90 Years of Reserve Bank of India (RBI)

90 Years of Reserve Bank of India (RBI)

Context: In a recent event held in Mumbai, the Prime Minister and the RBI Governor participated in a ceremony commemorating the 90th anniversary of the RBI.

About Reserve Bank of India (RBI): 
• The Reserve Bank of India (RBI), established on April 1, 1935, serves as the central bank of India, as per the provisions outlined in the Reserve Bank of India Act, 1934.
• Throughout its existence, the RBI has been instrumental in shaping Indias economic growth.
• Operating through both pre and postIndependence periods, the RBI has earned a global reputation for its professionalism and unwavering dedication.

Role and Functions of RBI:
• Monetary Policy and Inflation Control:
o One of the key functions of the RBI is to manage inflation and ensure the stability of the countrys financial system.
o This is achieved through setting the overnight interbank lending rate, known as the Mumbai Interbank Offer Rate (MIBOR), which acts as a benchmark for interest rate-related financial instruments in the Indian market.
• Regulation and Supervision:
o The RBI is tasked with regulating and supervising the financial sector of the country.
o This oversight extends to commercial banks, non-banking financial companies, and other financial institutions, ensuring the stability and integrity of the financial system.
• Management of Foreign Exchange:
o The RBI is responsible for managing Indias foreign exchange reserves.
o This involves regulating the foreign exchange market, controlling capital flows, and maintaining exchange rate stability.
• Financial Inclusion and Innovation (Digital Economy):
o The RBI has played a crucial role in promoting financial inclusion and fostering innovation within the financial sector.
o For example, the introduction of the Unified Payments Interface (UPI) has transformed the payments landscape across the nation.
• Digital Currency:
o The RBI has introduced the digital rupee, also known as the e-rupee, for person-to-person and personto-merchant transactions.
o This central bank digital currency issued by the RBI aims to facilitate digital transactions and enhance financial inclusivity.

Challenges:
• Managing Inflation and Interest Rates:
o The RBI faces the challenge of balancing inflation control with fostering economic growth.
o This involves adjusting the policy repo rate, which can have significant implications for the overall economy.
• Regulating the Banking Sector:
o A major challenge for the RBI is regulating the banking sector, particularly in addressing the issue of nonperforming assets or bad loans.
o While efforts are underway to resolve this issue, it remains a substantial challenge for the RBI.
• Dealing with Global Economic Uncertainties:
o Global economic uncertainties, including banking fragility in certain countries and geopolitical tensions, pose challenges for the RBI.
o Navigating these uncertainties while managing India’s foreign exchange reserves is crucial.
• Digital Currency:
o The emergence of digital currency presents a new challenge for the RBI in managing and integrating this form of currency into the Indian economy.
• ‘Impossible Trinity’ or ‘Trilemma’:
o The RBI grapples with managing the impossible trinity or trilemma which involves maintaining a stable foreign exchange rate, free capital movement, and an independent monetary policy simultaneously.

• Other Challenges:
o The RBI must address the impact of new technologies on the financial sector.
o Additionally, navigating economic disruptions caused by events such as the global financial crisis, the taper tantrum of 2013, demonetization, and the COVID-19 pandemic-induced disruptions remains a significant challenge.

Important Initiatives of RBI:
• Liquidity Boosting Measures:
o The RBI has introduced various measures to enhance liquidity and support the economy.
o These include reducing the reverse repo rate by 25 basis points to 3.75%, discouraging banks from parking excess liquidity under the Liquidity Adjustment Facility (LAF) window.
o Additionally, the RBI has initiated a ₹50,000-crore special refinance facility for financial institutions.
• Enabling the Market Economy:
o Transitioning from resource allocation to enabling the market economy, the RBI has implemented significant reforms.
o Reforms such as the Insolvency and Bankruptcy Code (IBC) and flexible inflation targeting have strengthened the banking system and curbed consumer price pressures.
• Budget Initiatives:
o The RBI has supported various initiatives outlined in the budget, including privatization, asset monetization, and new infrastructure financing schemes.
o The implementation of the IBC framework has notably reduced bad loans from 11.25% in 2018 to below 3% by September 2023, fostering healthy credit growth.
• Stabilizing the Rupee:
o To stabilize the rupee, the RBI has undertaken several measures.
o These measures include export restrictions, tax reductions on petrol and diesel, increased subsidy support for farmers, along with raising policy rates by 90 basis points and inflation targets by 100 basis points.