🏛️ RBI Functions & Policies - Complete Guide

Master RBI’s role, functions, monetary policy tools, and recent initiatives for IBPS Banking Awareness!

🔗 Related Pages

• Union Budget 2021–22: /sathee-bank-exam/current-affairs/economic-affairs/union-budget-2021-22/
• Banking Awareness Updates 2020: /sathee-bank-exam/current-affairs/banking/banking-awareness-updates-2020/
• Reports and Indices 2020: /sathee-bank-exam/current-affairs/static-gk/reports-and-indices-2020/
• Banking Schemes & Policies (2020): /sathee-bank-exam/current-affairs/static-gk/banking-schemes-and-policies-2020/
• Conferences & Summits 2020: /sathee-bank-exam/current-affairs/conferences-and-summits-2020/

🎯 About Reserve Bank of India (RBI)

Basic Information

Established: April 1, 1935 Headquarters: Mumbai, Maharashtra Current Governor: Shaktikanta Das (Since December 12, 2018) Deputy Governors: 4

Motto: “Reserve Bank of India” (English) “भारतीय रिज़र्व बैंक” (Hindi)

Symbol: Tiger and Palm Tree

Nationalized: January 1, 1949

Historical Timeline

1935: RBI established as private bank (based on Hilton Young Commission) 1949: Nationalized under RBI Act, 1934 1969: 14 major banks nationalized (social banking) 1980: 6 more banks nationalized 1991: Economic liberalization begins 2016: Monetary Policy Committee (MPC) established 2016: Demonetization implemented 2020: COVID-19 pandemic response measures

📋 Functions of RBI

1. Monetary Authority

Objective: Maintain price stability while keeping economic growth in mind

Key Responsibilities:

✅ Formulate and implement monetary policy ✅ Control money supply and credit in economy ✅ Manage inflation (target: 4% ±2%) ✅ Regulate interest rates ✅ Use monetary policy tools (Repo, CRR, SLR, etc.)

Tools:

Important: Rates are current as of RBI’s latest MPC meeting (October 2024). These rates change based on monetary policy decisions. Always verify from official RBI sources for the most current rates.

Monetary Policy Tools Explained

a) Repo Rate (Repurchase Rate)

Definition: Rate at which RBI lends short-term money to banks against securities

Current Rate: 6.50%

How it works:

• Banks borrow from RBI by selling securities
• Agreement to repurchase them later
• Lower repo → Cheaper loans → More borrowing → Economic growth

Impact: ↓ Repo Rate → ↓ Lending Rates → ↑ Borrowing → ↑ Investment → ↑ Growth ↑ Repo Rate → ↑ Lending Rates → ↓ Borrowing → ↓ Inflation

Example: “RBI cuts repo rate by 25 bps to boost economic activity.”

b) Reverse Repo Rate

Definition: Rate at which RBI borrows from commercial banks

Current Rate: 3.35%

How it works:

• Banks deposit surplus funds with RBI
• Earn interest on deposits
• Higher reverse repo → More deposits with RBI → Less money in market

Impact: ↑ Reverse Repo → ↑ Bank deposits with RBI → ↓ Money supply → ↓ Inflation

Example: “Banks parked ₹5 lakh crore with RBI under reverse repo window.”

c) Cash Reserve Ratio (CRR)

Definition: Percentage of deposits banks must keep with RBI in cash

Current Rate: 4.50%

How it works:

• Banks maintain 4.5% of NDTL* with RBI
• No interest paid on CRR
• Cannot be used for lending

*NDTL: Net Demand and Time Liabilities

Impact: ↑ CRR → ↓ Lending capacity → ↓ Money supply → ↓ Inflation ↓ CRR → ↑ Lending capacity → ↑ Money supply → ↑ Growth

Example: “If bank has ₹100 crore deposits, must keep ₹4.5 crore with RBI as CRR.”

d) Statutory Liquidity Ratio (SLR)

Definition: Percentage of deposits banks must invest in liquid assets (govt securities, cash, gold)

Current Rate: 18%

How it works:

• Banks maintain 18% of NDTL in approved securities
• Ensures bank solvency
• Helps government borrowing

Impact: ↑ SLR → ↓ Lending capacity → ↓ Credit growth ↓ SLR → ↑ Lending capacity → ↑ Credit availability

Example: “Banks must hold ₹18 of govt securities for every ₹100 deposits.”

e) Bank Rate

Definition: Rate at which RBI lends long-term money to banks (without collateral)

Current Rate: 6.75% (usually = MSF Rate)

Difference from Repo Rate:

• Repo: Short-term, with collateral
• Bank Rate: Long-term, without collateral

Impact: Similar to Repo Rate (affects lending rates)

Example: “RBI increased bank rate to control inflation.”

f) Marginal Standing Facility (MSF)

Definition: Emergency lending facility for banks to borrow overnight from RBI against government securities

Current Rate: 6.75% (usually = Bank Rate)

How it works:

• Banks can borrow up to 2% of NDTL
• Against SLR securities
• Higher rate than repo (penalty rate)

Purpose: Emergency liquidity support

Example: “Bank borrowed ₹500 crore under MSF to meet cash shortage.”

2. Regulator and Supervisor of Financial System

Banking Regulation:

✅ Issue licenses to banks ✅ Prescribe capital adequacy requirements ✅ Conduct inspections ✅ Monitor bank performance ✅ Take corrective action (PCA framework) ✅ Approve bank mergers and acquisitions

Recent Regulations:

a) Prompt Corrective Action (PCA) Framework

Objective: Early intervention in weak banks

Triggers:

• High NPA ratio (>10%)
• Negative Return on Assets (ROA < 0)
• Low Capital Adequacy Ratio (CAR < 9%)

Restrictions:

• Lending curbs
• Branch expansion ban
• Dividend distribution restrictions
• Management changes

Example: “RBI placed Central Bank of India under PCA in 2017 (lifted in 2021).”

b) Basel III Norms

Objective: Strengthen bank capital adequacy and risk management

Key Requirements (India):

• Minimum Capital Adequacy Ratio: 9%
• Common Equity Tier 1 (CET1): 5.5%
• Tier 1 Capital: 7%
• Capital Conservation Buffer: 2.5%

Implementation: Phased manner (2013-2019, extended to 2023)

Example: “SBI’s CAR stands at 13.5%, comfortably above Basel III norms.”

c) Differentiated Banking Licenses

Payment Banks (2014):

• Accept deposits up to ₹2 lakh
• No lending allowed
• Examples: Paytm Payments Bank, India Post Payments Bank

Small Finance Banks (2015):

• Focus on unbanked/underbanked segments
• Priority sector lending: 75% of ANBC
• Examples: AU Small Finance Bank, Ujjivan SFB

Example: “Airtel Payments Bank promotes financial inclusion in rural areas.”

3. Manager of Foreign Exchange

Key Responsibilities:

✅ Manage foreign exchange reserves ✅ Maintain exchange rate stability ✅ Implement FEMA (Foreign Exchange Management Act) ✅ Authorize forex dealers ✅ Monitor capital account transactions

Foreign Exchange Reserves (Forex):

India’s Forex Reserves (Oct 2024): ~$700 billion*

Components:

1. Foreign Currency Assets (FCA): ~85%
2. Gold: ~10%
3. SDRs (Special Drawing Rights): ~3%
4. Reserve Position in IMF: ~2%

Purpose:

• Import cover (10-12 months)
• Defend rupee
• Investor confidence
• Crisis management

Example: “RBI intervened in forex market to prevent sharp rupee depreciation.”

*Forex reserves fluctuate daily based on market conditions and RBI interventions.

Exchange Rate Management:

System: Managed Float (since 1993)

RBI Intervention:

• Buys dollars when rupee appreciates excessively
• Sells dollars when rupee depreciates sharply
• Objective: Prevent excessive volatility (not fix rate)

Example: “RBI sold $10 billion to stabilize rupee at ₹83/dollar.”

4. Issuer of Currency

Currency Management:

✅ Issue and distribute currency notes ✅ Manage currency circulation ✅ Destroy soiled/damaged notes ✅ Design security features ✅ Maintain adequate currency supply

Note: Coins issued by Government of India (Ministry of Finance), but distributed by RBI

Mahatma Gandhi Series:

Denominations: ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000*

*₹2000 note: Withdrawn from circulation in May 2023

Security Features:

• Watermark
• Security thread
• Latent image
• Micro lettering
• Color-shifting ink
• See-through register

Example: “RBI printed ₹3.5 lakh crore worth of notes in 2023-24.”

Clean Note Policy:

Objective: Ensure quality currency in circulation

Process:

1. Banks collect soiled notes from public
2. Send to RBI for destruction
3. RBI issues fresh notes to banks
4. Banks distribute to public

Example: “RBI destroyed ₹1 lakh crore worth of soiled notes in 2023.”

5. Banker to Government

Services to Central & State Governments:

✅ Maintain government accounts ✅ Receive and make payments ✅ Manage public debt ✅ Float government loans (bonds, T-bills) ✅ Advise on financial matters ✅ Act as agent for government in RBI

Debt Management:

Public Debt Types:

1. Market Loans (govt securities, bonds)
2. Treasury Bills (91, 182, 364 days)
3. External Debt (foreign borrowing)

RBI’s Role:

• Auction government securities
• Manage interest payments
• Redeem matured securities
• Maintain debt records

Example: “RBI conducted auction of ₹30,000 crore government bonds.”

6. Banker’s Bank

Services to Commercial Banks:

✅ Maintain accounts of banks ✅ Provide clearing and settlement services ✅ Lend to banks (repo, MSF, refinance) ✅ Act as lender of last resort ✅ Supervise and regulate banks

Clearing & Settlement:

Systems Operated by RBI:

1. RTGS (Real Time Gross Settlement) - Large value, real-time
2. NEFT (National Electronic Funds Transfer) - Retail, deferred
3. IMPS (Immediate Payment Service) - 24×7, instant

Example: “RBI processed ₹2,500 lakh crore via RTGS in 2023.”

Lender of Last Resort:

Definition: RBI provides emergency liquidity to solvent banks facing temporary cash shortage

Mechanism:

• Repo window
• Marginal Standing Facility (MSF)
• Emergency liquidity assistance

Example: “During 2008 crisis, RBI provided emergency liquidity to banks.”

7. Custodian of Foreign Exchange Reserves

Management of Reserves:

Objectives: ✅ Maintain confidence in monetary policy ✅ Provide cushion during crisis ✅ Limit external vulnerability ✅ Maintain adequate import cover

Investment Strategy:

• Safety (capital preservation)
• Liquidity (readily available)
• Return (optimization)

Asset Allocation:

• US Treasury securities
• Bonds of other countries
• Deposits with foreign central banks
• Gold reserves

Example: “RBI’s gold reserves increased from 557 tonnes to 800 tonnes.”

8. Developmental Role

Financial Inclusion Initiatives:

✅ Priority Sector Lending (PSL) norms ✅ Lead Bank Scheme ✅ Regional Rural Banks (RRBs) ✅ Self-Help Group (SHG) linkage ✅ Jan Dhan Yojana support ✅ Payment Banks licensing ✅ Financial Literacy initiatives

Priority Sector Lending:

Target: 40% of ANBC for domestic banks (Adjusted Net Bank Credit)

Sectors:

1. Agriculture: 18%
2. MSMEs: 7.5%
3. Export Credit
4. Education
5. Housing
6. Social Infrastructure
7. Renewable Energy
8. Others

Example: “Banks must lend ₹40 out of every ₹100 to priority sectors.”

Financial Inclusion Programs:

a) Jan Dhan-Aadhaar-Mobile (JAM) Trinity

Objective: Direct benefit transfer to beneficiaries

Components:

• Jan Dhan: Bank account for everyone
• Aadhaar: Unique ID
• Mobile: Enable digital payments

Achievement: 50 crore+ Jan Dhan accounts opened

Example: “Government transferred ₹2 lakh crore subsidies via JAM.”

b) PMJDY (Pradhan Mantri Jan Dhan Yojana)

Launched: August 28, 2014

Benefits:

• Zero balance account
• RuPay debit card
• ₹10,000 overdraft facility
• ₹2 lakh accidental insurance
• ₹30,000 life insurance (if RuPay used)

Achievement: 49+ crore accounts, ₹2 lakh crore deposits

Example: “PMJDY is world’s largest financial inclusion program.”

💹 Monetary Policy Committee (MPC)

Constitution

Established: October 2016 (under RBI Act amendment)

Members (6):

1. RBI Governor (Chairman)
2. RBI Deputy Governor (Monetary Policy)
3. RBI Officer (Executive Director or equivalent)
4. 3 External Members (appointed by Govt of India)

Current External Members (2025):

• Dr. Ashima Goyal
• Prof. Jayanth R. Varma
• Dr. Shashanka Bhide

Mandate

Primary Objective: Maintain inflation at 4% (±2% tolerance band)

Target Range: 2% to 6%

If inflation goes outside band:

• RBI must submit explanation to government
• State reasons for failure
• Propose remedial actions

Meeting Frequency: At least 4 times a year (bi-monthly)

Decision: By majority vote (Governor has casting vote in tie)

Recent MPC Decisions (2024-25)

April 2024: Repo rate maintained at 6.50% (status quo) June 2024: Repo rate maintained at 6.50% (pause) August 2024: Repo rate maintained at 6.50% (wait and watch) October 2024: Repo rate maintained at 6.50% (stance: neutral) December 2024: Repo rate maintained at 6.50% (monitoring inflation)

Rationale: Balancing growth and inflation concerns

🆕 Recent RBI Initiatives (2023-25)

1. Digital Payments

a) UPI (Unified Payments Interface)

Launched: 2016 Regulator: NPCI (under RBI oversight)

Growth:

• 2020: 2,200 crore transactions
• 2023: 11,000 crore transactions
• 2024: 15,000+ crore transactions

Features:

• 24×7 availability
• Instant transfer
• QR code payments
• International expansion (UAE, Singapore, France)

Example: “India processed over 14,800 crore UPI transactions in 2024.”*

*Verify latest UPI transaction data from NPCI/RBI weekly reports as figures change rapidly.

b) CBDC (Central Bank Digital Currency) - e₹

Launch: Pilot launched in December 2022

Types:

1. Wholesale CBDC (e₹-W): For banks and financial institutions
2. Retail CBDC (e₹-R): For public

Benefits:

• Reduced cash dependency
• Lower transaction costs
• Cross-border efficiency
• Financial inclusion

Status (2025): 1 crore+ users in pilot

Example: “RBI’s digital rupee is programmable and traceable.”

2. Banking Sector Reforms

a) Account Aggregator Framework

Launched: September 2021

Purpose: Enable secure sharing of financial data with user consent

Participants:

• Banks
• NBFCs
• Mutual Funds
• Insurance Companies

Benefits:

• Faster loan approvals
• Lower documentation
• Better credit assessment

Example: “Account Aggregator reduced loan processing time from weeks to hours.”

b) TReDS (Trade Receivables Discounting System)

Objective: Facilitate MSME financing by discounting bills

Platforms:

1. RXIL (Receivables Exchange of India)
2. M1xchange (Mynd Solutions)
3. A.TReDS (Axis Bank TReDS)

How it works:

• MSME uploads invoice on platform
• Financiers bid to discount
• MSME gets immediate payment

Example: “TReDS platform helped 50,000+ MSMEs get ₹50,000 crore financing.”

3. Credit & Lending Reforms

a) External Benchmark Lending Rate (EBLR)

Introduced: October 2019

Requirement: All floating rate loans linked to external benchmark

Benchmarks:

• RBI Repo Rate
• 3-month/6-month T-Bill yield
• Any other market benchmark

Benefit: Faster transmission of policy rate changes to borrowers

Example: “Home loan interest linked to repo rate changes every quarter.”

b) Loan Against Movable Property

Framework: CERSAI registration of movable assets

Assets Covered:

• Machinery
• Vehicles
• Inventory
• Receivables

Benefit: Easier loans for MSMEs without land/building

Example: “MSMEs can now pledge machinery worth ₹50 lakhs for working capital.”

4. Customer Protection

a) Ombudsman Scheme 2.0

Launched: November 2021

Features:

• Single portal for all complaints
• 30-day resolution timeline
• Appeals to Appellate Authority
• Covers NBFCs also

Grounds:

• Deficiency in banking service
• Unfair practices
• Mis-selling
• Delays

Example: “Integrated Ombudsman handles complaints against all RBI-regulated entities.”

b) Master Direction on Digital Lending

Issued: September 2022

Key Provisions:

• All loan disbursals to borrower’s account only
• Transparent pricing (APR disclosure)
• Fair practices code
• Data privacy protection
• Grievance redressal

Example: “Lenders must disclose all charges upfront in digital lending.”

🎯 Important for IBPS Exams

Most Asked Topics:

1. Monetary Policy Rates (10-15 questions)

• Current rates (Repo, CRR, SLR)
• MPC members
• Recent policy decisions

2. RBI Functions (5-8 questions)

• 7 main functions
• Regulatory role
• Currency management

3. Recent Initiatives (8-12 questions)

• Digital payments (UPI, CBDC)
• Financial inclusion
• Banking reforms

4. Schemes & Programs (5-8 questions)

• PMJDY
• Priority Sector Lending
• Differentiated banks

5. Forex Management (3-5 questions)

• Current forex reserves
• Components of forex

Quick Revision Points:

• ✅ RBI established: April 1, 1935
• ✅ Nationalized: January 1, 1949
• ✅ Current Governor: Shaktikanta Das
• ✅ Deputy Governors: 4
• ✅ MPC Members: 6 (3 RBI + 3 External)
• ✅ Inflation Target: 4% (±2%)
• ✅ Repo Rate: 6.50%
• ✅ CRR: 4.50%
• ✅ SLR: 18%
• ✅ Forex Reserves: ~$700 billion
• ✅ Minimum CAR: 9%
• ✅ PSL Target: 40% of ANBC
• ✅ DICGC Coverage: ₹5 lakh per depositor

📝 Study Strategy

Week 1: Master the Basics

• 7 functions of RBI
• Monetary policy tools
• Current rates (Repo, CRR, SLR)

Week 2: Deep Dive

• MPC composition and decisions
• Banking regulations (Basel, PCA)
• Differentiated banking licenses

Week 3: Recent Initiatives

• Digital payments (UPI, CBDC)
• Financial inclusion programs
• Customer protection measures

Week 4: Current Affairs

• Latest MPC decisions
• New RBI circulars
• Recent policy changes

Current Affairs:

• Monthly RBI Policy Updates
• New Banking Regulations
• Financial Sector News

Master RBI Functions - The heart of Banking Awareness! 🏛️