Reserve Bank of India (RBI)

India’s central bank turns ninety in 2026. It began under British rule, a full twelve years before independence.

MPC

Six people who set India’s repo rate, not RBI alone.

WMA

A short-term loan RBI gives governments, charged at the repo rate.

SDF

A newer, cheaper loan tool, used before a government’s WMA limit runs out.

Founding and Leadership

• RBI was set up on 1 April 1935. This followed the RBI Act, 1934.
• That Act itself followed an earlier recommendation. The 1926 Hilton Young Commission had proposed a central bank for India.
• RBI first worked out of Calcutta. In 1937, it moved to Bombay. It has stayed there, now Mumbai, ever since.
• RBI began life as a privately-owned bank. The government nationalised it on 1 January 1949, well after independence. Since then, it has been fully government-owned.
• C.D. Deshmukh became RBI’s first Indian Governor, in 1943. He later oversaw its move into government ownership.
• Sanjay Malhotra is RBI’s current Governor. He is the 26th person to hold the post. He took charge on 11 December 2024, for a three-year term.

The Hilton-Young Commission’s Exchange Rate

• The Hilton-Young Commission also set an exchange rate, back in 1926. It fixed the rupee against the British pound at 1 shilling 6 pence.
• This rate sat higher than the earlier one. The pre-war rate had been 1 shilling 4 pence.
• A higher rate made one thing easier. India sent regular payments to Britain, called “Home Charges.” The higher rate eased these payments.
• The higher rate also helped India’s credit standing. Lenders in London saw India as a more reliable borrower.
• Indian business opinion disagreed at the time. Many argued the high rate actually hurt Indian exporters.

The MPC and RBI’s Other Roles

• RBI does not set interest rates alone today. A separate body does that job. It is called the Monetary Policy Committee, or MPC.
• The MPC has six members. Three come from RBI itself: the Governor, a Deputy Governor, and an Executive Director.
• The other three members come from outside RBI. The central government appoints them.
• Each member gets one vote. If a vote ties, the Governor casts the deciding vote.
• The MPC targets 4% inflation. It allows a band of 2 percentage points, either above or below that.
• In 2026, the government renewed this target. It will now run through March 2031.
• RBI does far more than set rates. It issues India’s currency notes. It also acts as banker to the central and state governments.
• RBI serves commercial banks too, working like a “banker’s bank” for them. It also regulates banks and NBFCs, and manages India’s foreign exchange reserves.
• RBI’s income comes from two main sources. One is interest on government securities it holds. The other is returns on its foreign exchange reserves.
• RBI does not earn income from managing pension funds. It does not earn income by lending to private companies either.

Rules for Foreign Banks

• A foreign bank can set up its own subsidiary in India. This subsidiary must meet strict capital rules first.
• It needs a minimum capital of ₹500 crore. No bank gets an exemption from this rule, regardless of its size elsewhere.
• The subsidiary’s board also has nationality rules. At least half its members must be Indian nationals, NRIs, or PIOs.
• At least one-third of the board must be Indian nationals. These members must also live in India, not just hold Indian citizenship.

Emblem and Early History

• RBI’s emblem shows a tiger standing before a palm tree. The tiger is a Royal Bengal tiger, India’s national animal.
• The design copies an old East India Company coin, called the double mohur. That original coin showed a lion in the same pose.
• RBI’s designers later swapped the lion for a tiger. This change linked the emblem to independent India’s own national symbol.
• RBI’s founding came well before independence. It predates independence by twelve full years.
• RBI’s first two Governors were not Indian. Sir Osborne Smith held the post first. James Braid Taylor followed him.
• Three RBI Governors already have their own articles on this site: C.D. Deshmukh, I.G. Patel, and L.K. Jha.
• The MPC’s creation, in 2016, marked a real structural shift. Before that, RBI alone set interest rates. Now, the six-member MPC does this job instead.

Three Exam Traps

• UPSC CSP 2021 tested one specific detail. It asked how the RBI Governor actually gets appointed.
• The Governor is appointed under the RBI Act, 1934. The Constitution plays no direct role in this appointment. Don’t credit the Constitution for a power that really comes from an ordinary law.
• CAPF (ACs) 2026 tested a different RBI tool. It asked about Ways and Means Advances, or WMA.
• WMA loans are short-term. RBI introduced them back in 1997. They carry interest at the repo rate, not the bank rate.
• The same CAPF 2026 paper also tested a related tool. This one is called the Special Drawing Facility, or SDF.
• SDF charges a lower rate than the repo rate. States also use SDF before they exhaust their WMA limit, not after it.
• Mixing up SDF and WMA is a common trap. Watch both their rates, and the order states actually use them in.