Banking & Financial Awareness Module
RBI Structure & Monetary Policy Instruments
The Reserve Bank of India (RBI) operates as the nation's central monetary authority, established on April 1, 1935, under the Reserve Bank of India Act, 1934, based on the recommendations of the Hilton Young Commission. The RBI regulates currency issuance, manages foreign exchange reserves, and maintains price stability under the Flexible Inflation Targeting (FIT) framework. Monetary policy is determined by the six-member Monetary Policy Committee (MPC), which sets the Policy Repo Rate. The central bank utilizes direct and indirect quantitative instruments—including the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Marginal Standing Facility (MSF), and Open Market Operations (OMOs)—to regulate liquidity.
Key Concepts & Examination Highlights
- The RBI was established on April 1, 1935, under the Reserve Bank of India Act, 1934, following the Hilton Young Commission (Royal Commission on Indian Currency and Finance) report.
- The Monetary Policy Committee (MPC), constituted under Section 45ZB of the amended RBI Act, 1934, consists of 6 members (3 from RBI and 3 appointed by the Central Government) chaired by the RBI Governor.
- Under the Flexible Inflation Targeting (FIT) framework, the central bank targets a Consumer Price Index (CPI) inflation rate of 4% with a tolerance band of +/- 2% (2% to 6%).
- Cash Reserve Ratio (CRR) is the specified minimum fraction of total Net Demand and Time Liabilities (NDTL) that commercial banks must maintain as liquid cash reserves with the RBI.
Curriculum & Reference Sources: Reserve Bank of India (RBI Bulletin), Monetary Policy Reports, and RBI Act 1934.