Reserve Bank Of India

The RBI, short form of Reserve bank of India, is the central authority when it comes to the banking sector in India. It functioned under the ministry of finance and was first established in 1934. Back then, the institution was privately owned but then nationalized after independence in 1949. The RBI was set up in response to stabilizing the economy after the advent of the world war. Initially set up under the British, it also worked as the central banking authority for Burma till 1947, except during the time of Japanese occupation in the early 1940s

The RBI has many divisions and branches. The 4 regional representations in north, south, east and west are in Delhi, Chennai, Kolkata and Mumbai, respectively. The RBI has a total of 31 branches spread throughout the country, which are mostly situated within the capital cities of each state.

Major divisions within the RBI

The Bharatiya Reserve Bank Note Mudran regulates the printing of notes in order to cope with the demand and supply of banknotes within the economy. It was founded in 1995 in Bangalore. Apart from this, another agency also has the power to print currency in India, which is the Security printing and minting corporation of India Limited, which is owned by the government of India. The BRBNM made a world record for printing 20,000 million banknotes in the financial year 2016-17.

The deposit insurance and credit guarantee corporation, established in 1978, provides insurance for deposits and guarantees of credit facilities. Deposits that it ensures to cover all types fixed, savings, etcetera.

The national payments corporation of India was set up to control and oversee retail payments in India. Since the demonetization of 2016, online payments have been vastly popularized, and the now-famous BHIM app is overseen by this division of RBI. It was set up in 2008 and has since grown drastically to become one of the most important divisions under RBI over the best part of the last 2 decades. 

Monetary policies of RBI: 

The RBI is in charge of the monetary policies of India, which dictate interest rates that achieve price maintenance and economic growth. Other aims of the monetary policy include expansion of bank credit, promotion of investment, promoting efficiency and reducing rigidity.

The monetary policy can be of 2 types, expansionary and contractionary policies.

Expansionary policy:

It aims to increase the level of demand through an increase in govt spending or a decrease in taxes. Which path to take on this route, though, varies from different governments and political scenarios. 

Contractionary policy: 

The contractionary policy, as one might have guessed, does the reverse of the above-said policy. It decreases consumption, investment, and government spending to do so. Such measures are taken to slow down economies which may be overgrowing, which may cause massive disparities in different levels of the population.

Now, what are the actual instruments the RBi uses to control the flow of money within the economy?

The liquidity of the system or the ease of converting assets in a system is controlled by regulating the CRR or cash reserve ratio. It is an amount that all banks are required to keep with the RBI as balances. 

The bank rate or the interest rate is given by the RBI to the banking system for loans and other funds. Any increase in this rate would decrease the overall volume of credit, and thus the amount of money in circulation decreases.

There are other instruments like Credit ceiling, repo rate and in some cases, the RBI may even ask the banks directly to take some lending policies or measures. The measures and policy of the RBI depend on a number of factors like the current levels of inflation, GDP growth, MSF rate etc.

Conclusion: 

In conclusion, the RBI is a central body that plays a big role in maintaining and growing the economy. It takes emergency measures in big situations like when demonetization was announced against strong advisory against the policy. The RBI was responsible for coming up with a proper plan to swap out the now invalid 500, and 1000 rupee Mahatma Gandhi series notes for the new 500 and 2000 rupee notes.