Question

Explain any five functions of the Reserve Bank of India.

Answer 1

The Reserve Bank of India (RBI), being the central bank of India, performs the following key functions:

1. Issue of Currency Notes: In India, the Reserve Bank of India has the only authority to issue currency notes. It maintains gold, silver, and foreign exchange reserves to back the notes and instill public confidence. The monopoly preserves currency consistency, prevents over-issuance, and adds dignity to the currency system.
2. Banker to the Government: The RBI acts as a banker, agent, and adviser to the central and state governments. It receives and disburses payments on behalf of the government, administers the national debt, issues government securities, and represents the government at international financial conferences.
3. Banker's Bank and Lender of Last Resort: The RBI acts as the bank for all commercial banks in the country. Commercial banks store their cash reserves in it. When a commercial bank requires funds, it can request loans and rediscount bills from the RBI. Thus, the RBI is often known as the ‘lender of last resort’.
4. Credit Control: The RBI regulates the volume and direction of credit in the country through both quantitative control (Bank Rate, Open Market Operations, CRR, SLR) and qualitative control (margin requirements, loan rationing, moral suasion, and publicity). This helps to keep pricing and exchange rates stable.
5. Custodian of Foreign Currency Reserves: The RBI is the exclusive custodian of the country’s gold, foreign exchange, and other reserves. It responsibly manages these reserves in order to overcome balance-of-payments challenges and maintain exchange rate stability.