Reserve Bank of India

The Reserve Bank of India, which is the central bank of India, was established on April 1, 1935 in accordance with the provision of the Reserve Bank of India act, 1934. It was originally started as a shareholder bank with a share capital of Rs.5 croer divided into shares of Rs. 100 each fully paid-up. But since January 1949 the Reserve Bank has been nationalised and it is now a purely state concern. The government of India holds the entire share capital of the bank which has been acquired by payment of compensation to the shareholders.
Function and Powers : The Reserve Bank of India, performs the following functions :
1. It is the bank of Issue : The bank has the sole right of issuing paper notes in India. Except one rupee notes and coins as well as subsidiary coins which are issued by the ministry of Finance, Government of India, all other notes and coins are issued by the Reserve Bank. While issue of one rupee notes, coins and subsidiary coins is done by the ministry of Finance, Government of India, the RBI undertakes their distribution on behalf of the Government.
2. It acts as banker to the Government : It has been entrusted with the task of receiving all money on behalf of the Government as also with the task of making payments on its behalf. It performs these functions through the State Bank of India, which work as its agent at places where it has no office of its own.
It is responsible for buying and selling of the Government securities, remitting funds, management of public debts and raising new loans. The bank also grants temporary accommodation to the Government by purchasing their treasury bills which are generally for a period of three months. In addition, the bank is the adviser to the Government on all finical matters.
3. It is Banker's Bank : Being the apex bank, it acts as the banker to other banks. All schedule banks have to keep a certain percentage of their time and demand liabilities with the Reserve Bank. The schedule banks have also to submit weekly returns of their business to the Reserve Bank of India. In return they get privileges of rediscounting of bills of exchange and hundis, sale and discount of Government securities, as also remittance of funds free of charge.
4. It regulate the flow of credit : The RBI formulates and administers monetary policy and regulates the volume and flow of the credit created by the commercial banks. It operates general credit control measure through changing the bank rate or through open market operations. It also uses selective credit control measure to regulate this flow of credit in some specific lines of activity.
5. Supervisory powers of the RBI : The RBI exercise supervisory powers over the commercial bank as well as non-bank finical intermediaries like indigenous bankers, leasing companies, etc. Every bank has to get a license from the RBI to do banking business in India, and this license can be suspended or cancelled if the banks fail to fulfill certain stipulated conditions. For operating new branch the banks have to seek permission of the RBI. The RBI has the power to inspect the banks and seek any information from them.
6. It maintains the external value of the rupee : Since March 1947, India is the member of the International Monetary Fund. It has, therefore, to maintain its rate of exchange at the level which it has declared to this fund. The Reserve Bank takes suitable measure to maintain the value of rupee at this declared level. This bank is now under obligation to buy and sell foreign currencies to the authorized dealers at rates determined by the Central Government from time to time.
7. It has been entrusted with the collection of finical statistics about the country's economy : It publishes a weekly statement of the working of its Issue and Banking Department. It brings out very useful reports on banking, currency, finance and cooperative movement. Besides, the Reserve Bank issues a monthly bulletin surveying the current National and International economic developments. It also submits to the Government and annual report on the trend and progress of banking in India. It is a very useful compilation.
Restriction on the Reserve Bank: As it is a central bank, certain restrictions have been imposed on the Reserve Bank. It is not to compete with the commercial banks. It is not allowed to pay interest on its deposits. It cannot engage directly or indirectly in trade. It cannot also acquire or advance loans against immovable property. It is also prohibited from purchasing its own shares or the shares of any other bank or any company or granting loans on such security.

Reserve Bank of India

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