Pariksha SaathiLesson 2 of 10 · Banking and Financial Awareness
Reserve Bank of India: Origin, Organisation, Functions and Subsidiaries
Drafted with AI assistance and fact-checked on 28 October 2026; not yet read line by line by a human editor. Spotted a mistake? Tell us. Editorial standards & corrections
Why a central bank
A country needs one institution that issues currency, keeps the government's accounts, holds the reserves of banks, helps a bank facing a sudden run and looks after the value of the currency. Before 1935 these jobs were split: the Government of India issued notes through its Controller of Currency, and the Imperial Bank of India acted as banker to the government. The Royal Commission on Indian Currency and Finance of 1926, known as the Hilton Young Commission, recommended a separate central bank, and the Reserve Bank of India Act was passed in 1934.
Start and nationalisation
The RBI began operations on 1 April 1935. It was at first a shareholders' bank with a paid-up capital of Rs 5 crore held by private shareholders. Its central office opened in Calcutta and moved permanently to Bombay (now Mumbai) in 1937. Sir Osborne Smith was its first Governor and C.D. Deshmukh its first Indian Governor. The RBI also served as central bank for Burma until April 1947 and for Pakistan until June 1948. After Independence it was nationalised on 1 January 1949 under the Reserve Bank (Transfer to Public Ownership) Act 1948, and it has since been fully owned by the Government of India.
Organisation
The RBI is run by a Central Board of Directors appointed by the central government under section 8 of the RBI Act. Official directors are the Governor and not more than four Deputy Governors. Non-official directors are four nominated from the four Local Boards, ten nominated by the government from various fields and two government officials. The Governor and Deputy Governors hold office for up to five years and can be reappointed. The Local Boards cover the western, eastern, southern and northern areas from Mumbai, Kolkata, Chennai and New Delhi. Supervision is guided by the Board for Financial Supervision (1994), and payment systems by the Board for Regulation and Supervision of Payment and Settlement Systems. Under section 7 the government may, after consulting the Governor, give the RBI directions in the public interest.
Issuer of currency
Section 22 of the RBI Act gives the RBI the sole right to issue bank notes in India. The one-rupee note and all coins are issued by the Government of India, though the RBI puts them into circulation. Under the Minimum Reserve System, which replaced the proportional reserve system in 1956, the RBI must hold assets of at least Rs 200 crore, of which at least Rs 115 crore is in gold, against the notes it issues; these amounts were fixed in 1957. Notes are printed at four presses: Nashik and Dewas, run by the government's Security Printing and Minting Corporation of India, and Mysuru and Salboni, run by the RBI's subsidiary Bharatiya Reserve Bank Note Mudran. RBI notes carry the Governor's signature, while the one-rupee note carries the signature of the Finance Secretary.
Banker to government and to banks
The RBI is banker to the central government by law (sections 20 and 21) and to state governments by agreement (section 21A). It keeps their accounts, makes and receives payments for them, gives temporary ways and means advances and manages public debt by issuing government securities. As banker to banks it holds their cash reserves, runs clearing and settlement, and lends to them through its repo window. When a sound bank faces a sudden shortage of cash it can turn to the RBI as the lender of last resort, which stops panic spreading through the system.
Regulator, foreign exchange manager and builder
Under the Banking Regulation Act 1949 and the RBI Act, the RBI licenses, inspects and directs banks and regulates non-banking financial companies. It frames monetary policy to keep prices stable while keeping growth in mind. Under the Foreign Exchange Management Act 1999, which replaced FERA 1973, it manages foreign exchange, holds the country's reserves and steps into the market to smooth sharp swings in the rupee. It has also had a developmental role, helping to set up the Deposit Insurance Corporation (1962), IDBI (1964), the Unit Trust of India (1964) and NABARD (1982).
Subsidiaries
The RBI's wholly owned subsidiaries include the Deposit Insurance and Credit Guarantee Corporation (DICGC), formed in 1978 by merging the Deposit Insurance Corporation with the Credit Guarantee Corporation of India; Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL, 1995), which prints notes; and Reserve Bank Information Technology Private Limited (ReBIT, 2016), which handles information technology and cyber security. NABARD and the National Housing Bank were once owned by the RBI, but its stakes in them have been transferred to the government.
Key facts
- Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926) recommended a central bank; the RBI Act was passed in 1934.
- The RBI began work on 1 April 1935 with a private paid-up capital of Rs 5 crore and was nationalised on 1 January 1949.
- The RBI's central office moved from Calcutta to Bombay (Mumbai) permanently in 1937.
- First Governor of the RBI: Sir Osborne Smith; first Indian Governor: C.D. Deshmukh.
- Central Board (section 8): Governor, up to four Deputy Governors, four directors from Local Boards, ten nominated directors and two government officials.
- Section 22 of the RBI Act gives the RBI the sole right to issue bank notes; the one-rupee note and coins are issued by the Government of India and the one-rupee note is signed by the Finance Secretary.
- Minimum Reserve System (introduced 1956, amounts fixed 1957): at least Rs 200 crore of assets, including Rs 115 crore in gold, back the note issue.
- Note presses: Nashik and Dewas (SPMCIL, government); Mysuru and Salboni (BRBNMPL, RBI subsidiary).
- RBI subsidiaries: DICGC (1978), BRBNMPL (1995) and ReBIT (2016).
Quick revision
Hilton Young Commission 1926; RBI Act 1934; RBI from 1 April 1935 with Rs 5 crore private capital; HQ to Bombay 1937; nationalised 1 January 1949; first Governor Osborne Smith, first Indian C.D. Deshmukh; Central Board under section 8; sole note issuer (section 22), Re 1 note and coins by government; Minimum Reserve System Rs 200 crore incl. Rs 115 crore gold; banker to government and banks, lender of last resort, regulator, forex manager (FEMA 1999); subsidiaries DICGC, BRBNMPL, ReBIT.