Main Functions of Reserve Bank of India

The Reserve Bank of India, also known as RBI, was established on April 1, 1935, with respect to the provision of Reserve Bank of Indian ACT 1934. The central office of RBI was first established in Kolkata but permanently shifted to Mumbai in 1937. The central office of the RBI is the place where the government sits and formulates policies. Though RBI was originally privatised, since its nationalisation in 1949, the RBI is fully owned by the Government of India. 

The permeable of the Reserve Bank of India details the basic function of RBI as

"To govern the issues of banknotes and to maintain of reserves with a view to securing monetary stability in India and generally to function the credit and currency system of the country to its benefits, to have a current monetary policy structure, to meet the challenges of an increasingly complex economy, and to maintain price instability while considering the objective of growth". Read the article below to know the answer to the question “ What are the main functions of the Reserve Bank of India?”

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What are The Main Functions of RBI?

The powers and functions of the central bank vary from country to country. But there are certain main functions such as “ Bankers To The Government'' and “ Bankers To The Bank” are performed in all the central banks. The central bank of India, i.e. RBI also acts as a “ Bankers To The Government'' and “ Bankers To The Bank”.

Bankers To Bank

Like business organisations or individuals, banks need their own mechanism to transfer funds and settle inter-bank transactions such as borrowing from and lending to the other bank and institutions. As a banker to the government, RBI performs this role. While performing this function, the RBI focuses on:

• Providing an efficient means of transferring funds to the bank.

• In need, RBI acts as a lender of last resort.

• Enabling different types of banks to maintain their accounts with RBI for statutory cash reserve requirements and maintenance of transaction balances.

• Enables smooth, rapid, and seamless clearing and settlement of interbank transactions. 

Bank To The Government

The key function of RBI is to manage the Government's banking transactions. Like businesses, banks, and individuals, the Government needs a banker to perform financial transactions in an effective and efficient manner, including arranging resources from the public. Since its establishment, the RBI has adopted a traditional central banking function for managing Government's banking transactions. As an agent of the Government, RBI retains the responsibility of managing the debts and the issue of new loans and treasury bills on behalf of the Government. As a financial advisor to the Government, it supports the government on significant matters of economic policy such as the devaluation of the currency rate, deficit financing, foreign exchange policy, trade policy, etc. The performance of Government business is also observed by RBI treasury rules, treasury rules of the State Government, and timely instructions issued by the Controller General of Accounts and other Departments of Central and State Governments. 

Let us now discuss the traditional, promotional, and supervisory functions of RBI.

Traditional Functions of RBI

1.Issuance of Currency Notes

RBI has sole responsibility to issue currency notes except one rupee note which are issued by the Ministry of Finance. The currency notes issued by the RBI are declared as unlimited legal tender all over the country. This responsibility of issuing notes by the RBI has various benefits, including: 

• It brings uniformity in the note issuance.

• It is easy to control and regulate credit with respect to the requirements in the economy. 

• It maintains the faith of the public in the current notes.

2. Act as a Custodian of Cash Reserves of Commercial Banks

Commercial banks in India or all over the world feel secure to maintain their cash reserves with the central bank because the notes issued by the RBI commands the utmost confidence, and government banking transactions are conducted by the RBI. Certainly, the evolution of a central bank such as the Reserve Bank of India makes it possible for the banking system to secure the benefits of centralised cash reserves.

The importance of centralised cash reserves lies in the following points:

• Centralisation of cash reserves in the central bank strengtheneth the banking system of the country as it enhances the public confidence in the commercial banks.

• Centralised cash reserves in the central bank retain a longer and more elastic credit structure than those distributed among various individual commercial banks.

3. RBT Act As A Custodian of Foreign Exchange Reserves

RBI acts as a custodian of foreign exchange reserves of the country and has the responsibility of managing the official exchange rate. The important function of the RBI is to maintain the external value of the rupee. RBI can satisfy this function by controlling and regulating foreign exchange transactions.

Foreign exchange control implies the exercise of RBI control over the foreign exchange earning and disbursement of the country. The Foreign Exchange Empowerment Act entitles the RBI to issue direction for the administration of exchange control. To fulfil this, the RBI has set up a separate foreign exchange department.

4. RBI Controls The Credit of Economy

RBI has a responsibility to control the credits of the economy. It controls the volume of credit created by the commercial bank of India. This can be done by controlling the monetary policy, bank rate, cash reserve ratio, statutory reserve ratio, or through open market operations.

Traditionally, the RBI has the power to increase or decrease the deposit of the scheduled commercial bank required to be deposited with it in order to control the credit creation capacity of banks.

When the central bank increases the limit of deposits required to maintain with it, this minimises the liquidity with the banking system resulting in the contraction of credit. On the other hand, when the central bank decreases the limit of deposits required to maintain it, the bank enjoys more liquid cash with the system, and this results in credit expansion of the economy. According to the Bank regulation act1949, RBI has the power to ask any specific bank or the whole banking system not to lend certain types of securities to particular groups or persons. 

5. RBI Act As A Lenders of Last Resort

RBI is also known as a banker's bank. RBI not only maintains deposits of the commercial banks but also lends money to them during emergencies, and this is why it is known as the lender of last resort. The RBI also ensures to refinance and rediscounts the bills of exchange, promissory notes, and eligible commercial papers to the scheduled commercial bank as per section 17 of the RBI Act, 1934. To increase the involvement of commercial banks in lending to the priority sectors, the RBI also provides refinance to the respective commercial banks. To ensure the participation of cooperative banks, RBI provides loans in subsidy interest. In case, commercial banks require liquidity at a point in time, they approach RBI for support.  

Promotional Functions of RBI

• Development of Financial System and Agriculture.

• Promotion of Exports through finance and banking habits.

• RBI collects and publishes its annual reports, weekly reports, and reports on trends and progress of commercial banks of India.

• Provision of Training 

• Provision of Small Scale Industry Finance,

Supervisory Functions of RBI

• RBI issues license and renewal of a license to the bank.

• RBI performs banking inspection.

• RBI has full control over Non-Banking Financial Institutions.

• RBI implements a deposit insurance scheme.

• RBI acts as a central clearinghouse of payment and the central system.

RBI Important Facts

• On April 1, 1935, RBI was established as a private entity, but since Nationalisation in 1949, it has now been transformed into a government entity.

• The financial year of the Reserve Bank of India is from July 1 to June 30.

• RBI is only responsible for printing the currency notes. Minting of currency notes is made by the Government of India.

• K.J. Udeshi is considered to be the first woman to hold the position of deputy governor of RBI.

• The RBI was established on the suggestions of the Hilton Young Commission.

• The only prime minister to serve the position of governor of RBI is Manmohan Singh.