Reserve Bank Of India - RBI

What is the 'Reserve Bank Of India - RBI'

The Reserve Bank of India (RBI) is the central bank of India, which was established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create financial stability in India, and it is charged with regulating the country's currency and credit systems.

BREAKING DOWN 'Reserve Bank Of India - RBI'

Located in Mumbai, the RBI serves the financial market in many ways. One of its most important functions is establishing an overnight interbank lending rate. The Mumbai Interbank Offer Rate, or MIBOR, serves as a benchmark for interest rate-related financial instruments in India.

The RBI originally started as a private entity but was nationalized in 1949. The reserve bank is governed by a central board of directors appointed by the national government. The RBI's directors have always been appointed by the government, and since it became fully owned by the government of India, it continues to do so as outlined by the Reserve Bank of India Act. Directors are appointed for a period of four years.

The Purpose of the RBI

The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions and nonbanking finance firms. Initiatives taken on by the RBI include restructuring bank inspections, introducing off-site surveillance of banks and financial institutions and strengthening the role of auditors.

The current focus of the RBI is to continue its increased supervision of financial institutions while dealing with legal issues in banking fraud and consolidated accounting. It also is trying to create a supervisory rating model for its banks and aims to cut interest rates.

The Main Functions of the RBI

First and foremost, the RBI formulates, implements and monitors India's monetary policy. Its management objective is to maintain price stability and ensure that credit is flowing to productive economic sectors. It also manages all foreign exchange under the Foreign Exchange Management Act of 1999. This act allows the RBI to facilitate external trade and payment in order to promote the development and health of the foreign exchange market in India.

It acts as a regulator and supervisor of the overall financial system. This injects public confidence into the national financial system, protects interest rates and provides positive banking alternatives to the public. Finally, the RBI acts as the issuer of national currency. For India, this means that currency is either issued or destroyed, depending on its fit for current circulation. This provides the Indian public with monetary supplies of currency in the form of dependable notes and coins, a lingering issue in India.