What are the Objectives of RBI?
Banks in India are a very important part of the economy. The Reserve Bank of India is the one responsible for all the major actions related to the growth and development of the country. Hence, it is known as the central bank of the country. The Reserve Bank of India was formed on the 1st of April in 1935.
(Image Will be Uploaded Soon)
Reserve Bank of India Emblem
During the initial stages, this bank was considered to be private. Until 1949, the Reserve Bank of India remained a part of the private sector. After that period of time, the Government of India nationalized the bank. The headquarters of RBI was formerly in Calcutta. However, after the completion of the nationalization, the headquarters were shifted to Mumbai. In this article, students will get to learn important details about the objectives and functions of the Reserve Bank of India.
Some Facts About the Reserve Bank of India
Here are some well-known facts about the Reserve Bank of India.
The formation of the RBI happened on the recommendation from the Royal Commission on Indian Currency and Finance in the year 1926.
The nationalization of the RBI took place on the 1st of January, 1949.
A Panther and the Palm Tree is the emblem of RBI.
The government of India owns the Reserve Bank of India.
The establishment of the RBI happened according to the Reserve Bank of India Act, 1934.
The Reserve Bank of India happens to be a member of the Asian Clearing Union.
A central board of directors is responsible for controlling the RBI.
The term period for which the Government of India appoints the directors is 4 years.
The title for the Governor of Reserve Bank of India was first given to Sir Osborne Smith.
CD Deshmukh was the first Indian to be appointed as the Governor of RBI.
Major Objectives of Reserve Bank of India
Here are some of the main objectives of the Reserve Bank of India. All of these objectives are formed according to the Reserve Bank of India Act.
The main motto behind the establishment of the Reserve Bank of India was to regulate all the other banks in the country. The main objective was keeping a check on the reserves as well as issuing bank notes.
The Reserve Bank of India came into existence in order to secure the stability of the monetary conditions in the country. Operation of currency and credit system were also some of the benefits.
Prior to the establishment of RBI, the Imperial Bank of India and the Government of India were not able to have control of the financial system. Hence, a committee led by a young commission and Hilton shifted the responsibility to the RBI. Its main target was to regulate and control different financial policies and assist in banking development throughout the country.
The Reserve Bank of India was established with the main goal of being able to control the banking functions in the business sector. Hence, the main focus of the Reserve Bank of India is to issue the new currency notes.
Promoting the economic development and growth of the government of India was one of the major objectives of the Reserve Bank of India.
Governing of the RBI
The Reserve Bank of India governor was the first person responsible for the entire control of the bank. However, in the current times, there is a board of directors for that task. This board is appointed in an unbiased manner by the Government of India. the organization and management of the Reserve Bank of India are entirely in the hands of this board of directors. Hence, they are considered to be responsible for the actions that are taken in the RBI.
The board of directors situated in the Reserve Bank of India headquarters consists of a total of 20 people. There is one Governor, 4 deputy governors, and a total of 15 directors on the board. The governor of the Reserve Bank of India has maximum authority in the bank. The person in that title is appointed by the Indian government for a tenure of 5 years in total. However, it is also possible that the person is reelected to serve for another term. The central government is responsible for the appointment of the 4 Deputy governors. It is important for the central board of these directors to provide the powers in running the Reserve Bank of India. Hence, they should be meeting at least six different times and once every 3 months.
The Reserve Bank of India is an independent entity that is considered to be responsible for the different economic developments in the banking sector. With the information from this article, students will be able to gather all the information that they need regarding the topic.
FAQs on Objectives of RBI
1. What are the primary objectives of the Reserve Bank of India (RBI)?
The primary objectives of the Reserve Bank of India (RBI) are centred on maintaining the stability and growth of the Indian economy. Key objectives include:
Monetary Stability: Ensuring price stability by controlling inflation and maintaining confidence in the currency.
Financial System Oversight: Regulating and supervising the banking and financial system to protect depositors' interests and ensure public confidence.
Managing Foreign Exchange: Maintaining stable exchange rates and managing the country's foreign exchange reserves as per the Foreign Exchange Management Act (FEMA).
Issuer of Currency: Solely issuing and managing the supply of currency notes to ensure an adequate supply of clean and genuine notes.
Developmental Role: Promoting and developing financial institutions and markets to support national economic objectives.
2. What are the main functions through which the RBI achieves its objectives?
The RBI performs several crucial functions to meet its objectives, acting as the nation's central bank. Its main functions are:
Bank of Issue: The RBI has the sole authority to issue currency notes in India, which helps in maintaining uniformity in the money supply.
Banker to the Government: It acts as a banker, agent, and advisor to the central and state governments, managing their accounts and public debt.
Banker's Bank and Supervisor: The RBI holds a part of the cash reserves of commercial banks, acts as a lender of last resort, and supervises their operations to ensure stability.
Controller of Credit: It uses monetary policy tools like the repo rate and cash reserve ratio to control the money supply and credit creation by commercial banks.
3. How do the RBI's monetary policy objectives support India's overall economic growth?
The RBI's monetary policy objectives are designed to create a stable macroeconomic environment conducive to growth. This is achieved by:
Maintaining Price Stability: By keeping inflation in check, the RBI protects the purchasing power of the currency, which encourages savings and long-term investment.
Ensuring Adequate Credit Flow: The RBI ensures that productive sectors of the economy have access to sufficient credit at reasonable rates, which fuels business expansion and industrial activity.
Managing Liquidity: Through its instruments of monetary policy, the RBI manages the amount of money in the system to prevent economic overheating or recession, thus promoting sustainable growth.
4. Why is managing foreign exchange reserves considered a critical objective of the RBI?
Managing foreign exchange reserves is a critical objective for the RBI because it directly impacts the nation's economic stability and international standing. The key reasons are:
Maintaining Confidence: A healthy level of reserves builds confidence in the market about the country's ability to meet its international payment obligations.
Stabilising the Rupee: The RBI can buy or sell foreign currency from its reserves to manage excessive volatility in the exchange rate of the Indian Rupee.
Absorbing Economic Shocks: Reserves act as a buffer to absorb external shocks, such as a sudden stop in capital inflows or a sharp rise in import prices (e.g., crude oil).
5. How does the RBI's objective as a 'banker's bank' differ from the objectives of a commercial bank?
The objectives are fundamentally different. A commercial bank's primary objective is to earn profit for its shareholders, while the RBI's objective as a 'banker's bank' is to ensure the stability and efficiency of the entire banking system. The key difference between a central bank and a commercial bank lies in their core purpose:
Purpose: The RBI acts as a regulator and facilitator, not a competitor. It holds statutory reserves (CRR, SLR) and acts as the lender of last resort. A commercial bank operates to serve the public directly and maximise profit.
Customer Base: The RBI's customers are the government and other banks. A commercial bank's customers are the general public and businesses.
Motive: The RBI operates for public welfare and economic stability. A commercial bank operates with a profit motive.
6. What is the connection between the RBI's objective of controlling credit and maintaining price stability?
The connection is direct and forms the core of monetary policy. The objective of controlling credit is the primary mechanism for achieving price stability (i.e., controlling inflation). When the RBI wants to control inflation, it makes credit more expensive and harder to obtain. This is done by increasing policy rates like the repo rate. This reduces the overall money supply in the economy, which in turn lowers aggregate demand and helps bring prices down. Conversely, to boost a slowing economy, the RBI can make credit cheaper, increasing the money supply and stimulating demand.
7. When was the Reserve Bank of India established and nationalised?
The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. Initially, it was a privately owned institution. It was later nationalised on January 1, 1949, after which it came under the full ownership of the Government of India.
