Question

Explain the functions of RBI.

Answer 1

Reserve Bank of India (RBI) is the central bank of India. It is at the apex of the banking system in the country. It is entrusted with the responsibility of regulating the money market. RBI was set up on the recommendations of the Hilton Young Commission. The RBI Act of 1934 provides the statutory basis of the functions of a bank. On 1^st April 1935, RBI commenced its operations as a private shareholders’ bank. It was nationalized on 1^st January 1949. RBI is the most important constituent of the money market.

The following are the functions of RBI:

1. Issue of currency notes: The RBI has a monopoly for printing currency notes in the country. It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies.
2. Banker to the Government: The second important function of the RBI is to act as the Banker, Agent, and Adviser to the Government of India and the states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government.
3. Banker’s Bank: The RBI performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of the country.
4. Controller of the Credit: The RBI undertakes the responsibility of controlling credit created by commercial banks. RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country. When RBI observes that the economy has sufficient money supply and it may cause an inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.
5. Custodian of Foreign Exchange Reserves: For the purpose of keeping the foreign exchange rates stable, the RBI buys and sells foreign currencies and also protects the country's foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently, India has a Foreign Exchange Reserve of around US$ 360bn.
6. Collection and publication of data: RBI collects and compiles statistical information related to banking and other financial sectors.
7. Other Functions: The RBI performs a number of other developmental works. These works include the function of clearinghouse arranging credit for agriculture (which has been transferred to NABARD) collecting and publishing the economic data, buying and selling of Government securities (gilt edge, treasury bills, etc) and trade bills, giving loans to the Government buying and selling of valuable commodities, etc. It also acts as the representative of the Government in the International Monetary Fund (I.M.F.) and represents the membership of India.
8. Promotional And Developmental Functions:  RBI performs certain promotional and developmental functions such as:

1. Extending banking services to semi-urban and rural areas. Providing security to depositors. Development of specialized institutions for agricultural credit, industrial finance.
2. Extending banking services to semi-urban and rural areas.
3. Providing security to depositors. Development of specialized institutions for agricultural credit, industrial finance.