RBI Functions PDF

 Index Chapter Content Page No No. 1 Evolution of Central Banking Globally and in India 1 2 Legal Framework for Reserve Bank Functions 7 3 Monetary Policy Framework...

 Index Chapter Content Page No No. 1 Evolution of Central Banking Globally and in India 1 2 Legal Framework for Reserve Bank Functions 7 3 Monetary Policy Framework 17 4 Market Operations 27 5 Financial Stability 43 6 Overview of the Indian Financial System 51 7 Regulation of Commercial Banks 53 8 Supervision of Commercial Banks 73 9 Regulation and Supervision of Co-operative Banks 91 10 Regulation and Supervision of Non-Banking Financial 103 Companies 11 Enforcement in RBI 123 12 Development and Regulation of Financial Markets 127 13 Payment and Settlement Systems 147 14 Currency Management 161 15 Banker to Banks and Governments 175 16 Public Debt Management 185 17 Understanding RBI Balance Sheet 191 18 Foreign Exchange Management 205 19 Foreign Exchange (Forex) Reserves 217 20 Consumer Education and Protection 223 21 Financial Inclusion and Development 233 22 Development of Institutions 249 23 Research, Surveys and Data Dissemination 253 24 FinTech and Reserve Bank of India 265 25 International Relations 273  Foreword It is a great pleasure to introduce this booklet on “Functions and Working of RBI”-2024 edition, four years after release of the last edition in the year 2020. The first edition was brought out in 2010 to create and spread awareness among general members of public on Reserve Bank’s multifaceted roles ranging from management of currency, financial markets and payment systems to maintaining financial stability, regulating and supervising the financial sector and conduct of monetary policy, etc. The subsequent editions have enriched and updated the contents based on the developments in the financial sector-both domestic and international and the Bank’s response to such developments. The COVID pandemic had a huge disruptive impact on the country’s financial sector and the economy. The measures taken to support economic recovery included pro-active monetary policy measures including unconventional ones like long term repo operations (LTRO), targeted LTRO, Government Securities Acquisition Programme (GSAP) and special Open Market Operations (OMO), opening of special refinance facilities / lines of credit and so on. The last four years witnessed a digital transformation of the financial landscape. Digital payment systems expanded, and use of United Payments Interface (UPI) grew exponentially. Reserve Bank innovation Hub (RBIH) was set up as a subsidiary to promote and facilitate innovation in the financial sector. Unified Lending Interface (ULI), a key project undertaken by RBIH, is expected to facilitate frictionless credit to individuals and businesses. In this period, the regulatory and supervisory norms were also strengthened, and stricter cybersecurity and risk management guidelines were put in place. The recent past saw initiatives like introduction of Central Banking Digital Currency (CBDC) and focus on internationalisation of Rupee. Sustainable finance and climate initiatives have also gained traction. It was, therefore, felt necessary to bring in a new edition capturing these and other such major developments that have marked the Bank’s journey post bringing out of the last edition. The current edition is special as it is being brought out as we are celebrating the 90 th year of existence of Reserve Bank. We hope that this updated version will demystify RBI and bring clarity on the Bank’s critical and ever-evolving role in the economic development of the country while maintaining financial stability. We are confident that the publication’s use and relevance will not only be limited to students of finance and economics but would enrich the knowledge of a much wider diaspora of readers. We would like to acknowledge the contribution of the team at RBSC, specially that of the members of faculty and various Central Office Departments for their painstaking efforts in shaping and upgrading the contents. We also express our deep gratitude to Deputy Governor, RBI, Shri Swaminathan J, for unveiling the latest edition on November 4, 2024. Further, we would like to express our gratitude to Rajbhasha Department, Central Office and Chennai Regional Office for their support in carrying out translation of the content in Hindi to enable us to bring out the publication in both Hindi and English language. We welcome suggestions and feedbacks at [email protected], which will help us in enhancing the future editions and keeping the content relevant and useful. Mala Sinha Principal, RBSC [ii] [iii]  List of Abbreviations AA Account Aggregator BLBC Block Level Bankers’ Committee ABPS Aadhaar Bridge Payment System BLS Bank Lending Survey ACB Audit Committee of the Board BoP Balance of Payments ACD Agricultural Credit Department BPSS Board for Regulation and AD Additional Director Supervision of Payment and AD / AP Authorised Dealer / Authorised Settlement Systems Person BR Act Banking Regulation Act, 1949 AD Cat Authorised Dealer - Category BSPI Business Service Price Index (I/II/III) BSR Basic Statistical Return ADF Asset Development Fund CALCS Capital Adequacy, Asset Quality, AePS Aadhar enabled Payment System Liquidity, Compliance, Systems AFA Additional Factor Authentication and Control AFS Available for Sale CAMELS Capital Adequacy, Asset Quality, AGL Aggregate Gap Limit Management, Earnings, Liquidity AGR Alternate Grievance Redress and Systems and Control AI Artificial Intelligence CBDC / R / W Central Bank Digital Currency AIF Alternative Investment Fund CBDC - Retail / Wholesale AIFI All India Financial Institution CBS Core Banking System AI-ML Artificial Intelligence and Machine CCIR Comprehensive Credit Learning Information Repository AML Anti-Money Laundering CCP Central Counter Party APB Aadhar Payment Bridge CCs Currency Chests ARCH Auto Regressive Conditional CCS Consumer Confidence Survey Heteroskedasticity CD Certificate of Deposit / Credit to ARCs Asset Reconstruction Companies Deposit ASISO Automated Sweep-in and Sweep- CDES Currency Distribution and out Exchange Scheme ATB Auction Treasury Bill CDIS Co-ordinated Direct Investment B2B/ B2C Business to Business / Business Survey to Customer CDS Credit Default Swaps BBPCU Bharat Bill Payment Central Unit CEPC/ CEPD Consumer Education and BBPOU Bharat Bill Payment Operating Protection Cell /Consumer Unit Education and Protection BBPS Bharat Bill Payment System Department BC Business Correspondent CET 1 Common Equity Tier 1 Capital BCBS Basel Committee for Banking CF Contingency Fund Supervision CFL Centres for Financial Literacy BCSBI Banking Codes and Standards CFPB Consumer Financial Protection Board of India Bureau BFS Board for Financial Supervision CFR Central Fraud Registry BFs Business Facilitators CFT Combating Financing of BHIM Bharat Interface for Money Terrorism BIS Bank for International CGD Comprehensive Guidelines on Settlements Derivatives BkSPI Banking Services Price Index [iv] CGRA Currency and Gold Revaluation Technology Examination Account CTS Cheque Truncation System CIC Currency In Circulation / Core CVPS Currency Verification and Investment Company / Credit Processing System Information Companies CWBN Cylinder Watermarked Bank Note CIC (R) Act Credit Information Companies DBIE Database on Indian Economy (Regulation) Act, 2005 DCC District Consultative Committees CIMS Centralised Information DCCB District Central Cooperative Bank Management System DCCs District Consultative Committees CIN Challan Identification Number DEA Depositor’s Education and CIR Credit Information Report Awareness CIs Credit Institutions DFHI Discount and Finance House of CISBI Central Information System for India Ltd Banking Infrastructure DGI Data Gaps Initiatives CIT Cash In Transit DLA Digital Lending App CLS Continuous Linked Settlement DLRC District Level Review Committee CMB Cash Management Bill DPI Digital Payment Index/ Digital CMS Complaint Management System Public Infrastructure CNP Card Not Present DRG Development Research Group CoA / CoR Certificate of Authorisation/ DSL Data Science Lab Certificate of Registration DSR Debt Service Ratio CP Card Present / Commercial DvP Delivery-versus- Payment Paper ECB European Central Bank CPI Consumer Price Index ECB External Commercial Borrowing CPIN Common Portal Identification ECL Expected Credit Loss Number ECS Electronic Clearing Service CPIS Co-ordinated Portfolio Investment EDPMS Export Data Processing and Survey Monitoring System CPSS Committee on Payment and EEFC Exchange Earners Foreign Settlement Systems Currency Account CRA Credit Rating Agency EMIs Equated Monthly Instalments CRAR Capital to Risk weighted Asset ETCD Exchange Traded Currency Ratio Derivative CrCS Credit Conditions Survey ETF Exchange Traded Fund CRCS Central Registrar of Co-operative ETP Electronic Trading Platform Societies EU European Union CRDC Currency Research and EV Economic Value Development Centre EWG/ EWI/ Early Warning Group / CRILC Central Repository of Information EWS Early Warning Indicator/ on Large Credits Early Warning Signals CROMS Clearcorp Repo Order Matching EXIM Export-Import Bank of India System FAME Financial Awareness Messages CRPC Centralised Receipt and FAR Fully Accessible Route Processing Centre FATF Financial Action Task Force CRR Cash Reserve Ratio FATS Foreign Affiliate Trade Statistics CSD Customer Service Department/ FBA Financial Benchmark Central Securities Depositories Administrator CSF Consolidated Sinking Fund FBIL Financial Benchmarks India CSITE Cyber Security and Information Private Ltd [v] FC Financial Commitment FPI Foreign Portfolio Investor/ FCA Foreign Currency Assets Foreign Portfolio Investment FCCB/ FCEB Foreign Currency Convertible FPSs Fast Payment Systems Bonds/ Foreign Currency FR Act Factoring Regulation Act, 2011 Exchangeable Bonds FRA Forward Rate Agreement FCNR/ Foreign Currency Non- FRBM Fiscal Responsibility and Budget FCNR (B) Resident/ Foreign Currency Management Account (Non-Resident) Account (Banks) FRBs/ FRSB Floating Rate Bonds/ Floating FCRA Foreign Contribution (Regulation) Rate Savings Bond Act FRRR Fixed Rate Reverse Repo FCS Foreign Collaboration in Indian FSB Financial Stability Board Industry Survey FSDC/ Financial Stability and FCS-OIS Foreign Currency Settled FSDC-SC Development Council Overnight Indexed Swap / Sub-Committee of the Financial FCVA Foreign Contracts Valuation Stability and Development Accounts Council FDI Foreign Direct Investment / FSI/ FSU Financial Stability Institute / Federal Deposit Insurance Financial Stability Unit FERA/ FEMA Foreign Exchange Regulation Act F-TRAC Financial Market Trade Reporting / Foreign Exchange Management and Confirmation Platform Act, 1999 FVTPL Fair Value through Profit and FETERS Foreign Exchange Transactions Loss Electronic Reporting System GAH Gilt Account Holder FFCR Free Full Credit Report GARCH Generalized Auto Regressive FFMC Full-Fledged Money Changers Conditional Heteroskedasticity FG Forward Guidance GCC General Credit Card FI Financial Inclusion/ Financial GDAL Granular Data Access Lab Institution GDDS General Data Dissemination FI Foreign Investment System FICNs Fake Indian Currency Notes GDP Gross Domestic Product FIF/ FI-Index Financial Inclusion Fund GFC/ GFSR Global Financial Crisis/ Global /FIP Financial Inclusion Index/ Financial Stability Report Financial Inclusion Plan GRF Guarantee Redemption Fund FIMMDA Fixed Income, Money Market and GS Act Government Securities Act, 2006 Derivatives Association of India G-SAP G-sec acquisition programme FIRREA Financial Institutions Reform, G-Sec Government Security Recovery, and Enforcement Act GST/ GSTIN Goods and Services Tax/ Goods FISIM Financial Intermediation Services and Services Tax Identification Indirectly Measured Number FIT Flexible Inflation Targeting HFC Housing Finance Company FLA/ FLAIR Foreign Liabilities and Assets/ HFT Held for Trading Foreign Liabilities and Assets HKMA Hong Kong Monetary Authority Information Reporting HLC High Level Committee FLCs/ FLW Financial Literacy Centres/ HPI House Price Index Financial Literacy Week HTM Held to Maturity FLDG First Loss Default Guarantee IBBI Insolvency and Bankruptcy Board FMC/ FMI Financial Markets Committee / of India Financial Market Infrastructure IBC Insolvency and Bankruptcy Code FPC Fair Practices Code IBS International Banking Statistics [vi] IBU IFSC Banking Unit IRF Inter-Regulatory Forum for ICAAP Internal Capital Adequacy monitoring Financial Assessment Process Conglomerates ICC Investment and Credit IRO / IRRBB Interest Rate Option/ Interest Companies / IRS Rate Risk in Banking Book/ ICCW Interoperable Card-less Cash Interest Rate Swaps Withdrawal IRTG Inter-Regulatory Technical Group ICEGATE Indian Customs Electronic Data IS Interest Subvention Interchange Gateway ITRS International Transactions ICMTS Integrated Compliance Reporting System Management and Tracking JAM Jan Dhan Yojana, Aadhar and System Mobile IDBI Industrial Development Bank of JLGs Joint Liability Groups India KCC Kisan Credit Card IDF Infrastructure Debt Fund KFS Key Facts Statement IDG Inter-Departmental Group KVIC Khadi and Village Industries IDPMS Import Data Processing and Commission Monitoring System KYC Know Your Customer IE Indian Entity LABs Local Area Banks IESH Inflation Expectations Survey of LAF Liquidity Adjustment Facility Households LCR Liquidity Coverage Ratio IFC International Finance Centre LEI Legal Entity Identifier IFMIS Integrated Financial Management LERMS Liberalised Exchange Rate and Information System Management System IFR Investment Fluctuation Reserve LLP Limited Liability Partnership IFSC/ IFSCA International Financial Services LRS Liberalised Remittance Scheme Centre / International Financial LSP Lending Service Provider Services Centres Authority LTRO/ Long Term Repo Operations / IFSC Indian Financial System Code LTRRO Long Term Reverse Repo IGB Indian Government Bond Operation IIP International Investments LTV Loan to Value Position LVPS Large Value Payment System ILO International Labour Organisation MANI Mobile Aided Note Identifier IME Informal Micro Enterprises MBP Market Borrowing Programme IMF International Monetary Fund MCC Merchant Category Code IMPS Immediate Payment System MCGDM Monitoring Group on Cash and InvITs Infrastructure Investment Trust Debt Management IO Internal Ombudsman MCVs Mobile Coin Vans IoRS Interoperable Regulatory MDA Micro Data Analysis Sandbox MFI Micro Finance Institutions IOS Industrial Outlook Survey MGC Mortgage Guarantee Companies IOSCO International Organization of MIBOR Mumbai Inter-bank Outright Rate Securities Commissions MICR Magnetic Ink Character IPA Issuing and Paying Agent Recognition IRA Investment Revaluation Account MISS Modified Interest Subvention IRACP Income Recognition and Asset Scheme Classification and Provisioning MMID Mobile Money Identifier IRD Interest rate derivatives MMIFOR Modified Mumbai Interbank Forward Outright Rate [vii] MMO Money Market operations NDSI-NBFC Systemically Important Non- MNBCs Miscellaneous Non-Banking Deposit taking Non- Banking Companies Financial Companies MNSB Multilateral Net Settlement Batch NDTL Net Demand and Time Liabilities MPC/ MPR Monetary Policy Committee/ NEFT/ NETC National Electronic Funds Monetary Policy Report Transfer/ National Electronic Toll MSCS Multi State Co-operative Society Collection MSD&E Ministry of Skill Development and NFS National Financial Switch Entrepreneurship NGNF Non-Government Non-Financial MSE/ MSME Micro and Small Enterprise/ NHB Act National Housing Bank Act, 1987 Micro Small and Medium NI Act Negotiable Instruments Act Enterprises NIC Notes in Circulation MSF Marginal Standing Facility NII Net Interest Income MSS Market Stabilisation Scheme NOFHC Non-Operative Financial Holding MTDS/ MTF Medium Term Debt Management Company Strategy / Medium-Term NOOPL Net Overnight Open exchange Framework Position Limit MTM Mark to Market NPAs Non-Performing Assets NACH National Automated Clearing NPCI National Payments Corporation House of India NAIOs Non- Administratively NRD-CSR Non-Resident Deposits - Independent Offices Consolidated Single Return NAMCABS National Mission for Capacity NRE/ NRI Building of Bankers for financing / NRO Non-Resident External/ Non- MSME Sector Resident Indian/ Non-Resident NBBL NPCI Bharat BillPay Ltd. Ordinary NBFC Non-Banking Financial Company NSDL National Securities Depository NBFC-ICC NBFC-Investment and Credit Limited Company NSFE/ NSFI National Strategy for Financial NBFC-IFC NBFC-Infrastructure Finance Education/ National Strategy for Company Financial Inclusion NBFC-P2P Peer-to-Peer Lending NSFR Net Stable Funding Ratio NBFI Non-Bank Financial NSO National Statistical Office Intermediation / Non- Bank NTRP Non-tax Receipt Portal Financial Intermediary collections NCAs National Competent Authorities NUCFDC National Urban Cooperative NCD Non-Convertible Debenture Finance and Development NCFE National Centre for Financial Corporation Limited Education OCI Overseas Citizens of India NCMC National Common Mobility Card ODI Overseas Direct Investment ND Nominee Director ODR Online Dispute Resolution NDDC/ NDF Non-Deliverable Derivative OECD Organization for Economic Contract / Non-Deliverable Cooperation and Development Forward OI Overseas Investment NDS Negotiated Dealing System OLTAS Online Tax Accounting System NDS-OM Negotiated Dealing System – OMFPI Organized Market Food Price Order Matching Index NDS-Call Negotiated Dealing System-Call OMO Open Market Operation OPI Overseas Portfolio Investment [viii] OSMOS Off-site Monitoring and RCA Root Cause Analysis Surveillance System RCBs Rural Cooperative Banks OT Operation Twist RCS Registrar of Co-operative OTC Over the Counter Societies OTP One-Time Password RDG Account Retail Direct Gilt Account P2M/ P2P Peer-To-Merchant / Peer-to-Peer REITs Real Estate Investment Trusts PA Payment Aggregator Repo Repurchase Agreement PACS Primary Agriculture Credit REs Regulated Entities Societies RFC/ RFC(D) Resident Foreign Currency PAN Permanent Account Number Account / Resident Foreign PB Payment Bank Currency (Domestic) Account PBC Principal Business Criteria RFID Radio Frequency Identification PCA Prompt Corrective Action RIDF Rural Infrastructure Development PCARDB Primary Co-operative Agriculture Fund and Rural Development Bank RMCB Risk Management Committee of PCAF Prompt Corrective Action the Board (RMCB) Framework RNBCs Residuary Non- Banking PCE Partial Credit Enhancement Companies PD Primary Dealer RoCs Registrar of Companies PDO Public Debt Office RRB Regional Rural Bank PFMI Principles for Financial Market RS Regulatory Sandbox Infrastructure RTGS Real Time Gross Settlement PFMS Public Funds Management RTI Act Right to Information Act System RTP Reserve Tranche Position PG Payment Gateway SAARC South Asian Association for PIDF Payment Infrastructure Regional Cooperation Development Fund SAC Standing Advisory Committee PMJDY Prime Minister Jan Dhan Yojana SAF Supervisory Action Framework PML Prevention of Money Laundering SAKAR Supervisory Assessment of PoS Points of Sale/ Point of Service KYC/AML Risks PPIs Pre-paid Instruments SARFAESI PPP Public Private Partnerships Act Securitisation and Reconstruction PRI Prompt Repayment Incentive of Financial Assets and PSL/ PSLCs Priority Sector Lending/ Priority Enforcement of Security Interest Sector Lending Certificates Act, 2002 PSPs Payment System Participants SBNs Specified Bank Notes PSS Act Payment and Settlement SBR Scale-Based Regulation Systems Act, 2007 SBS Shredding and Briquetting PTPFC Public Tech Platform for System Frictionless Credit SCARDB State Co-operative Agriculture QCVM Quick Response (QR) code- and Rural Development Bank based coin vending machine SCB Scheduled Commercial Bank QR Code Quick Response Code SCDs Small Coin Depots RBA Risk-based approach SC-NEC Sub Committee of National RB-IOS Reserve Bank-Integrated Executive Committee Ombudsman Scheme, 2021 SDDS Special Data Dissemination RBI-RD Reserve Bank of India-Retail Standards Direct SDF/ SDR Special Drawing Facility/ Special RBS Risk Based Supervision Drawing Rights [ix] SDF Standing Deposit Facility STP Straight Through Processing SDMX Statistical Data and Metadata STRIPS Separate Trading of Registered eXchange Interest and Principal of SEACEN South East Asian Central Banks Securities SEs Supervised Entities TAFCUB Task Force for Co-operative SFB Small Finance Bank Urban Banks SFDB SAARCFINANCE Database T-Bills Treasury Bills SFG Sustainable Finance Group TGFIFL Technical Group on Financial SGB Sovereign Gold Bond Inclusion and Financial Literacy SGrB Sovereign Green Bond TLTRO Targeted long-term repo SGS State Government Security operations SHG Self Help Group TR Trade Repositories SIPS Systemically Important Payment TReDS Trade Receivables Discounting System System SISS Survey on the Indian Start-up TREPS Triparty Repo Dealing System Sector TSP Telecom Service Providers SLBC/ SLCC State Level Bankers’ UAP Udyam Assist Platform Committees/ State Level UAPA Unlawful Activities (Prevention) Coordination Committees Act SLF-MF Special Liquidity Facility for UBB Uniform Balance Book Mutual Funds UCB Urban Co-operative Bank SLR Statutory Liquidity Ratio UDAY Ujjwal DISCOM Assurance SLTRO Special Long-Term Repo Yojana Operation ULI Unified Lending Interface SMS Short Messaging Service UMPT Unconventional Monetary Policy SNA- Tool SPARSH Single Nodal Agency - UPI Unified Payments Interface Samayochit Pranali Akikrut USSD Unstructured Supplementary Sheeghra Hastantaran Service Data SNRR Special Non-Resident Rupee UTLBCs Union Territory Level Bankers’ Account Account Committees SoC Statement of Cooperation VRR Variable Reverse Repo SPARC Supervisory Program for VRR Voluntary Retention Route Assessment of Risk and Capital WACR Weighted Average Call Rate SPARSH System for Pension WGMS Working Group on Money Supply Administration (Raksha) WLA/ WLAOs White Label ATMs/ White Label SPD Standalone Primary Dealer ATM Operators SPF Survey of Professional WMA Ways and Means Advances Forecasters WPI Wholesale Price Index SPMCIL Security Printing & Minting WSA Weekly Statement of Affairs Corporation of India Limited WSS Weekly Statistical Supplement SRO Self-Regulatory Organization WTDs Whole-Time Directors SRPHi Survey on Retail Payment Habits XBRL Extensible Business Reporting of Individuals language SRVA Special Rupee Vostro Account ZLB Zero-Lower Bound SSS Securities Settlement System StCB State Co-operative Bank STCI Securities Trading Corporation of India [x] [xi]  Chapter 1: Evolution of Central Banking Globally and in India “There have been three great inventions since the beginning of time: fire, the wheel and central banking” – Will Rogers The evolution of central banks can be traced back to the seventeenth century when Riksbank, the Swedish Central Bank was set up in 1668. The Bank of England was founded in 1694. The Central Bank of the United States, the Federal Reserve established in 1914, was relatively a late entrant to the Central Banking arena. The Reserve Bank of India, India’s central bank, started operations in 1935. At the turn of the twentieth century there were only eighteen central banks. Today, most of the countries have a central bank. Central banks are not regular banks. They are unique both in their functions and their objectives. In the beginning, central banks were established with the primary purpose of providing finance to the government to meet their war expenses and to manage their debt. They were initially known as banks of issue with the term central banking coming into existence only in the nineteenth century. They were founded as “special” commercial banks and would evolve into public-sector institutions much later. The “special” nature of these banks was based on government charters, which made them not only the main bankers to the government but also provided them monopoly privileges to issue notes or currency. Central banks also held accounts of other banks even as they engaged in normal commercial banking activities. Given their “special” status and their size, they soon came to serve as banker to banks facilitating transactions between banks as well as providing them banking services. The eighteenth and nineteenth century witnessed several financial panics. Panics are a serious problem as failure of one bank may lead to failure of others. Banks are susceptible to panics or “runs” as more popularly known, due to the nature of their balance sheets. Their liabilities are short-term and liquid (banks’ major liabilities are demand deposits, which means depositors can ask their money back anytime they want and therefore immediately payable) and the assets are long-term and illiquid (in the sense that it is not easy to sell them and convert into cash quickly). Banks engage in this so-called maturity or liquidity transformation to allocate society’s available pool of resources effectively between savers and borrowers. The failure of banks and its potential adverse impact on the real economy was and is a serious concern for all policymakers. In 1873, Walter Bagehot, an editor of the Economist magazine, published a book titled “Lombard Street”, where he clearly articulated that to avoid panics, central banks should assume the role of “lender of last resort”. The doctrine, which came to be known as Bagehot’s dictum states that a central bank, in periods of panics or crisis, should lend freely, against quality collateral and at a penal rate of interest. The idea being, a bank that is facing a “run” by its depositors or other lenders can tide over temporary liquidity problem in the stress period, by borrowing from the central bank against collateral. It can pay off the depositors and buy some time before things calm down. Given bank runs are self- fulfilling prophecies, if the banks can navigate this period without becoming insolvent, a crisis could be averted. The very fact that the bank was able to meet the withdrawal demands would comfort the other depositors waiting to withdraw and wean them away. Without the ‘lender of last resort’ facility, banks must resort to fire-sale of their assets and that too at a deep discount. Thus, in addition to be a banker to the government and banks, central banks also became lenders of last resort. The main mission of a central bank is to maintain macroeconomic stability and financial stability. Macroeconomic stability refers to achieving stable and sustainable growth and keeping prices stable, i.e., low and stable inflation. Financial stability on the other hand refers to keeping the financial system resilient and avoiding financial crisis. The relative importance of these objectives has varied over time. While the pursuit of sustainable economic growth and low and stable inflation have been fundamental to central banking activities since the early nineteenth century with the advent of the gold standard, the importance of financial stability became more prominent since the Great Depression of the 1930s when the world economy faced large bank failures and deep recession. To achieve the objectives of macroeconomic stability and financial stability, central banks have certain tools at their disposal. To achieve economic stability, central banks use monetary policy. By varying short-term interest rates, i.e., either raising or lowering the interest rates, they control the supply of and demand for money in the economy and thereby economic activity and inflation. For example, if the economy is growing fast and inflation is high, central bank may raise the interest rates it charges the banks to lend money. Higher interest rates will permeate into other rates, such as housing loan, consumer loan, etc. As the cost of borrowing increases, it discourages consumption and investment and thus reduces growth and inflation. On the other hand, if the economy is growing too slow or if the inflation is too low, the central bank will lower the interest rate. This will feed into other rates and encourage spending and investment thereby pushing economic growth and inflation. The trick of the trade is to achieve sustainable growth and low and stable inflation. Thus, sometimes, central banking is said to be “neither a science nor an art, but a craft”. To deal with financial stability, central banks main tool is provision of liquidity. This tool, as explained earlier, is referred to as “lender of last resort”. Some central banks, which are also the banking regulators in their economies employ another tool, viz., regulation and supervision, also to foster financial stability. By setting prudent rules and principles and examining and monitoring banks adherence to these rules and principles, the central banks aim to create a healthy and robust banking and financial system. A resilient and safer banking system will reduce the chances of financial crisis in the first place. In many countries the regulatory and supervisory roles are performed by multiple agencies and therefore may not be a main function of the central bank. The internationalization of commercial banking activity brought several risks to the fore. The failure of two banks in 1974, the Franklin National Bank in the United States and Bank Herstatt in Germany, which had international implications necessitated international cooperation and coordination among central banks. The Basel Committee for Banking Supervision (BCBS) was thus established. The committee sets international regulatory standards, known as Basel Standards, that forms the bedrock for all national and international banking regulations. Since the outbreak of the financial crisis in 2007-08, the toolbox of central banks has been strengthened. These tools or measures are popularly known as “unconventional policies”, reflecting their use in extraordinary circumstances. Quantitative or credit easing, negative interest rates, forward guidance, etc., are some of the tools employed by central banks to deal with the crisis and its aftermath. The central banks also became “market makers of last resort” during the crisis as the markets became dysfunctional. These concepts will be explained in subsequent chapters. Another incident that further shaped evolution of Central Banks is the once-in-a-millennium outbreak of CoVID-19 pandemic. Unlike many other crises that tested or rather shaped the functioning of Central Banks globally, this one emanated from outside the financial sector but nevertheless pushed the Central Banks to put their best foot forward to work together with respective sovereigns to try and minimize the impact of the pandemic on the real economies. Many Central Banks responded invariably but the approach remained quite varied. Expectedly, the central banks deployed their full arsenal of tools, but the responses were tailored to the nature of stress experienced in each country and the evolutionary stage or structure of their financial systems. Central Banks have promptly eased their policy stance, acting decisively to prevent market dysfunction and complemented the same with regulatory forbearance, supervisory flexibility, to support banks' ability and intent to lend. The fiscal policy response from the sovereigns too was swift and forceful. However, the faster recovery has come with some surprises in the form of unleashed inflation. Post pandemic, many central banks have also trained their sights on digital payments including a digital currency. Similarly, as fintech is transforming the financial landscape, the nature of regulation has to adjust. The sheer diversity in the functions performed by fintech firms, necessitates a widening of the regulatory perimeter. The approach to regulation also needs to adapt to the type of entity being regulated. While similar activities should attract uniform regulation in most cases, such activity-based regulation might be less effective than entity-based regulation when one is dealing with financial activities by bigtech firms. Cybersecurity risks are likely to overshadow financial risks for all. Systemic risks, operational risks and risks affecting competition are of prime importance when dealing with large financial market infrastructure entities or bigtech. Countries need to overcome the legislative and regulatory deficits in dealing with concerns surrounding privacy, safety and monetisation of data. Regulations pertaining to data issues needs to adapt to a world where boundaries between financial and non-financial firms is getting increasingly blurred or geographical boundaries are no longer a constraint. (BIS Papers No 11733). Another area where central banks are increasingly becoming involved is managing the risks emanating from climate change. Climate change poses a threat to our long-term growth and prosperity. It has potential to create shocks to monetary stability, growth, financial stability, the safety and soundness of regulated entities. In many countries, including India, the Central Banks are statutorily mandated to pursue a given set of objectives. This means that they should address risks and threats that impact their core mission. Climate change does pose such a risk. They must, therefore, manage outcomes which could affect the stability of the financial system and safety and soundness of the financial entities. More Importantly, the risks arising from climate change transverse geographical boundaries and sectoral segmentations. Therefore, tackling climate change requires global co-ordination and co-operation. Being mindful of these challenges, international organisations such as the IMF and standard-setting bodies such as the BCBS and FSB are stepping up their work on issues relating to climate change. At the global level, several initiatives are already underway under the aegis of the G-20. Different standard setting bodies are undertaking focused work to address the vulnerabilities arising from climate change. The Financial Stability Board (FSB) had published a "Roadmap for Addressing Financial Risks from Climate Change", which was endorsed by the G20 in July 2021 and has since been updated. The Roadmap sets out a comprehensive and coordinated plan for addressing climate-related financial risks and covers four areas, i.e., firm-level disclosures, data, vulnerabilities, and regulatory and supervisory practices & tools. Evolution of the Reserve Bank of India The origins of the Reserve Bank of India (RBI) can be traced to 1926, when the Royal Commission on Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the creation of a central bank for India to separate the control of currency and credit from the Government and to augment banking facilities throughout the country. The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and functions have evolved, as the nature of the Indian economy and financial sector changed. Though started as a private shareholders’ bank, the Reserve Bank was nationalised in 1949. The Preamble to the Reserve Bank of India Act, 1934, under which it was constituted, specifies its objective as “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”. The primary role of the RBI, as the Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money or preserve the purchasing power of the currency. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. In addition, the RBI has two other important mandates, inclusive growth and development, as well as financial stability. In a country where a large section of the society is still poor, inclusive growth assumes great significance. Access to finance is essential for poverty alleviation and reducing income inequality. One of the core functions of the RBI, therefore, is to promote financial inclusion that leads to inclusive growth. As the central bank of a developing country, the responsibilities of the RBI also include the development of financial markets and institutions. Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help allocate and absorb the risks entailed in financing India’s growth is a key objective of the RBI. India’s financial system is dominated by banks. Their regulation and supervision are therefore important both from the viewpoint of protecting the depositors’ interest and preserving financial stability. The RBI, deriving powers from the Banking Regulation Act, 1949, designs and implements the regulatory policy framework for banks operating in India. Over the years, the purview of regulation and supervision has been expanded to include non- banking entities also. The global economic uncertainties during and after the Second World War warranted conservation of scarce foreign exchange by sovereign intervention and allocation. Initially, the RBI carried out the regulation of foreign exchange transactions under the Defence of India Rules, 1939 and later, under the Foreign Exchange Regulation Act of 1947. Over the years, as the economy matured, the role shifted from foreign exchange regulation to foreign exchange management. The 1991 balance of payment and foreign exchange crisis was a watershed event in India’s economic history. Being at the centre of country’s monetary and financial system, the RBI played a key supporting role in helping the Government manage the crisis and undertake necessary market and regulatory reforms. The approach under the reform era included a thrust towards liberalisation, privatisation, globalisation and concerted efforts at strengthening the existing and emerging institutions and market participants. The Reserve Bank adopted international best practices in areas, such as, prudential regulation, banking technology, variety of monetary policy instruments, external sector management and currency management to make the new policy framework effective. Central banks are at the heart of a country’s payment and settlement system. “One of the principal functions of central banks is to be the guardian of public confidence in money, and this confidence depends crucially on the ability of economic agents to transmit money and financial instruments smoothly and securely through payment and settlement systems”1. The RBI has, over the years, taken several initiatives in building a robust and state-of-the- art payment and settlement system that not only improves the “plumbing” of the financial system but also its stability. The last two and a half decades have also seen growing integration of the national economy and financial system with the world. While rising global integration has its advantages in terms of expanding the scope and scale of growth of the Indian economy, it also exposes India to global shocks. The crisis of 2007-08 gave a glimpse of financial instability in other economies posing threat to our financial stability. Hence, preserving financial stability has become an even more important mandate for the RBI. In order to alleviate COVID-19 related stress in the financial markets and specific segments of the economy, the Reserve Bank had used a number of targeted and system- level liquidity measures as part of unconventional monetary policies, which led to stable expansion in its balance sheet size. As a per cent of GDP, the Reserve Bank’s balance sheet size expanded to 28.6 per cent in 2020-21 from 24.6 per cent in 2019-20, before moderating to 26.7 per cent in 2021-22 and further to 22.5 per cent in 2022-23 (Chart II.4.2 a & b). The expansion in the Reserve Bank’s balance sheet was, however, relatively subdued as compared with that in the US, the UK and the Euro Area. During the same period, the reserve money (the stock of monetary liabilities in the central bank’s balance sheet/base money) as per cent of GDP in India also remained stable vis-à-vis other major economies as the liquidity measures were carefully designed and targeted with in-built terminal dates, reducing the challenge of exiting from post-COVID unconventional policies1. Further, Money supply, commonly proxied by broad money (M3 – Sum of currency with public, demand and time deposits with banks and other deposits with Reserve Bank), viewed in the context of economic activity - M3 to nominal GDP ratio - indicates that India witnessed a faster normalisation of COVID-19 induced stimulus, with the ratio reverting to the pre-pandemic steady levels unlike other major economies (Chart II.4.8). 1 Bank oversight of payment and settlement systems, BIS, May 2005  Chapter 2: Legal Framework for Reserve Bank Functions The structure, roles and responsibilities of central banks vary between countries, which is very much evident from their origins and the variety of functions they perform. The statutes governing the establishment and mandate of central banks are also not uniform even as they play a crucial role in determining the functions of central banks across the world. In India, the RBI is the central banking authority constituted by the Reserve Bank of India Act, 1934 (‘RBI Act’), and its duties and responsibilities flow from that statute. However, the range of functions, which the RBI is undertaking is not only covered under the RBI Act2 but is also covered under various other statutes. Thus, the legal backing for the functions of RBI is spread over a number of statutes. In this chapter, we examine in detail the legal provisions vis-à-vis the multifarious functions that are conferred on the RBI. Reserve Bank of India – Legal Background Pursuant to the recommendation of the Royal Commission on Indian Currency and Finance, a Bill was introduced in the Legislative Assembly in 1927 to create a central bank for India, which was later withdrawn due to lack of agreement among various sections of people. Subsequently, the White Paper on Indian Constitutional Reforms (1933) recommended for the establishment of a Reserve Bank in India. Accordingly, a fresh Bill was introduced in the Legislative Assembly, which got passed and received the Governor General’s assent on March 6, 19343. Consequently, the RBI Act came into force and the RBI commenced its operations as the central bank of the country on 1st April 1935 as a private shareholders’ bank, with a paid-up capital of Rupees five crore. Aims and Objectives – The Preamble The purposes for which the RBI has been established as India’s central bank are outlined in the preamble to the RBI Act (amended), as follows: i) to regulate the issue of banknotes 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; and ii) that it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy and the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth. Thus, the Preamble in the RBI Act, as amended by the Finance Act, 2016, provides that the primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth, and to meet the challenge of an increasingly complex economy. The RBI Act envisages as an authorized business of RBI the exercise powers and functions and the performance of duties not only under that Act but also under any other law for the time being force4. Accordingly, the functions which the RBI is undertaking are not restricted only within the provisions of the RBI Act, but also extends to various areas, such as, regulation 2 Section 17 of RBI Act, 1934 3 Source: RBI Website, “History of the Reserve Bank of India” 4 Section 17(15A) of RBI Act, 1934. and supervision of banks, consumer protection, management of foreign exchange, management of government securities, regulation and supervision of payment systems, etc., for which powers are drawn from various laws, namely, the Banking Regulation Act, 1949, Foreign Exchange Management Act, 1999, Government Securities Act, 2006, Payment and Settlement Systems Act, 2007, etc. General Administration – Legal Background The general superintendence and direction of the affairs and business of the RBI is entrusted to the Central Board (Section 7 of RBI Act) consisting of Directors appointed under Section 8 of the RBI Act including Directors nominated by the Central Government. The Board of the RBI is headed by the Governor and assisted by not more than four Deputy Governors. The Board exercises all powers and do all acts and things which may be exercised by the RBI. Banking and Other Functions – Legal Background Section 17 of the RBI Act enables RBI to do banking business, such as accepting deposits, without interest, from Central Government, State Governments, local authorities, banks and any other persons. The other business, which the RBI may transact are also mentioned in the said provision. It states that the RBI may accept money as deposits, repayable with interest, from banks or any other person under Standing Deposit Facility Scheme, purchase, sale and rediscount of Bills of Exchange, make short term loans and advances to banks and other institutions, provide annual Contributions to National Rural Credit Funds, deal in Derivatives, purchase and sale of Government Securities, deal in repo or reverse repo, lend or borrow securities including foreign securities, purchase and sale of shares of State Bank of India, National Housing Bank, Deposit Insurance and Credit Guarantee Corporation, etc., keeping of Deposits with SBI for specific purposes, making and issue of Banknotes, etc. Section 18 facilitates the RBI to act as a ‘Lender of Last Resort’. Section 19 lists out the kinds of businesses which RBI may not transact. The provisions of the RBI Act enable the RBI to act as banker to Central Government and State Governments. Under Sections 20 and 21 of the RBI Act, RBI has an obligation and right respectively to accept monies for account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union. In the case of State Governments, the said banking functions may be undertaken by way of an agreement between the RBI and the State Government concerned, as provided in Section 21-A of the RBI Act. These agreements made between the RBI and the State Governments are statutory as they are required to be laid before the Parliament as soon as they are made. Issue Functions - Legal Background Issuance of bank notes is one of the key central banking functions the RBI is authorised and mandated to do. Section 22 of the RBI Act confers on RBI the sole right to issue bank notes in India. The issue of bank notes shall be conducted by a department called the Issue Department, which shall be separated and kept wholly distinct from the Banking Department (Section 23). The RBI Act enables RBI to recommend to Central Government the denomination of bank notes, which can be of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or other denominations not exceeding ten thousand rupees (Section 24). The design, form and material of bank notes shall be approved by the Central Government on the recommendations of Central Board of the Reserve Bank of India (Section 25). Every bank note shall be a legal tender at any place in India, however, on recommendation of the Central Board, the Central Government may declare any series of bank notes of any denomination to be not a legal tender (Section 26). Reserve Bank of India is committed to put only clean notes into circulation (Section 27). Another important function is exchange of mutilated or torn notes, which under the RBI Act is not a matter of right, but of grace (Section 28). The bank notes that are being issued by the RBI are exempt from payment of stamp duty (Section 29). The Act describes assets and liabilities of Issue Department (Section 33 & 34). The obligations in respect of supply of coins and different forms of currency are given in Sections 38 & 39 respectively. To facilitate introduction of digital currency, the Act was amended in the year 2022 to (i) explicitly define a “bank note” to mean a note issued by the Bank, whether in physical or digital form, under section 22; and (ii) make certain provisions not applicable to digital form of bank notes (section 22A). Monetary Policy Functions - Legal Background Chapter III-F of the RBI Act provides for a statutory basis for the Monetary Policy Framework and the functioning of Monetary Policy Committee. The Central Government, in consultation with the RBI shall determine the inflation target in terms of the Consumer Price Index, once in every five years, which needs to be notified in the Official Gazette (Section 45ZA). Similarly, it is the Central Government that should constitute a Monetary Policy Committee by notification in the Official Gazette (Section 45ZB). The Monetary Policy Committee shall consist of (a) the Governor of the RBI; (b) Deputy Governor of the RBI in charge of Monetary Policy; (c) one officer of the RBI to be nominated by the Central Board; and (d) three persons to be appointed by the Central Government. The Monetary Policy Committee has been entrusted with the statutory duty to determine the Policy Rate required to achieve the inflation target. The decision of the Monetary Policy Committee is binding on the RBI and the RBI shall publish a document explaining the steps to be taken by it to implement the decisions of the Monetary Policy Committee (Section 45ZJ). It has been the objective of the statute that a committee-based approach will add lot of value and transparency to monetary policy decisions. The meetings of the MPC shall be held at least four times a year and it shall publicize its decisions after each such meeting (Section 45ZK). Public Debt Functions – Legal Background The Parliament of India enacted the Government Securities Act, 2006 (‘GS Act’) with an objective “to consolidate and amend the law relating to Government securities and its management by the Reserve Bank of India” (preamble of the Act). The GS Act applies to Government securities created and issued by the Central Government or a State Government (Section 1 of GS Act). The GS Act prescribes the procedure and modalities to be followed by the RBI in the management of the public debt and also confers various powers on the RBI, including the power to determine the title to a government security, if there exists any doubt in the opinion of the Reserve Bank of India (Section 12 of GS Act). Further, Section 18 of the GS Act provides that no order made by the RBI under that Act shall be called in question by any Court for the reasons stated therein. Prior to the enactment of the GS Act, the said public debt functions of the RBI have been governed by the provisions of the Public Debt Act, 1944. The enactment of the GS Act has not fully repealed the Public Debt Act, 1944. This is evident from Section 31 of the GS Act which states that the Public Debt Act, 1944, shall cease to apply to the Government securities to which that Act applies and to all matters for which provisions have been made under the GS Act. Foreign Exchange Management – Legal Background The powers and responsibilities with respect to external trades and payments, development and maintenance of foreign exchange market in India are conferred on the RBI under the provisions of the Foreign Exchange Management Act, 1999 (“FEMA”). Section 10 of the FEMA empowers the RBI to authorize any person to be known as authorized person to deal in foreign exchange or in foreign securities, as an authorized dealer, money changer or offshore banking unit or in any other manner as it deems fit. Similarly, it empowers the RBI to revoke an authorization issued to an authorized person in public interest, or if the authorized person has failed to comply with the conditions subject to which the authorization was granted or has contravened any of the provisions of the FEMA or any rule, regulation, notification, direction or order made thereunder. However, the revocation of an authorization may be done by the RBI after following the prescribed procedure in the FEMA. Section 13 of the FEMA details out the contraventions which may be adjudicated and penalized by the Adjudicating Authority (Directorate of Enforcement). RBI has been empowered to compound certain contraventions under Section 15 of the FEMA in accordance with the Rules framed in that regard. Banking Regulation & Supervision – Legal Background India has a variety of banks viz., banking companies (banks which are companies and regulated by the Banking Regulation Act, 1949), State Bank of India (constituted by the State Bank of India Act, 1955), Nationalised Banks (constituted by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/ 1980), Regional Rural Banks (constituted under the Regional Rural Banks Act, 1976), and Co-operative banks (constituted either under the Multi-State Co-operative Societies Act, 2002 or State Co- operative Societies Acts). Although RBI is entrusted with the task of regulating and supervising all types of banks in the country, the powers exercisable by it towards different banks are not uniform. The power to regulate and supervise banking companies has been provided by the provisions of the Banking Regulation Act, 1949 (BR Act, 1949) to the RBI. The preamble to the BR Act, 1949, states that it is an Act to consolidate and amend the law relating to banking and the powers of RBI to formulate banking policy (Section 5(ca) of BR Act), to regulate and supervise banking business etc., are scattered across the BR Act, 1949. Section 5(ca) of the BR Act, 1949, states that banking policy means any policy, which is specified from time to time by the RBI, in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources. The appointment, re-appointment or termination of chairman and whole-time directors of a banking company shall not have effect, unless done with the previous approval of the Reserve Bank (Section 35 B of BR Act). Similarly, as a part of control over management, Section 36-AB of BR Act, 1949, empowers RBI to appoint additional directors on the boards of banking companies. Section 36-AA of the BR Act, 1949 enables RBI to remove executives, officers and employees of a banking company under certain conditions. Moreover, the RBI has been empowered under BR Act, 1949, to supersede the boards of banking companies (Section 36ACA of BR Act). Though it is not the role of the Reserve Bank to micro-manage the affairs of banks, it has powers to control advances by banking companies (Section 21 of BR Act). Section 22 of the BR Act, 1949 confers on RBI the power to issue licenses and also to cancel licenses of banking companies. Another important regulatory power that has been vested in the RBI is the power to issue directions to banking companies. Under Section 35A of the BR Act, 1949, RBI has the power to issue directions to banking companies in public interest or in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company or to secure the proper management of any banking company. The Banking Regulation (Amendment) Act, 2017 has provided powers to RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, if authorized by the Central Government (Section 35AA of BR Act), and to issue directions to banking companies in relation to resolution of stressed assets (Section 35 AB of BR Act). As part of the supervisory powers, RBI has been empowered to inspect banking companies on its own or at the instance of Central Government under the provisions of the BR Act, 1949 (Section 35). “Thus, an overall responsibility to find out the well-being of a banking company, in improving monetary stability and economic growth as well as keeping in view the interests of depositors”, has been left with the Reserve Bank of India (Janata Sahakari Bank Ltd. V/s. State of Maharashtra (AIR 1993 Bombay 252)). Only those provisions of the BR Act which are mentioned in section 51 of the BR Act will apply to State Bank of India, Nationalised Banks and Regional Rural Banks. In the case of co-operative banks, the application of the provisions of the BR Act will be subject to the modifications mentioned in section 56 of the very same Act. Regulation and Supervision of NBFCs – Legal Background The regulation and supervision of non-banks is one of the critical functions that the RBI has been entrusted with. Section 45-IA of the RBI Act mandates every non-banking financial company to obtain a Certificate of Registration from the RBI and to have a net owned fund as may be specified by the RBI in the Official Gazette, before commencing such non- banking financial business. Further, as a part of regulation and supervision of non-banks, the RBI has been conferred with the statutory powers to regulate or prohibit issue of prospectus or advertisements soliciting deposits of money by non-banking institutions (Section 45J of RBI Act), power to determine policy and issue directions to non-banking financial companies, etc. (Section 45JA of RBI Act). Further, the RBI has been empowered under Section 45-L of the RBI Act to call for information and issue directions to financial institutions for the reasons stated therein. As a part of the supervisory control over the non- banks, the RBI has the power to inspect non- banking institutions under Section 45-N of the RBI Act, 1934. Pursuant to the amendment by Finance Act in 2019, RBI has been empowered to remove a director from Board of an NBFC (Section 45 ID) and/or supersede the Board of an NBFC if the Bank is satisfied that in the public interest or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of the depositors or creditors (Section 45 IE). The Bank may, in addition to the above, in the interest of financial stability, amalgamate or reconstruct or split an NBFC into different units (Section 45 MBA). In such a scenario, the Bank may also establish a Bridge Institution, temporary institutional arrangement made under the scheme, to preserve the continuity of the activities of the NBFCs that are critical to the functioning of the financial system. Regulation & Supervision of Co-operative banks – Legal Background In terms of Article 246 of the Constitution of India, the legislative powers of the Union and the State are given in three Lists, viz., the Union List, the State List and the Concurrent List respectively of Schedule VII to the Constitution. The entry relating to incorporation, regulation and winding-up of Cooperative Societies fall in State List whereas the entry relating to banking fall in the Union List. This results in the duality of jurisdiction over cooperative banks by the Reserve Bank of India and the Registrar of Cooperative Societies. In Janata Sahakari Bank Ltd. v. State of Maharashtra, the Bombay High Court has held that “though the control over management of Co-operative Society where it is Co-operative Banking Society or otherwise is vested in the Registrar of Co-operative Societies, but insofar as banking is concerned, by virtue of Section 56 of the Banking Regulation Act, 1949, read with Section 35A of the Act ibid, it will be a subject with which the Reserve Bank of India has full power”. The Banking Regulation (Amendment) Act, 2020 (which replaced Banking Regulation (Amendment) Ordinance 2020 promulgated on June 27, 2020) amended the Banking Regulation Act, 1949 with respect to its applicability to co-operative banks. By virtue of this amendment, certain provisions of the BR Act including those relating to the control over the management and functioning of banks i.e., sections 10, 10A, 10B, 10BB, 10C, 10D, 35B etc. were extended to co-operative banks, which were not applicable earlier. Section 56 has also been modified to give primacy to the provisions thereunder in case of any conflict with any other laws. The Amendment Act states that the BR Act will not apply to primary agricultural credit societies and cooperative societies whose principal business is long term financing for agricultural development, if these societies do not use the words ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business and does not act as drawee of cheques. The Amendment Act provides that a cooperative bank may issue equity shares, preference shares, or special shares on face value or at a premium to its members or to any other person residing within its area of operation. Further, it may issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons subject to the prior approval of the Reserve Bank of India (RBI), and any other conditions as may be specified by RBI. The Amendment Act adds that in case of a co-operative bank registered with the Registrar of Co- operative Societies of a state, the RBI is empowered to supersede the Board of Directors after consultation with the concerned state government, and within such period as specified by it. Further, section 53A has been newly inserted and made applicable to co-operative banks, whereby RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification for such time period and under such conditions as may be specified by the RBI. As Sections 49B and 49C of the Banking Regulation Act, 1949 have been made applicable to Co-operative Banks following the Banking Regulation (Amendment) Act, 2020, any changes to a cooperative bank's name or byelaws require written certification from the Reserve Bank confirming no objection before approval by the Central/State Registrar of Cooperative Societies. Regulation of Transactions in Derivatives, Money Market Instruments – Legal Background Chapter III-D was inserted in the RBI Act with effect from January 09, 2007 by way of an amendment to the RBI Act, 1934. In the said chapter, the Parliament of India thought it as appropriate to introduce provisions relating to regulation of transactions relating to derivatives, money market instruments, securities, etc. by the RBI. Sub-section (a) of Section 45U of the RBI Act defines derivative as an instrument to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called ‘underlying’), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency rupee options or such other instruments as may be specified by the RBI from time to time. Similarly, money market instruments have been defined to include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as the RBI may specify from time to time. The expression “securities” have been defined to mean securities of Central Government or a State Government or securities of local authority specified by the Central Government and for the purpose of ‘repo’ and ‘reverse repo’ to include corporate bonds and debentures. The power of RBI to regulate transactions in derivatives, money market instruments etc. have been provided under Section 45W of the RBI Act, which states that the RBI may, in public interest or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the RBI may specify from time to time. Section 45V also provides that transactions in derivatives specified by RBI shall be valid, if at least one of the parties to the transaction is an entity falling within the regulatory purview of RBI, thus conferring certainty to the legal validity of such contracts. Payment and Settlement Functions – Legal Background The Parliament of India enacted the Payment and Settlement Systems Act, 2007 (‘PSS Act, 2007’) with an objective to provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose and for matters connected therewith or incidental thereto. Under Section 4 of the PSS Act, 2007, no person shall commence or operate a payment system except with an authorization issued by the RBI. Similarly, under Section 8 of the PSS Act, 2007, RBI has the power to revoke the authorization granted to any person if it contravenes any of the provisions of the PSS Act or does not comply with regulations or fails to comply with the orders or directions issued by the RBI or operates the payment system contrary to the conditions subject to which the authorization was issued. The regulation and supervision of payment systems has been conferred on the RBI by virtue of provisions of Chapter IV of the PSS Act, 2007. The regulatory and supervisory controls include power to determine standards for the functioning of payment systems, power to call for returns, documents or other information, power to enter and inspect payment systems, power to carry out audit and inspections, power to issue directions, etc. Credit Information Companies Regulation Functions Reserve Bank has been entrusted with the task of regulation and supervision of Credit Information Companies under the Credit Information Companies (Regulation) Act, 2005. Three institutions form the essential pillars of the Act, viz. the Credit Information Companies, the Credit Institutions and Specified Users. The Act empowers the Reserve Bank to issue directions to Credit Information Companies and to inspect them. The Reserve Bank is also authorised by the statute to determine policy in relation to functioning of credit information companies. Consumer Protection and promotion Functions – Legal Background Protection of the interests of the depositors is one of the vital mandates of the RBI. The various provisions in the RBI Act, 1934, BR Act, 1949, etc., are replete with the phrases like “in the interests of depositors” wherever it entrusts powers to the RBI. Apart from depositors, the resolution of grievances of customers who deal with its regulated entities is also important for the Reserve Bank of India. Reserve Bank of India has formulated three Ombudsman Schemes for covering operations of banks, NBFCs and payment systems. Reserve Bank of India (RBI) integrated its three erstwhile Ombudsman Schemes viz. (i) the Banking Ombudsman Scheme, 2006, (ii) the Ombudsman Scheme for Non-Banking Financial Companies, 2018, and (iii) the Ombudsman Scheme for Digital Transactions, 2019, into one Scheme - ‘The Reserve Bank - Integrated Ombudsman Scheme, 2021 (the Scheme / RB-IOS, 2021)’ with effect from November 12, 2021. The Scheme simplifies the grievance redress process at RBI by enabling the customers of Regulated Entities (REs) like banks, Non-Banking Financial Companies (NBFCs), Payment System Participants (PSPs) and Credit Information Companies to register their complaints at one centralised reference point. The objective of the Scheme is to resolve the customer grievances involving ‘deficiency in service’ on part of REs in a speedy, cost-effective and satisfactory manner. Reserve Bank of India attaches high importance to its promotional and developmental roles. Clause (8AA) of section 17 of the RBI Act states that the promoting, establishing, supporting or aiding in the promotion, establishment and support of any financial institution - whether as its subsidiary or otherwise, is a business which can be transacted by the Reserve Bank. Section 54 of that Act points to the developmental role of RBI in matters of rural development. It provides that the Reserve Bank may maintain expert staff to study various aspects of rural credit and development and in particular it may (i) tender expert guidance and assistance to the National Bank; and (ii) conduct special studies in such areas as it may consider necessary to do so for promoting integrated rural development. Factoring Regulation Act 2011 - The Act provides a legal framework for the assignment of receivables, outlining the rights and obligations of all parties involved. The RBI's role includes regulating and supervising factors, issuing directions to factors and collecting information from them. MSME Act 2006 – The Act provides for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. The provisions of the Act mandate that a senior official from the RBI, not below the rank of an Executive Director, is included in the National Board for MSMEs, ensuring that the RBI has a significant role in the policy-making process for the MSME sector. RBI is responsible for the smooth flow of credit to MSMEs, so as to minimize the incidence of sickness among and enhance the competitiveness of such enterprises. Conclusion The powers and functions of the RBI have further widened consequent upon the amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 and the National Housing Bank Act, 1987. The provisions of SARFAESI Act empowers RBI with regard to regulation and supervision of Asset Reconstruction Companies. The amendments made in the year 2019 to the provisions of National Housing Bank Act, 1987 transferred certain regulatory powers over housing finance companies from the National Housing Bank (NHB) to the Reserve Bank of India (RBI). Accordingly, HFCs are being treated as one of the categories of NBFCs for regulatory purposes. Consequent upon the amendment, RBI has, in exercise of its powers under the RBI Act and NHB Act, issued directions to NBFC-HFCs. The change aims to enhance the stability and efficiency of the housing finance sector. Although, the object and purpose of establishment of the RBI, as could be observed from the preamble to the RBI Act, 1934, is to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability and also to formulate monetary policy with an objective to maintain price stability while keeping in mind the objective of growth, the multifarious functions which the RBI has been entrusted with through various legislations shows that the central bank of the country has much wider mandates than what have been summarized in the preamble to the RBI Act, 1934. The regulation and supervision of banks, non-banks, co-operative banks, management of currency, management of public debt of the Union and the State, management of foreign exchange, acting as banker to banks, banker to governments, protection of interests of depositors, spreading of financial literacy, etc., are all part of achieving the common goal as enshrined in the preamble to the RBI Act, 1934.  Chapter 3: Monetary Policy Framework Monetary Policy Making in India Definition, objectives and tools Central banks around the world were established to preserve monetary and financial stability. They also had several other functions such as issuance of currency and management of public debt, etc., but monetary and financial stability have over time remained the core objective of central banks. The functions of central banks were written into law to empower them to deliver on their mandate effectively. The Reserve Bank was set up under the Reserve Bank of India Act 1934 with the original Preamble that describes the broad mandate of the Reserve Bank as follows “it is expedient to constitute a Reserve Bank for India 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”. Monetary policy refers to the use of monetary instruments under the control of the central bank to influence variables, such as interest rates, money supply and availability of credit, with a view to achieving the objectives of policy. Accordingly, the objectives of monetary policy evolved as maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. With progressive liberalization and increasing globalization of the economy, maintaining orderly conditions in financial markets emerged as an additional policy objective. Thus, over time, the role of monetary policy in India has evolved to maintain a judicious balance between price stability, economic growth and financial stability. However, pursuant to the amendment to the RBI Act, 1934 in May 2016, the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. The amended Preamble to RBI Act reads as follows: “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” “AND WHEREAS it is essential to have a modern monetary policy framework to meet the challenges of an increasingly complex economy; AND WHEREAS the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth”. Evolution of Monetary Policy Framework in India In order to attain the objectives of monetary policy, it is necessary to have a consistent policy framework. Broadly, monetary policy framework consists of objectives, operating procedure and governance arrangements. Objectives are the aims of monetary policy, which are nominal anchors and long-term in scope but are not directly under the control of the central bank. As a result, central banks strive to achieve these objectives through use of instruments which are under their direct control or indirectly target intermediate and operating targets, which bear a stable relationship with the ultimate objectives. The choice of the operating target is crucial as this variable is at the beginning of the monetary transmission mechanism. Similarly, the  selection of intermediate targets is conditional upon the channels of transmission – the process through which monetary policy actions impact the ultimate objectives. Operating procedure essentially deals with how the central bank intends to influence the operating target and thereby the intermediate target through its liquidity management operations. Therefore, the operating procedure is essentially the day-to-day management of liquidity conditions consistent with the overall stance of the monetary policy. In other words, operating procedure is also called the nuts and bolts of monetary policy, the “plumbing in the architecture” (Patra et al., 2016). Governance arrangements primarily deal with the process of decision making and focus on responsibilities, powers and accountability of the monetary authority. From the perspective of global best practices, historically, bank reserves and short- term interest rates have evolved as the two dominant operating targets. However, the focus shifted to short-term interest rates in early 1990s with the adoption of market-based monetary policy frameworks, reflecting greater significance of interest rates in monetary transmission mechanism as markets developed in a deregulated environment. Consequently, the overnight rate emerged as the most commonly pursued operating target in the conduct of monetary policy. India's monetary policy framework has undergone several transformations over the years reflecting underlying macroeconomic and financial conditions. During 1971-1985, the monetisation of the fiscal deficit exerted a dominant influence on the conduct of monetary policy. The pre- emption of resources by the public sector and the resultant inflationary consequences of high public expenditure necessitated frequent recourse to the cash reserve ratio ( CRR) to neutralize the secondary effects of monetary expansion. Financial repression in the form of interest rate prescriptions, statutory pre-emptions and directed credit partly crowded out the private sector from the credit market. Against this backdrop, the Committee to Review the Working of the Monetary System (Chairman: Dr. Sukhamoy Chakravarty, 1985) recommended a new monetary policy framework based on monetary targeting with feedback, drawing on empirical evidence of a stable demand function for money. Monetary Targeting Framework Under this framework, broad money became the intermediate target while reserve money was one of the main operating instruments for achieving control on broad money growth. Accordingly, monetary (M3) projection was made consistent with the expected real GDP growth and a tolerable level of inflation. Technically, in a simple form, if expected real GDP growth was 6 per cent, the income elasticity of demand for money was 1.5 and a tolerable inflation was 5 per cent, the M3 expansion target was set at 14 per cent [M3 growth = 1.5(6) +5 =14 percent] (Mohanty, 2010). This framework was in operation during mid-1980s to 1997-98. Analysis of the money growth outcomes during the monetary targeting regime indicates that targets were rarely met. The biggest impediment to monetary targeting was lack of control over RBI's credit to the central government, which accounted for the bulk of reserve money creation. With economic and financial sector reforms in the 1990s, there was shift in financing government and the commercial sector with increasing reliance on market-determined interest rates and exchange rate. RBI was able to move away from direct instruments to indirect market-based instruments. The statutory liquidity ratio (SLR) and CRR were gradually reduced to 25 per cent and 9.5 per cent, respectively, of net demand and time liabilities (NDTL) by 1997. Furthermore, as the pace of trade and financial liberalization gained momentum in the 1990s, the efficacy of broad money as an intermediate target was re-assessed. Financial innovations and external shocks emanating from swings in capital flows, volatility in the exchange rate and global business cycles imparted instability to the demand for money. There was also increasing evidence of changes in the underlying transmission mechanism of monetary policy with interest rate and the exchange rate gaining importance vis-à-vis quantity variables. Against this backdrop, the search for an alternative monetary framework in India ended after switching over to a Multiple Indicator Approach in 1998-99. Multiple Indicator Approach The RBI adopted a 'multiple indicator approach' in April 1998 with a greater emphasis on rate channels for monetary policy formulation relative to quantity instruments. Under this approach, a number of quantity variables such as money, credit, output, trade, capital flows and fiscal position as well as rate variables such as rates of return in different markets, inflation rate and exchange rate were analyzed for drawing monetary policy perspectives. The multiple indicator approach was augmented and guided by forward looking indicators since the early 2000s drawn from the RBI’s surveys of industrial outlook, credit conditions, capacity utilization, professional forecasters, inflation expectations and consumer confidence. The RBI, however, continued to give indicative projections of key monetary aggregates as money was deemed to be a crucial information variable. The multiple indicator approach seemed to work fairly well from 1998-99 to 2008-09, as reflected in the average real gross domestic product (GDP) growth rate of 7.1 per cent associated with an average inflation of about 5.5 per cent in terms of both the wholesale price index (WPI) and the Consumer Price Index (CPI). Subsequently, however, there was a growing public debate on the efficacy and even the credibility of this framework as persistently high inflation and weakening growth co-existed as visible signs of stagflation. Use of a large panel of indicators was also not providing a clearly defined nominal anchor for monetary policy. It also left policy analysts unclear about what the RBI looks at while taking policy decisions. In fact, several high-level Committees in India have been highlighting since 2007 that the RBI must consider switching over to inflation targeting. Flexible Inflation Targeting Against this backdrop, the RBI constituted an Expert Committee to Revise and Strengthen the Monetary Policy Framework (Chairman: Dr. Urjit R. Patel) on September 12, 2013 to recommend what was needed to be done to revise and strengthen the current monetary policy framework with a view to, inter alia, making it transparent and predictable. The Expert Committee submitted its report in January 2014 and set the stage for a move towards the adoption of a flexible inflation targeting (FIT) framework as monetary policy in India. In the FIT framework, the policy (repo) rate is set, based on an assessment of the current and evolving macroeconomic situation, with the aim of achieving the inflation target on an average over the business cycle, while accommodating growth concerns in the short run (RBI, 2014). Once the repo rate is announced, the operating framework designed by the RBI envisages liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the operating target – the weighted average call money rate (WACR) – around the repo rate. The details of the operational framework of monetary policy is elaborated in the next chapter “Market Operations”. These changes in money market rates then get transmitted to the entire financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth. Prior to the amendment to the RBI Act in May 2016, the flexible inflation targeting framework, as recommended by the above-mentioned Committee, was governed by an Agreement between the Government of India and the Reserve Bank of India in February 2015. The amendment of the RBI Act in May 2016 provided the statutory basis for the implementation of the flexible inflation targeting framework. As per the amended Act, the inflation target would be defined in terms of all India Consumer Price Index (CPI) and the inflation target would be set by the Government of India, in consultation with the Reserve Bank, once in every five years. The failure to achieve the inflation target was defined as when: (a) the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters; or (b) the average inflation is less than the lower tolerance level for any three consecutive quarters. In the event of a failure to meet the inflation target, the Reserve Bank has to set out in a report to the Central Government: (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions. The only instance of the Monetary Policy Committee (MPC) sending a report to the Government consequent upon inflation exceeding 6 per cent, the upper tolerance threshold around the target, for three successive quarters in 2022 was in November 2022. The amended Act requires the Reserve Bank to publish, once in every six months, a document called the Monetary Policy Report that explains (a) the sources of inflation; and (b) the forecast of inflation for 6 to18 months ahead. The amended RBI Act came into effect in June 2016. In pursuance of the amended Act, the Central Government notifie