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Functions of Reserve Bank of India


Posted Date: 13-Mar-2010  Last Updated:   Category: Education    
Author: Member Level: Gold    Points: 25


Functions of RBI in India; Functions of the Central Bank



The functions of the Reserve Bank of India are as follows:-
(1) Monopoly of note issue:
The RBI has the sole right of note issue. All currency notes except one rupee note and coins are issued by the Issue Department of the central bank. The RBI follows the minimum reserves system under which the bank has to maintain a minimum reserve of Rs.200 crores of which a minimum of Rs.115 crores in gold and bullion and the rest in foreign securities. This function helps the Central Bank to control money supply in the economy.

(2) Banks to the Government:
The RBI is the Banker's agent and adviser to the government. It accepts deposits and make payments on behalf of the Government. Issue of loans, management of public debt, sale of treasury bills are undertaken by the bank. It helps the government in ensuring better co-ordination of monetary and fiscal policies. It provides short term loans namely "ways and means advances" to the Central Government and State Government. These loans have to be rapid within a period of 3 months.

It represents the government in various international organizations like IMF, World Bank etc. It sends its official as representative of the government for international seminars and conferences. All important policy decision are taken by the government in consultation with the RBI. It advises the government on important matters like agricultural credit, devaluation of rupee, credit policy for the industrial and export sectors etc.

(3) Banker's Bank:
RBI acts as a banker for all the commercial banks. All scheduled banks come under the direct control of RBI. All commercial as well as schedule bank has to keep a minimum reserve with the RBI. They have to submit weekly reports to RBI about their transactions. By performing 3 functions, the RBI helps the member banks significantly. They are given below such as:
(a) It acts as the lender of the last resort.
(b) It is the custodian of cash reserves of commercial banks.
(c) It clears, transfers the transaction. It acts as the central clearing house.

(4) Management of foreign exchange reserves:
RBI is the custodian of the foreign exchange reserves of the country. It is the responsibility of the RBI to stabilize external value of rupee and carry out transactions in foreign currencies. The Foreign Exchange Regulation Act (FERA) passed by the government empowered RBI to have full control over management of foreign exchange.

(5) Credit control:
The central bank uses the quantitative and qualitative tools to control credit. It is one of the principal functions of RBI. It helps the bank to ensure exchange rate stability and price stability. In quantitative credit control, the volume of credit is controlled and in qualitative credit control, the direction of credit is regulated. Bank rate, open market operations and cash reserve ratio are used under the quantitative method. In selective credit control, the weapons used are variation in margin requirements, moral suasion, rationing of credit, issue of directives etc. At present selective control has been given much importance and it is more suitable for India.


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