banks, acts as lender of last resort |
| Monetary Policy | Controls money supply and credit through CRR, SLR, Repo Rate, etc. |
| Foreign Exchange Management | Manages India’s foreign exchange reserves, regulates forex market |
| Regulation & Supervision | Regulates and supervises commercial banks, NBFCs, payment systems |
| Developmental Role | Promotes financial inclusion, develops financial markets, supports priority sector lending |
💡 Lender of Last Resort — Example
Imagine a bank (say, XYZ Bank) is facing a liquidity crisis — it doesn’t have enough cash to meet depositor withdrawals. No other bank will lend to it because they think it might fail.
In this situation, RBI steps in as the lender of last resort — it provides emergency loans to XYZ Bank to prevent it from collapsing. This prevents a bank run and maintains financial stability.
This is why RBI is called the “banker’s bank” — it’s the bank that banks turn to in emergencies.
4. Key Points for Exam
🔑 Must-Remember Facts
- RBI established: April 1, 1935
- RBI nationalised: January 1, 1949
- RBI headquarters: Mumbai
- First Governor: Sir Osborne Smith
- First Indian Governor: C.D. Deshmukh (1943)
- RBI issues all currency notes except ₹1 note (issued by Ministry of Finance)
- MPC established: 2016; 6 members; decides repo rate
- RBI = lender of last resort for commercial banks
- RBI manages India’s foreign exchange reserves
- Governor appointed for 3-year term (renewable)