RBI: History, Constitution, and Governance
An exploration of the Reserve Bank of India (RBI) covering its establishment on the Hilton Young Commission's recommendation, nationalization, Preamble, and the organizational structure including the Central Board of Directors.
Expert Answer & Key Takeaways
An exploration of the Reserve Bank of India (RBI) covering its establishment on the Hilton Young Commission's recommendation, nationalization, Preamble, and the organizational structure including the Central Board of Directors.
1. Genesis and Establishment
The Reserve Bank of India (RBI) is India's central bank and regulatory body responsible for the regulation of the Indian banking system. It is under the ownership of the Ministry of Finance, Government of India.
Key Historical Facts:
- Hilton Young Commission: The RBI was set up on the basis of the recommendations of the Royal Commission on Indian Currency and Finance (Hilton Young Commission) in 1926.
- RBI Act, 1934: The statutory basis of the bank was provided by the Reserve Bank of India Act, 1934.
- Establishment: RBI commenced operations on April 1, 1935.
- Initial Capital: It started with an initial share capital of ₹5 crore, fully paid up, divided into shares of ₹100 each. Initially, it was a shareholders' bank.
- Relocation: The Central Office of the RBI was initially established in Calcutta but was permanently moved to Mumbai in 1937.
- First Governor: Sir Osborne Smith (1935 - 1937).
- First Indian Governor: Sir C.D. Deshmukh (1943 - 1949).
2. Nationalization of RBI
Following India's independence, the Government passed the Reserve Bank (Transfer to Public Ownership) Act, 1948.
- Under this Act, RBI was nationalized on January 1, 1949.
- It became a fully state-owned central bank, empowering the government to issue binding directions to the RBI in the public interest (under Section 7 of the RBI Act).
The Preamble of the RBI:
The basic functions of the Reserve Bank as described in its Preamble are:
"To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."
3. Organization and Management Board
The general superintendence and direction of RBI's affairs are vested in the Central Board of Directors. The Board is appointed by the Government of India in keeping with the RBI Act for a period of four years.
Composition of the Central Board (Maximum 21 members):
1. Official Directors (Full-time):
- Governor: Currently 1 (Presently Shri Shaktikanta Das, 25th Governor).
- Deputy Governors: Maximum of 4. (Presently: M. Rajeshwar Rao, T. Rabi Sankar, Swaminathan J, and Michael Debabrata Patra).
2. Non-Official Directors:
- Nominated by Government: 10 Directors (usually eminent experts from fields like economics, finance, agriculture, industry, etc.).
- Government Officials: 2 officials nominated by the Central Government (usually the Economic Affairs Secretary and Financial Services Secretary).
- Local Boards: 4 Directors, one representing each of the four Local Boards based in Mumbai, Kolkata, Chennai, and New Delhi.
Local Boards:
The four local boards advise the Central Board on local matters and represent the territorial and economic interests of regional cooperative and indigenous banks.
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