The Author, Isha Mitruka is a 5th year, BBA LLB student at Christ University, Banglore. She is currently interning with LatestLaws.com.
LEGAL HISTORY
The Reserve Bank of India (hereinafter referred as “RBI”) started as a private shareholders’ bank but it was nationalized in the year 1949 to take on responsibility of the interests and need of the people of India which was newly independent. Coordination of the government policies and the policies of the central bank was the main aim behind the nationalization.
The Bank was set up post the recommendations of the Hilton Young Commission through the Reserve Bank of India Act, 1934. The Commission suggested the establishment of Central Banks in order to facilitate banking throughout the county and to separate the function of credit control and issuance of currency. The Reserve Bank of India started operations in the year 1935 and since then, a lot of its functions have evolved according to the economy of the country. The RBI has had a huge impact on the financial stability of India which has only been possible because of its several functions and responsibilities which are laid out in the Preamble of the RBI Act which was amended lately by the Finance Act, 2016.[1]
FUNCTIONS OF THE RBI
There are several functions of the RBI which can be categorized as traditional, development functions and supervisory functions.
- Monetary Policy – RBI is responsible for regulating the monetary policies along with its formulation and implementation. It aims to achieve the goal of price stability in the country by adopting the guidelines for inflation targeting to the Government. It ensures the limitations on the inflation prices through the use of money supply, interest rates and availability of credit and is responsible for regulating the monetary system of the country as held in the case of Peerless General Finance and Investment Co. Limited and Ors. vs. Reserve Bank of India and Ors.[2] by the Supreme Court of India.
- Banker to the Banks – RBI serves as the guide to all the other banks in India and helps them by giving them directions and controlling the bank reserves through the Cash Reserves that every commercial bank is required to have with the RBI.
In the case of Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and Ors.[3], the Court held that the RBI is a banker to other banks whise objective is to bring stability and regulate the credit system in India. It also held that the RBI is lender of the last resort.
- Banker to the Government of India – Apart from representing the country internationally, the Reserve Bank of India also acts as an agent and merchant banker to the Government and maintains its accounts along with providing it financial assistance and advice. It also makes and receives payment on behalf of the Government and carries out all the functions of a bank for the Central Government of India such as exchange, public debt management, remittance among several other functions.
- Issuance of Currency notes – Only RBI has the authority to issue currency i.e. notes. It also exchanges the damaged currency notes for new ones and regulates the good quality cash in the market. It is responsible for issuance of bank notes as under Section 22 of the RBI Act.
- Exchange Rate Management- The RBI is responsible for preparing domestic policies that maintain the value of rupee and helps in achieving the stability of exchange rate. In order to achieve the stability, it brings both the demand and the supply of foreign currency closer to each other. This is done under the provisions of the Foreign Exchange Management Act, 1999 (hereinafter referred as “FEMA”). The RBI also has the power to prohibit and regulate the deals in relation to foreign exchange and give power to other institutions through issuing license for acting as authorized agents for foreign exchange in the market.
- Supervision over other banks – It not only acts as a banker to other banks but supervises their activities through conduct of audits of such banks and regulation of establishment of their branches and granting them license for certain activities. License granting authority of the RBI comes from Section 22 of the Banking Companies Act, 1949. The function of the RBI includes supervision of the entire banking system as held by the Supreme Court in Reserve Bank of India and Ors. v. Jayantilal N. Mistry and Ors.[4]
- Credit Control – One of the most important functions of the RBI is to control credit through various tools. It also does so by checking the capacity of creation of credit as if it goes by unregulated then the economy might end up with inflationary cycles. In order to manage the credit, the RBI uses instruments such as quantitative instruments, qualitative instruments and selective instruments. The importance of this is stated in the case of L&T Finance Limited v. Saumya Mining Ltd.[5] where the High Court of Bombay held that credit control was considered as the pith and substance of the RBI.
- Development of the agriculture sector – RBI assesses the needs of the agriculture sector and controls the banks and finance for it which is Regional Rural banks and NABARD. It does so to make the credit available for such sectors that provide help to people in the rural parts of India.
- Provision of finance to industries is another role of the RBI which it takes on for the development of the sector and does so by setting up financial institutions such as IDBI, SIDBI, EXIM among several others.
- Data Collection and Publication of reports – Collection of statistical data such as savings, inflation, deflation, interest rates, investments among others, is crucial for making policies.
- Export promotion – RBI supports EXIM and ECGC while encouraging facilities for supporting foreign trade like exports, financially.
The supervisory functions include giving license to banks along with their new branches, inspection of the assets and liabilities of the banks it regulates the financial position of the economy. It also issues directives and has the power to control Non- Bank Financial Institutions.
In the recent case of Internet and Mobile Association of India v. Reserve Bank of India[6], the importance of the RBI was reiterated stating that it was “not just any statutory authority”. It also held that the RBI Act survived post constitutional period through Article 372(1) of the Constitution and the power given to the RBI under Section 3(1) of the Act cannot be taken away along with the power to issue bank notes under Section 22(1).
RESTRICTIONS ON THE RBI
All the functions by the RBI have expanded since the amendments made to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests, Act, 2002 and the National Housing Bank Act, 1987.
Along with several functions, the Reserve Bank of India also has certain restrictions as specified under Section 19 of the RBI Act, 1934. Such restrictions include that it cannot compete with the commercial banks, it cannot be involved in trade directly or indirectly, it cannot receive or advice loans against immovable properties, it is not permitted to pay interests on deposits or purchase its own shares. It also cannot own the shares of any other bank or company or granting loans on such security. It cannot draw bills payable if it is done not on demand. In the case of Krishnaraj Goswami vs. The Reserve Bank of India and Ors.[7], it was alleged that the RBI had no power to issue a circular under FEMA but this was held to be incorrect by the High Court of Bombay and that it could regulate through any kind of directions under FEMA.
References:
