Origin and History of RBI
The Reserve Bank of India is the country's central bank. This organization is in charge of issuing and supplying the rupee. Economically and financially, the RBI is the ultimate authority. India's RBI is primarily responsible for regulating and legalizing all currencies. It was established on April 1, 1935. Nonetheless, it was nationalized after India's independence in 1947. Along with its role as the central bank for currency circulation, RBI also has several other responsibilities.
The committee makes rules and regulations for all bank operations in India and works for our nation's economic development. Let's know about the story of the reserve bank of India.
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More On the History of RBI
British authorities established the Imperial Bank of India in 1921 as India's national bank. However, the Imperial Bank struggled to articulate its achievement sufficiently and failed to make any progress as the Central Bank. Consequently, the government entrusted the Hilton Young Commission with the matter in 1925. A single association cannot operate as two separate entities for both credit and cash management. The commission presented their reports saying this cannot be done. The establishment of a national bank is therefore necessary. The Reserve Bank of India was established on April 1, 1935. The nationalization of the RBI occurred in January 1949.
The RBI was also unique in the fact that, right from its very beginning, it viewed itself as taking on an exclusive role in promoting progress, particularly in agriculture. When India launched its plan attempts, the Bank's advancement function gained prominence, particularly in the sixties when the Reserve Bank, from various perspectives, initiated the idea and practice of using finance to catalyze improvements.
Functions of RBI
Now, we will discuss the functions of RBI. Money supply management is one of the core functions of the RBI. Additionally, it has been coordinated for agriculture, industry, and a number of other fields. The RBI is likewise responsible for supporting the value of the rupee outside the country.
RBI Act 1934 states that the RBI performs three kinds of functions as any other central bank. Let's take a closer look at these three types of functions in detail.
Banking Functions
Bank of Issue: Among the Reserve Bank's departments, one is responsible for issuing currency notes. As per section 22 of the RBI Act, it is the only bank with authority to print numerous currency notes, except one rupee note, which the Ministry of Finance issues.
Government-Banker Relations: Secondly, the Reserve Bank of India functions as a banker, agent, and adviser to the Government of India. It is responsible for the Bank's banking activities on behalf of the Governments of India. Furthermore, it provides the government with useful recommendations on economic and financial topics and governing the government's public debt.
Bankers' Bank: Essentially, the Reserve Bank of India functions as the banker's bank, lending money to all of the country's commercial banks.
The Credit Controller: As the RBI has the power to affect the volume of credit made by banks in India, it can be considered a credit controller. It can change the Bank rate or engage in open market activity to accomplish these objectives.
Foreign Reserve Custodian: Reserve banks must ensure the outer estimation of public cash is balanced. Gold and foreign currencies are kept as reserves to cover note issues and to meet the unfavourable offset between regions. Furthermore, foreign currencies are supervised by the government through controls.
Supervisory Functions
Reserve Bank Act, 1934, and Banking Regulation Act, 1949 gave the RBI vast powers of supervision and control over the business and cooperative banks. The RBI has jurisdiction over licensing, foundations, liquidity, recreation, and liquidation of assets. The RBI has greatly assisted in improving the standard of banking in India through its supervisory functions.
Promotional Functions
The Reserve Bank's role has steadily broadened during the past decade as monetary development has become a new priority. It now performs a variety of development and promotional functions that, in the past, were considered outside the traditional scope of central banking.
The list of RBI banks in India includes some of the most famous banks like Bank of Baroda, Bank of Maharashtra, Indian Overseas Bank, Union Bank of India, Central Bank of India, and many more. To know whether your Bank comes under the RBI or not, check the list of RBI banks in India on the website of RBI.
The Reserve Bank of India heavily influences financial markets. So, now that you have read this blog, you must have gained a thorough understanding of the origin and history of RBI, its functions, objectives, interesting history, and several other interesting facts about the Reserve Bank of India.
FAQs on Establishment of RBI
1. When was the Reserve Bank of India (RBI) established and under which act?
The Reserve Bank of India (RBI) was established on April 1, 1935. Its establishment was based on the provisions of the Reserve Bank of India Act, 1934. The blueprint for the bank was laid out based on the recommendations of the Hilton Young Commission, also known as the Royal Commission on Indian Currency and Finance, in 1926.
2. What is the difference between RBI's establishment in 1935 and its nationalisation in 1949?
This is a common point of confusion. Here’s the clear distinction:
Establishment (1935): The RBI was initially set up as a privately owned entity on April 1, 1935. Although it functioned as India's central bank, its ownership was held by private shareholders.
Nationalisation (1949): Following the Transfer of Public Ownership Act, 1948, the RBI was nationalised on January 1, 1949. This means the Government of India took over its ownership from the private shareholders, bringing it under complete state control to better align its policies with the country's economic planning.
3. Why was the RBI initially established as a private shareholders' bank and not a government entity?
The decision to establish the RBI as a private shareholders' bank was influenced by the prevailing global model at the time, particularly the Bank of England. The key reasons were:
To ensure operational autonomy and keep the central banking functions insulated from direct political pressures.
To foster credibility and confidence in its role as the regulator of currency and finance.
This structure was later changed with nationalisation in 1949 to align the bank’s functions more closely with the government's post-independence developmental objectives.
4. Who is considered the guiding force behind the conceptual framework of the RBI?
While the Hilton Young Commission formally recommended its creation, Dr. B.R. Ambedkar is widely regarded as the intellectual and guiding force behind the RBI's conceptual framework. His book, "The Problem of the Rupee – Its Origin and Its Solution," provided the foundational ideas and guidelines that were presented to and largely adopted by the Hilton Young Commission. Therefore, his work was instrumental in shaping the structure and purpose of India's central bank.
5. Where was the first headquarters of the RBI, and when did it move to its current location?
The Reserve Bank of India's central office was initially established in Calcutta (now Kolkata) in 1935. However, it was permanently moved to Bombay (now Mumbai) in 1937. The Governor of the RBI sits at the Mumbai headquarters, where the bank's core policies are formulated.
6. Is the RBI considered a statutory corporation? Explain why.
Yes, the Reserve Bank of India is a prime example of a statutory corporation. A statutory corporation is an autonomous corporate body created by a special Act of the Parliament or State Legislature. The RBI qualifies as one because it was established by a specific law, the RBI Act of 1934, which defines its powers, objectives, and functions, rather than being registered under the Companies Act.
7. How did the establishment of the RBI change the financial system in India?
The establishment of the RBI was a landmark event that fundamentally restructured India's financial system. Its key impacts were:
Unified Currency Control: It took over the function of currency issuance from the government, standardising India's monetary system.
Banker to the Banks: It became the apex bank, regulating and supervising other commercial banks, a role previously managed inadequately by the Imperial Bank of India.
Monetary Stability: It provided a formal mechanism for controlling credit and maintaining monetary stability in the country, which was crucial for economic growth. You can learn more about its role by understanding the functions of a central bank.
