The Reserve Bank of India is India’s central bank and is wholly owned by the Government of India. Established on April 1, 1935, the RBI’s main office is located in India’s capital of Mumbai. Active management of the Reserve Bank of India (RBI) is provided by the central board of directors, which includes the bank’s governor, a maximum of four deputy governors, and a few directors of relevant local boards. The central board delegates specific functions through its committees and sub-committees, including: the committee of central board, which oversees the current business of the central bank; the board for financial supervision, which regulates and supervises commercial banks, finance companies, and financial institutions; and the board for payment and settlement systems.

The main functions of the RBI include:

  • Monetary authority: formulates, implements, and monitors India’s monetary policy. The main objectives of which are maintaining price stability, ensuring adequate flow of credit to productive sectors, and financial stability.
  • Issuer of currency: issues currency and coins, and exchanges or destroys currency notes and coins unfit for circulation
  • Banker and debt manager to government of India: performs merchant banking functions for central and state governments and also acts as their banker, determines how best to raise money in debt markets to help the government finance its requirements
  • Banker to banks: enables clearing and settlement of inter-bank transactions, maintains banks’ accounts for statutory reserve requirements, and acts as a lender of last resort
  • Regulator and supervisor of the financial system: protects the interests of depositors, facilitates orderly development and conduct of banking operations, and maintains financial stability through preventive and corrective measures
  • Manager of foreign exchange: regulates transactions related to the external sector, enables the development of the foreign exchange market (forex), ensures smooth functioning of the domestic forex market, and manages India’s foreign currency assets and gold reserves
  • Regulator and supervisor of payment and settlement systems
  • Maintaining financial stability: an explicit objective of the RBI since the early 2000s
  • Development: ensures credit availability to productive economic sectors, establishes institutions to develop India’s financial infrastructure, expands access to affordable financial services, and promotes financial education and literacy

India’s Growing Economy

India has reported top gross domestic product (GDP) growth rates across the world. It is also known as one of the four most powerful emerging market countries, collectively part of the BRICs which contain Brazil, Russia, India, and China.

The International Monetary Fund (IMF) and World Bank have highlighted India in several reports showing its high rate of growth. In April 2019, the World Bank projected India’s GDP growth would expand by 7.5% in 2020. Also in April 2019, the IMF showed an expected GDP growth rate of 7.3% for 2019 and 7.5% for 2020. Both projections have India with the highest expected GDP growth in the world over the next two years.

7.5%

The World Bank’s projection for India’s GDP growth in 2020.

These growth rates make the role of the Reserve Bank of India increasingly important as the country’s total GDP moves higher. India is a top 10 nation for GDP overall but its numbers fall far behind the world’s superpowers in the United States and China.

GDP Growth and Nominal GDP.

India is expected to have a GDP of $2.935 trillion and $3.304 trillion in 2019 and 2020 respectively. This compares to expectations of $21.506 trillion and $22.336 trillion for the U.S. China’s expected GDP for the same time periods is $14.242 trillion and $15.678 trillion.

The RBI’s Role

As with all economies, the central bank plays a key role in managing and monitoring the monitory policies affecting both commercial and personal finance as well as the banking system. As GDP moves higher on the world rankings the RBI’s actions will become increasingly important.

In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to 6%. The rate cut was the second for 2019 and is expected to help impact the borrowing rate across the credit market more substantially. Prior to April, credit rates in the country have remained relatively high, despite the central bank’s positioning, which has been limiting borrowing across the economy. The central bank must also grapple with a slightly volatile inflation rate that is projected at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5% to 3.8% in the second half of 2020.

The RBI also has control over certain decisions regarding the country’s currency. In 2016, it affected a demonetization of the currency which removed Rs. 500 and Rs. 1000 notes from circulation, mainly in an effort to stop illegal activities. Post analysis of this decision shows some wins and losses. The demonetization of the specified currencies caused cash shortages and chaos while also requiring extra spend from the RBI for printing more money. One of the biggest advantages, however, was the increase in tax collection which resulted from greater consumer reporting transparency.

In December 2018, the country elected Shaktikanta Das as its new RBI leader. Das is a supporter of demonetization inline with the top government officials’ views. Das is also expected to better align with India’s government leadership and amicably support better access to credit.

The Bottom Line

As one of the fastest growing emerging market countries in the world, India and its central bank have several unique challenges ahead that will require nimble navigation from the RBI. Shaktikanta Das will be charged with guiding the monetary policy direction over the next three years for the country as it continues to take the spotlight for GDP growth. The country also has a diverse range of goods and services along with a rising inflation rate. With the Indian economy steadily accounting for a greater share of the global economy, it is expected that the RBI will gain greater attention from world leaders while also growing in stature as one of the world’s most-watched central banks.