What is RBI all about?
RBI has a mandate that is wider than is typical of central banks. The preamble to the RBI Act, 1934 describes its main functions as "...to regulate the issue of Bank Notes and 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." This preamble indicates the two core functions of the Reserve Bank: (i) issue of currency; and (ii) monetary authority. The Act also entrusts other functions to the Reserve Bank such as regulation of non-bank financial institutions, management of foreign exchange reserves, management of sovereign debt - by statute in respect of central government and by agreement in respect of state governments - and regulation of forex, money and government securities markets and their derivatives.
The statutes make the Reserve Bank a full service central bank. It is the issuer of currency and is the monetary authority. It regulates and supervises banks, non-bank financial companies and segments of the financial markets. It is the banker and debt manager to the Government. It is the gate keeper of the external sector. It regulates and supervises the payment and settlement system. Being both the monetary authority and banking sector regulator gives it also the principal responsibility for financial stability.
Inflation Targeting
Inflation targeting, by its very nature, is an issue in central bank governance. The defining features of an inflation targeting central bank are a precise mandate, a single instrument (the policy interest rate) in its armoury, a single minded devotion to achieving this target and a principal-agent relationship with the Government.
The Reserve Bank is not an inflation targeting central bank. Nevertheless there is an influential view that our economy will be better served if the Reserve Bank becomes one. The argument is that inflation hurts much more in a country like India with hundreds of millions of poor people and that the Reserve Bank will be more effective in combating inflation if it is not burdened with other objectives.
Debt Management Office
The RBI Act mandates the Reserve Bank to be the debt manager of the Central Government. The Reserve Bank also manages the debt of state governments by mutual agreement as provided in law. There is now a proposal to shift this function out of the central bank, and this has generated a debate around several governance issues.
Responsibility for Financial Stability
The Reserve Bank's mandate for ensuring financial stability arises mainly from its mandated functions of regulator of the banking system, regulator and supervisor of the payment and settlement systems, regulator of the money, forex, government security and credit markets, banker to the banks, as also the lender-of the last resort. This unique combination of responsibilities for macroprudential regulation and microprudential supervision, together with an implicit mandate for systemic oversight has allowed the Reserve Bank to exploit the synergies across various dimensions.
[From a speech by Dr. D. Subba Rao, Governor, Reserve Bank of India at the meeting of the Central Bank Governance Group in Basel on May 9, 2011.]