Functions of RBI Reserve Bank of India

Functions of RBI

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Functions of RBI Reserve Bank of India

The Reserve Bank of India performs various functions related to monetary management, banking operations, foreign exchange, developmental works, and research on problems of the economy. The main operations are those functions of RBI that every central bank of each nation performs worldwide. Essentially, these functions align with the objectives for which the bank is set up, encompassing the fundamental functions of the central bank.

The following are some of the major functions of RBI – Reserve Bank of India:

  1. Note Issue
  2. Banker to the Government
  3. Banker’s Bank
  4. Credit Control
  5. Custodian of Foreign Exchange Reserves
  6. Developmental Functions
  7. Supervisory Function

1. Note Issue

As the Central Bank of the country, the RBI is entrusted with the sole authority to issue currency notes, maintaining a certain minimum reserve consisting of a gold reserve worth Rs. 115 crore and foreign exchange worth Rs. 85 crore. This provision was later simplified and amended.

The RBI has the sole right, authority, or monopoly of issuing currency notes, except for the one-rupee notes and coins of smaller denominations. These currency notes, issued by the RBI, are legal tender. Currently, RBI comes in denominations of 2, 5, 10, 20, 50, 100, 500, and 1,000 Rupees. The RBI has the power not only to issue and withdraw but also to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes, and government of India bonds.

2. Banker to the Government

The RBI serves as the banker for the government, and as a result, all funds of both the Central and State Governments are kept with it. It acts as an agent of the government responsible for effectively managing the public debt. The RBI also provides “ways and means advances” to the government for short periods.

The RBI, being the apex monetary body, has to work as an agent of the central and state governments. It performs various banking functions, such as accepting deposits, and taxes, and making payments on behalf of the government. RBI serves as a government representative, even on the international stage. It maintains government accounts, provides financial advice to the government, manages government public debts, and maintains foreign exchange reserves on behalf of the government. It also provides an overdraft facility to the government during periods of financial strain. This allows the government to access extra funds when required.

3. Banker’s Bank

The RBI also functions as the banker for other banks operating in the country. It regulates the entire banking system, maintains a certain percentage of its deposits as a minimum reserve, acts as the lender of last resort to its scheduled banks, and operates clearinghouses for all other banks.

The RBI, being an apex financial institution, has obligatory powers to guide, help, and direct other commercial banks in the country. The RBI  has the authority to regulate the levels of bank reserves and enable other banks to generate credit in proportion to those reserves. Every commercial bank has to maintain a part of its reserves with its parent, namely the RBI. Similarly, in times of need or urgency, these banks approach the RBI for funds. Thus, it is referred to as the lender of last resort.

4. Credit Control

The RBI is entrusted with the sole authority to control credit created by commercial banks by applying both quantitative and qualitative credit control measures such as variations in the bank rate, open market operations, selective credit controls, etc.

A commercial bank in the country creates credit in response to the prevailing demand within the economy. However, if this credit creation is unchecked or unregulated, it leads the economy into inflationary cycles. On the other hand, if credit creation is below the required limit, it harms the growth of the economy. As the central bank of the nation, the RBI has to pursue growth with price stability. Thus, it regulates commercial banks’ credit creation capacity by implementing diverse credit control mechanisms.

5. Custodian of Foreign Exchange Reserves

The RBI is entrusted with the sole authority to determine the exchange rate between the rupee and other foreign currencies and to maintain the reserve of foreign exchange earned by the Government. The Reserve Bank of India (RBI) also maintains a strong relationship with the International Monetary Fund (IMF).

It is an essential function of the RBI. To maintain stability in the external value of the rupee, it has to formulate domestic policies in that direction. Additionally, it needs to prepare and implement the foreign exchange rate policy, which will help in achieving exchange rate stability. To maintain exchange rate stability, it has to bring the demand and supply of foreign currency (U.S. Dollar) close to each other.

6. Developmental Functions

The RBI is also working as a development agency by establishing various sister organizations like the Agricultural Refinance Development Corporation and the Industrial Development Bank of India, among others, to facilitate industrial and agricultural credit in the country.

On July 12, 1986, NABARD was established and took over the entire responsibility of ARDC. The Reserve Bank of India has contributed Rs 100 crore. Which is half of the share capital of NABARD. Thus, the Reserve Bank is performing an important role in controlling and managing the entire banking, monetary, and financial system of the country.

7. Supervisory Function

The RBI has been bestowed with extensive authority to oversee the banking system within the country. It has the authority to issue licenses for setting up new banks, open new branches, determine minimum reserves, inspect the functioning of commercial banks in India and abroad, and guide and direct the commercial banks in India. It can conduct periodic inspections and audits of commercial banks in India.

Functions of RBI

Promotional and Regulatory Functions of RBI Reserve Bank of India

The Reserve Bank of India (RBI) has played an important role in the country’s economy, encompassing both regulatory and promotional aspects. Since the inception of planning in 1951, developmental activities have gained momentum in the country. Consequently, the RBI has been entrusted with increasing responsibilities in both the realms of regulation and promotion. Presently, the RBI performs a wide range of promotional and regulatory functions within the nation.

The following are some of the promotional and regulatory functions performed by the RBI:

1. Regulating the Volume of Currency

The RBI performs the regulatory role of issuing and controlling the entire volume of currency within the country through its dedicated Issue Department. While regulating the volume of currency, the RBI gives equal priority to the demand for currency and the stability of the economy.

2. Regulating Credit

The RBI also plays a role in controlling the credit money created by commercial banks through its qualitative and quantitative methods of credit control, thereby maintaining a balance in the money supply of the country.

3. Control over Commercial Banks

Another regulatory role performed by the RBI is to exercise control over the functioning of commercial banks. It also enforces certain rational banking principles and prudential norms to be followed by commercial banks.

4. Determining the Monetary and Credit Policy

The RBI formulates the monetary and credit policy of the country every year, thereby controlling the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate, interest rate, and credit to priority sectors, among other aspects.

5. Mobilizing Savings

The RBI plays a vital promotional role in mobilizing savings through its member commercial banks and other financial institutions in India. The RBI also guides commercial banks to extend their banking network in the unbanked rural and semi-urban areas and encourages the development of banking habits among the people. All these efforts have led to a greater degree of monetization of the economy and have succeeded in reducing the activities of indigenous bankers and private moneylenders.

6. Institutional Credit to Agriculture

From its inception, the Reserve Bank of India (RBI) has consistently aimed to increase the flow of institutional credit to agriculture. Keeping this objective in mind, the RBI set up ARDC in 1963 to meet the long-term credit requirements of rural areas. Later, in July 1982, the RBI established the National Bank for Agriculture and Rural Development (NABARD) by merging the Agricultural Refinance and Development Corporation (ARDC) with it to oversee its agricultural credit functions.

7. Specialized Financial Institutions

The RBI has also played an important promotional role in establishing specialized financial institutions to meet the long-term credit needs of large and small-scale industries and other sectors. Accordingly, the RBI has promoted the development of various financial institutions like IDBI, ICICI, WCI, SIDBI, SFCs, Exim Bank, etc., which are making a significant contribution to the industry and trade of the country.

8. Security to Depositors

To eliminate a major barrier to deposit mobilization arising from frequent bank failures, the Reserve Bank of India (RBI) took a significant step in 1962 by establishing the Deposit Insurance Corporation of India. The primary objective of this corporation is to safeguard depositors against the negative effects of such failures.

9. Advisory Functions

The Reserve Bank of India (RBI) plays an important role in providing advisory services to both the Central and State Governments on financial matters and general economic issues.

10. Policy Support

The RBI also provides active policy support to the government through its investigation and research on serious economic problems and issues of the country, thereby assisting the government in formulating its economic policies most rationally. Thus, it is observed that the Reserve Bank of India (RBI) has been playing a dynamic role in the economic development process of the country through its promotional and regulatory framework.

Establishment of Reserve Bank of India

The Reserve Bank of India was established in 1935 under the provisions of the Reserve Bank of India Act, 1934, in Calcutta, and it eventually moved permanently to Mumbai. Though originally it was privately owned and nationalized in 1949.

Governance Structure of the Reserve Bank of India (RBI)

The Government of India appoints the Governor and not more than four Deputy Governors under the Reserve Bank of India Act for a term of four years. The current Governor of RBI is Mr. Shaktikanta Das. Presently, there are four Deputy Governors –  BP Kanungo, Dr. M.D. Patra, M Rajeshwar Rao, and MK Jain.

Nominated by the Government are ten directors from various fields and two government officials. Additionally, there are four Directors, one each from four local boards.

The Reserve Bank of India, the apex authority of the central banking system in India, holds significant power. It has a monopoly over the issuance of banknotes and governs the monetary system of the country. These powers and functions related to the issuance of banknotes and the currency system are regulated by the Reserve Bank of India Act, of 1934. Additionally, the Banking Regulation Act, of 1949, also empowers the Reserve Bank with certain functions and powers.

Developmental and Promotional Functions of RBI

In addition to routine traditional functions, central banks, especially in developing countries like India, have to perform numerous country-specific functions that can change according to the requirements of the country. The RBI has been performing the role of promoter of the financial system ever since its establishment. Some of the major development functions of the RBI are outlined below.

1. Development of Agriculture

In an agrarian economy, the RBI has to provide special attention to the credit needs of agriculture and allied activities. It has successfully generated service in this direction by increasing the flow of credit to this sector. It has established the Agriculture Refinance and Development Corporation (ARDC) to look after credit, the National Bank for Agriculture and Rural Development (NABARD), and Regional Rural Banks (RRBs).

2. Development of the Financial System

The financial system comprises financial institutions, financial markets, and financial instruments. A sound and efficient financial system is a precondition for the rapid economic development of the nation. The RBI has encouraged the establishment of major banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy.

3. Provision of Training

The RBI has always sought to provide essential training to the staff of the banking industry. The RBI has set up bankers’ training colleges in several places. Notable examples include the National Institute of Bank Management (NIBM), Bankers Staff College (BSC), and College of Agriculture Banking (CAB).

4. Provision of Industrial Finance

Rapid industrial growth is the key to faster economic development. In this regard, the adequate and timely availability of credit to small, medium, and large industries is very significant. The RBI has always played an important role in setting up special financial institutions such as ICICI Ltd., IDBI, SIDBI, EXIM BANK, etc.

5. Publication of Reports

The Reserve Bank has a separate publication division that collects and publishes data on various sectors of the economy. Reports and bulletins are regularly published by the RBI, including the RBI weekly reports, RBI Annual Report, Report on Trends and Progress of Commercial Banks in India, etc. This information is made available to the public at affordable rates.

6. Collection of Data

As the apex monetary authority of the country, the RBI collects, processes, and disseminates statistical data on various topics, including interest rates, inflation, savings, and investments, among others. This data proves to be highly valuable for researchers and policymakers.

7. Promotion of Export through Refinance

The RBI always endeavours to enhance facilities for providing finance for foreign trade, especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purposes.

8. Promotion of Banking Habits

As an apex organization, the RBI always strives to promote banking habits in the country. It institutionalizes savings and takes measures to expand the banking network. It has established many institutions such as the Deposit Insurance Corporation (1962), UTI (1964), IDBI (1964), NABARD (1982), NHB (1988), etc. These organizations are dedicated to developing and promoting banking habits among the people. During economic reforms, it has taken many initiatives to encourage and promote banking in India.

Supervisory Functions of RBI

The Reserve Bank also performs many supervisory functions. It has the authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given as follows:

1. Bank Inspection: The RBI grants licenses to banks working as per the directives and in a prudent manner without undue risk. In addition to this, it can ask for periodical information from banks on various components of liabilities and assets.

2. Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit Insurance Guarantee Corporation to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The Reserve Bank of India (RBI) is responsible for implementing the Deposit Insurance Scheme in case of a bank failure.

3. Granting licenses to banks: The RBI grants licenses to banks for carrying out their business. License is also given for opening extension counters, new branches, and even to close down existing branches.

4. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the working of a monetary policy. However, RBI has a right to issue directives to the NBFIs from time to time-related to their functioning. Through regular inspection, it can control the NBFIs.

Reserve Bank of India’s Credit Policy

The Reserve Bank of India has a credit policy that aims at pursuing higher growth with price stability. Higher economic growth means producing more quantity of goods and services in different sectors of an economy. Price stability, however, does not mean any change in the general price level but controlling inflation. The credit policy aims at increasing finance for industrial and agricultural activities. When the credit policy is implemented, the role of other commercial banks is very important. Commercial banks’ flow of credit to different sectors of the economy depends on the actual cost of credit and the availability of funds in the economy.

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