Question

Explain any four roles that RBI plays as a regulator.

Answer 1

Role of RBI as a regulator - 

1. Government's Bank: The central bank acts as a banker, fiscal agent and advisor to the Government. It makes and receives payments on behalf of the Government. It floats and manages public debts for the Government. As a fiscal agent, the central bank advises the Government on matters concerning monetary and banking policies. It also serves as a representative of the Government in international conferences on monetary and economic matters.
2. Controller of Credit: Commercial banks create credit by lending money. They may create too much or too little credit. The level of credit in the country causes fluctuations in the price level. It becomes necessary to exercise control over credit so as to ensure stability in the economy. The central bank exercises strict control on the credit granting capacity of commercial banks. This is the most important function of a central bank. Credit control is both qualitative and quantitative in nature.
3. Monopoly of Note Issue: Generally the central bank of a country has the monopoly to issue currency notes. Government grants the exclusive right to the central bank to issue notes on its behalf. In India, one rupee note is issued by the Ministry of Finance. All other currency notes are issued by the Reserve Bank of India. In order to inspire public confidence in paper currency, the central bank keeps reserves of gold and silver against the issue of notes.
4. Banker's Bank: The central bank acts as a banker to all the commercial banks in the country. As a banker's bank, the central bank provides short-term loans and billd is counting facilities to commercial banks. It also advises the commercial banks on various matters relating to their business. Commercial banks are required to keep a certain proportion of their deposits in the form of cash reserves with the central banks. These reserves enable the central bank to exercise control over credit by commercial banks.