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Reserve Bank of India (RBI) And Its Functions

Last Updated : 11 Dec, 2023
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RBI (Reserve Bank of India) is the central bank of India and a statutory body responsible for multiple tasks like printing the currency notes, controlling monetary policy and acting as a custodian to other primary banks of the nation. The RBI was established on April 1, 1935 under the Reserve Bank of India Act, 1934 on the recommendation of the Hilton-Yong-Commission or commonly referred to as Royal Commission on Indian currency and finance. It is headquartered in Mumbai. The main motive behind setting up RBI was to separate the currency control from the government and provide other banking facilities. The Reserve Bank of India was nationalized with effect from 1st January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. The working of RBI is regulated by the RBI governor appointed by the central government of India and the Governor acts as the main decision-maker in RBI.

The RBI role is responsible for the design, production, distribution and the overall management of the nation’s currency.

Functions of RBI

Functions of RBI

What are the Main Functions of RBI?

Issue Currency Notes

The issue and printing of currency notes are one of the primary functions of the RBI functions. The Reserve Bank of India prints notes of all denominations except 1 rupee and that’s because the one rupee note is issued by the Indian Ministry of Finance. The issue and printing of currency notes in India are regulated under the Minimum Reserve System (MRS). As per the MRS, the Reserve Bank of India keeps a reserve asset of Rs 200 crore out of which INR 120 crore would be in form of Gold and the rest in the form of foreign currency. Also, the addition of any new denomination or discontinuation of any existing denomination is being done by RBI. For example, during demonetization in November 2016, RBI discontinued old 500 and 1000 rupee notes and added new 2000 and 500 rupee notes.

Central Bank for other Banks (Lender of the Last Resort)

The Reserve Bank of India acts as a parent bank to all the primary banks operating in India. However hereby RBI functions plays a role as lender (acting as the lender of the last resort for all banks when they are in financial crisis situation) that lends money to the primary banks of India on certain interests. Also, it keeps an eye on the financial transactions of the banks so that amount of account holders remain secured in the banks.

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Keeping a Track of Foreign Exchange Reserve

Buying and selling foreign currencies and thus making sure a stable foreign exchange in India comes into RBI’s account. Reserve Bank of India holds the right to buy and sell foreign currencies in the international foreign exchange market. Also, RBI functions makes sure that turbulence in the foreign exchange market does not affect the economy of the nation.

Acting as a Banker to the Government

The RBI functions acts as a banker to the central and the state governments of India and fulfills all the banking necessities of the government. Also, RBI plays a crucial role as an advisor to the central government of India and assists the government in framing economic policies for the nation.

Controlling Credit Flow

The credit made by the primary commercial banks of India is being controlled by the RBI functions. Also, RBI is responsible for regulating the flow of money in the market. RBI adopts both quantitative and qualitative methods to regulate the cash flow in the market. RBI increases or decreases the repo rate to control inflation and regulate the cash flow in the market.

Other Important Functions

The RBI acts as a representative of India in the IMF (International Monetary Fund) or RBI monetary policy, and also in many other major international financial organizations. The Reserve Bank of India is also responsible for looking after government treasures, available securities, foreign reserves, etc.  The RBI also plays a major role in the development program run by the central government of India and finances some of these programs. Also, other activities like presenting the economic data of the nation, GDP growth, and the inflation rate is also done by the RBI functions.

RBI and the Economy of India

After the Central Government of India and the Ministry of Finance, its Reserve Bank of India plays the most crucial role in driving the economy of Indian banking system. RBI extends its services to the other commercial banks of India and thus these banks provide banking services to the netizens. Also, RBI functions provides a safe and secure banking infrastructure to people living in India. The RBI tries to keep the repo rate as low as possible to ensure the proper cash flow in the market so that people invest more money in the development works. RBI jointly with the central government of India provides ease in foreign trade so that it attracts more FDI (Foreign Direct Investment).

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Indian banking

FAQs on Reserve Bank of India

1. What is the Reserve Bank of India (RBI)?

The RBI is India’s central bank. It was established in 1935. The bank regulates India’s financial system. It designs monetary policy. Currency issuance is one of its responsibilities. It manages foreign exchange reserves. The RBI acts as a banker to the government as well as the banks.

2. What are the functions of the RBI in relation to the banking sector?

The RBI oversees the banking sector carefully. It grants licenses to banks. It defines rules for how they operate. The bank keeps a close watch on their performance. The RBI takes steps to correct banks when required. It also works to maintain the stability of the financial system. This is particularly important for protecting the interests of those who deposit their money in banks.

3. What is the primary objective of the RBI’s monetary policy?

The main goal of the RBI’s monetary policy is price stability. At the same time it seeks to encourage economic growth. Its ambition is to control inflation. The aim is to keep inflation within a designated range. This is calculated using the Consumer Price Index (CPI).

4. What is the composition of the Monetary Policy Committee (MPC)?

The Monetary Policy Committee comprises six people. These individuals make important decisions about monetary policy. This includes setting interest rates. Three of these members are from the RBI itself. The remaining three members are external (appointed by the Government of India).

5. What is the role of the RBI in regulating non-banking financial institutions (NBFCs)?

The RBI lays down operational rules for NBFCs (Non-banking Financial Institutions). Its guidelines cover capital adequacy as well as risk management. This central bank also has powers to inspect NBFCs. Furthermore it can supervise them as needed. When considered necessary the RBI can take steps to maintain an NBFC’s integrity. 

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