MAIN FUNCTIONS OF THE RESERVE BANK OF INDIA

The RBI, like any other central bank, performs almost all traditional central
banking functions. But, due ti the specific nature of the country’s underdeveloped
economy it has undertaken some development and promotional functions also. First
we shall explain its general central banking functions.

General Central Banking Functions

Since the RBI was established on the model of the Bank of England, its general
banking functions are very much similar to those of Bank of England. These
functions are as follows:
1. Issues of currency notes.
Like any other central bank the RBI has sole right to issue currency
notes. Under the original Act, there was provision for issuing currency notes
according to the proportional reserve system. This system being
relatively less elastic, was not suited to the requirements of development
planning. Thus the original Act was amended and the proportional reserve
system of note issue was replaced by the minimum reserve system.
According to the RBI (Amendment) Act, 1957 a minimum gold and foreign
exchange reserve was to be of Rs.200 crore. Valve of gold was not to be at
any time less than Rs115 crore. This provision released a large amount of
foreign exchange which was earlier kept as part of reserve. Following the
policy of other central banks the RBI ( Amendment) Act, 1957, empowered
the RBI to dispense with the entire holding of foreign securities with the prior
sanction of the central government.
There is a division of work between the issue and the Banking
Departments of the RBI in respect of note issue. Currency notes are being
issue by the Issue Department on the basis of demand made by the Banking
Department while making demand for currency notes has to transfer
government or other approved securities to the Issue Department.

2. Banker to the government.

The RBI renders useful service to the government in the capacity of
its banker,agent and adviser. The RBI has the obligation to transact the
banking business of the central and the state government. Thus it accepts
money on account of these governments makes payment on their behalf and
carries out other banking operations such as their exchange and remittances.
It also undertakes the management of public debt and is responsible for the
issue of new loans. For ensuring the success of the loan operations it actively
operates in the gilt-edged market. The RBI has intimate knowledge of the
financial market and thus offers useful advice to the government on the
quantum and terms of new loans. Since the Treasury bill market is very
narrow, selling of Treasury bill on behalf of the government is relatively a less
important function of the RBI, the RBI is authorized to make ways and means
advances to the government. These short term loans are repayable within 90
days from the state of advance. Since the discharge of this function involves
receipts and payments on behalf of both Central and the State government
and not only in the capital cities, but also in many other towns, it has
appointed the State Bank Of India as its sole agent for transacting
government business.
 The need for coordination between the monetary and fiscal
policies is now geing universal recogned. As such, central bank’s
function as the adviser to the government has assumed new
significance.prior to the beginning of economic planning in india the RBI’s
role as the adviser to the government was rather limited. The position has,
hawever, changed over the last decades. The range of the advisory function
of the RBI is now quite extensive. “ like all Central banks, the Bank(RBI) act
as adviser to the government not only on policies concerning banking and
financial matters but also on a wide range of economic issues including those
in the field of planning and resource mobilization. It has of course a special
responsibility in respect of financial policies and measures concerning new
loans, agricultural finances and legislation affecting banking and credit. The
Bank’s (RBI’S) advice is sought on certain aspects of formulation of the
country’s Five Year Plans such as the financial pattern, mobilization of
resources and institutional arrangements with regard to banking and credit
matter.’’

3. Banker’s bank.
The RBI has been vested with extensive powers to control
commercial banking system under the Reserve Bank of India Act,
1934 and the Banking Regulation Act, 1949. According to the Banking
Regulation Act, 1949, all banking companies included in the second
scheduled banks. For inclusion in the Second Schedule a bank must satisfy
the RBI that the affairs are not conducted in a manner detrimental to the
interests of its depositors. All scheduled banks are under a statutory
obligation to maintain a certain minimum of cash reserve ( to be decided by
the RBI) with the RBI against their demand and time liabilities. An
amendment of 1962 to the Banking Regulation Act has empowered the RBI
to determine the Cash Reserve Ratio (CRR) between 3 per cent and 15 pr
cent of aggregate demand and time liabilities. Apart from this statutory
control over the commercial banks, the RBI can also direct the scheduled
banks to maintain 100 per cent caash reserve against all deposits received
after a specific date. Further, the scheduled banks are required to submit
weekly statements of their transactions to the RBI.