Question

Explain the functions of RBI.

Explain the functions of the Reserve Bank of India.

Answer 1

The Reserve Bank of India (RBI) is the apex institution of India’s banking system, responsible for regulating the money market. Established on 1st April 1935 based on the Hilton Young Commission’s recommendation, it was nationalized on 1st January 1949. The RBI Act of 1934 defines its functions.

The following are the functions of the RBI:

1. Issue of currency notes: RBI has the sole right to issue currency notes of all denominations, except one rupee note and coins. As per the ‘Minimum Reserve System’ of 1957, RBI is required to maintain minimum gold and foreign exchange reserves of Rs 200 crores, out of which at least ₹ 115 crores should be in gold and the remaining ₹ 85 crores should be in terms of foreign currency and government securities.
2. Banker to the Government: RBI acts as a banker, agent and advisor to the Government. It transacts the business of both the Central and State Governments. It accepts money as well as makes payments on behalf of these Governments. It also undertakes the management of public debt. It advises the Government on a wide range of economic issues.
3. Banker’s Bank: RBI exercises statutory control over the commercial banks. All scheduled banks are compulsorily required to maintain a certain minimum of cash reserves with the RBI against their demand and time liabilities. RBI provides financial assistance to banks in the form of discounting of eligible bills. Loans and advances are also provided against approved securities.
4. Custodian of Foreign Exchange Reserves: RBI acts as a custodian of the country’s foreign exchange reserves. It has to maintain the official rate of exchange of rupee as well as ensure its stability. RBI also undertakes to buy and sell the currencies of all the members of the International Monetary Fund (IMF).
5. Controller of Credit: As a supreme banking authority of the country, RBI has the power to influence the volume of credit created by commercial banks. It also monitors the purpose or use of credit. Quantitative methods such as bank rate, open market operations, variable reserve ratios such as Cash Reserve Ratio (CRR), Statutory Liquid Ratio (SLR) etc. control the volume of credit created. Qualitative methods such as fixing margin requirements, credit rationing, moral suasion etc. regulate the purpose or use of credit.
6. Collection and Publication of Data: RBI collects and compiles statistical information related to banking and other financial sectors of the economy.
7. Promotional and Developmental Functions: RBI also performs certain promotional and developmental functions such as extending banking services to semi-urban and rural areas, providing security to depositors, development of specialized institutions for agricultural credit, industrial finance etc.
8. Other Functions: RBI acts as a clearing house for settling the accounts between its member banks. As a lender of last resort, it also provides liquidity to banks experiencing financial difficulty.