Q1.
With numerous banks and financial institutions, it is essential to have clear rules and regulations that everyone follows. But who sets these regulations?
Answer
The Reserve Bank of India — India’s central bank, and the “banker to banks”.
The chapter’s account of it:
- “The Reserve Bank of India (RBI) is the bank that supervises the Indian banking system. It is also called India’s central bank.” Several countries have such central banks.
- It was established in 1935 and performed some of the functions of a central bank. After Independence the RBI was transferred to the Government of India, and has been functioning as the banker of banks, the central bank, since 1949.
- It “maintains accounts of other banks and facilitates exchange of funds between them”, and “provides loans to banks and the government”.
The rules it sets (page 202) concern:
| Area | What the RBI decides |
|---|---|
| Currency | Printing and distributing Indian currency like banknotes |
| Interest rates | Fixing the benchmark interest rate — “the base interest rate that the RBI fixes for lending money to commercial banks” |
Why it happens: the benchmark rate is the base on which every other rate is built. If the RBI lends to a bank more cheaply, the bank can lend to Rima more cheaply, and it can also afford to pay Navdeep a little more on his deposit. One rate at the top therefore moves rates all across the country — which is why it must be set by an institution answerable to the nation and not by any single bank.
Did you know? The entrance of the RBI office in Delhi is flanked by statues of a yakṣha and a yakṣiṇi. In Hindu mythology yakṣhas are demigods who guard the treasures of Kubera, the God of Wealth — a fitting image for the one institution with the sole right of issuing currency.