— Kannan K The Reserve Bank of India’s (RBI) financial inclusion index, which captures the extent of financial inclusion across the country, improved to 67 in March 2025 compared to 64.2 in the corresponding period the previous year. The central bank has said that growth was witnessed across all sub-indices – access, usage, and quality - in FY25. Recently, in its half-yearly Financial Stability Report (FSR), the RBI also noted that the Indian economy remains a key driver of global growth, underpinned by sound macroeconomic fundamentals and prudent macroeconomic policies. At the same time, it has proposed the creation of a Financial Conditions Index (FCI), which would enable real-time monitoring of the country’s financial health. As the central bank, the RBI plays a vital role in regulating the country’s economy and promoting financial literacy. Let’s explore its formation, evolution, core responsibilities, and contemporary issues. How RBI evolved post-liberalisation The RBI was established on April 1, 1935 via the Reserve Bank of India Act, 1934 based on the recommendations of the Hilton Young Commission. The bank was constituted with primary objectives of regulating the issue of currency, maintaining reserves, and operating the credit and currency system of the country. As a colonial institution owned by private shareholders, the RBI was nationalised in 1949, and its objectives were realigned with India’s developmental goals. Following economic liberalisation of the 1990s, the RBI’s role evolved further and became more facilitative in nature. There was noted a shift from direct control of foreign exchange rates and credit to a broader focus on monetary policy and systemic regulation. The RBI is governed by a Central Board of Directors appointed by the Government of India. The board comprises official directors (the Governor and up to four Deputy Governors) and non-official directors, including nominees from various fields, government officials, and representatives from the four local boards. All members are appointed for a period of four years. The RBI operates through 30 specialised departments, such as the Department of Currency Management and the Department of Banking Regulation, and maintains its presence across the nation through its central office and 33 regional offices. In a key reform in 2016, the Monetary Policy Committee (MPC) - a six-member statutory body - was established to control the level of inflation in the economy. In doing so, it uses tools such as repo rate - the rate at which the RBI lends money to banks. Headed by the Governor of the RBI, the MPC is mandated to meet at least four times a year. The body takes decisions on the basis of majority vote. Last month, the MPC announced a significant cut in repo rate by 50 basis points (0.5 per cent) to 5.5 per cent and reduced the Cash Reserve Ratio (CRR) by 100 basis points to boost growth prospects. Balancing stability and growth The RBI acts as banker to both the Government of India and state governments, managing their banking accounts and debt. It is also the banker of all scheduled banks, and manages their accounts as well as facilitates inter-bank transactions. In addition, the central bank acts as a ‘lender of last resort’ for commercial banks, meaning it provides financial support to commercial banks that are facing severe liquidity issues, and prevents systemic crises. It has an important developmental role through the promotion of financial inclusion and awareness, and ensuring credit flow to various sectors via priority sector lending requirements. In essence, the RBI steers the Indian economy, effectively balancing both stability and growth. It makes use of a range of tools to achieve the goals of its monetary policy. The most important among them are: — Repo Rate: The rate at which the RBI lends money to commercial banks. It is a benchmark rate, meaning it acts as a reference point for commercial banks to set the interest rates. A lower repo rate makes borrowing cheaper and encourages economic activity, while a higher repo rate discourages banks from lending and controls inflation. Fixing the repo rate is the core responsibility of the MPC. — Reverse Repo Rate: The interest rate the central bank pays commercial banks when they park their excess cash is called the reverse repo rate. — Cash Reserve Ratio (CRR): The percentage of a bank’s total deposits that it is required to maintain in liquid cash with the RBI. The RBI determines the CRR percentage from time to time. — Statutory Liquidity Ratio (SLR): Percentage of a bank’s deposits that it is required to maintain in the form of liquid assets like cash, gold, or approved securities. — Marginal Standing Facility (MSF) Rate: The rate at which banks can borrow money from the RBI on an overnight basis in an emergency situation due to the lack of interbank liquidity. — Open Market Operations (OMOs): The RBI buys and sells government securities in the open market for the injection or absorption of durable liquidity in the banking system. An increase in the repo rate, SLR, CRR, and MSF reduces the money supply in the economy, helping in inflation control but slowing down growth. On the other hand, reducing these rates injects liquidity into the economy, stimulating growth but potentially causing inflation. Calibrating these monetary tools to strike the right balance between price stability and sustainable growth is one of the core responsibilities of the RBI. Safeguarding India’s economic stability Moreover, there are challenges faced by the country’s central bank, notable among them are the digitalization of the economy, the emergence of new financial technologies (fintech), and the growing threat of cyberattacks. The pace of innovations in the financial sector, such as in areas like digital payments, requires the central bank to swiftly build and deploy advanced supervision and regulation technology (RegTech and SupTech). In addition, maintaining the resilience of the Indian economy to withstand shocks, both global and domestic, remains one of the key responsibilities of the RBI. Notably, the RBI is actively developing regulatory frameworks for emerging technologies to enhance supervisory oversight for managing cyber and even climate-related financial risks, and strengthen capital and liquidity requirements for reinforcing overall financial sector resilience. It has also introduced initiatives like the digital rupee as a Central Bank Digital Currency (CBDC) to keep pace with evolving financial trends. This proactive approach ensures the central bank remains at the forefront of safeguarding India's economic stability. Post Read Questions How has the Reserve Bank of India (RBI) contributed to maintaining India’s macroeconomic stability amid global economic uncertainties? Support your answers with examples. Evaluate the role of the Reserve Bank of India (RBI) in maintaining monetary stability. What could be possible ways to improve its effectiveness, specifically amid rapid digitalisation? What does the the Reserve Bank of India's (RBI) Financial Inclusion Index measure, and how do the sub-indices of access, usage, and quality contribute to the overall picture of financial inclusion in India? How can the RBI strengthen its supervisory framework to address rising cyber threats in the financial sector? (Kannan K is a Doctoral candidate at the Centre for Economic and Social Studies, Hyderabad) Share your thoughts and ideas on UPSC Special articles with ashiya.parveen@indianexpress.com. Subscribe to our UPSC newsletter and stay updated with the news cues from the past week. Stay updated with the latest UPSC articles by joining our Telegram channel – IndianExpress UPSC Hub, and follow us on Instagram and X.
