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HomeFinance/AccountingRoleofReserveBankofIndia(RBI)inIndianEconomy

RoleofReserveBankofIndia(RBI)inIndian
Economy
BYKUCHKHAASHAI

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TUESDAY,FEBRUARY15,2011

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BankIssue:
UnderSection22oftheReserveBankofIndiaAct,thebankhasthesolesighttoissuebanknotes
ofalldenominations.ThenoticeissuedbytheReservebankhasthefollowingadvantages:
Itbringsuniformitytonoteissue.
Itiseasiertocontrolcreditwhenthereisasingleagencyofnoteissue.

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Itkeepsthepublicfaithinthepapercurrencyalive.

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Ithelpsinthestabilizationoftheinternalandexternalvalueofthecurrencyand

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Creditcanberegulatedaccordingtotheneedsofthebusiness.

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Management

Thesystemofnoteissueasitexiststodayisknownastheminimumreservesystem.Thecurrency
notesissuedbytheBankaridlegaltendereverywhereinIndiawithoutanylimit.Atpresent,theBank
issuesnotesinthefollowingdenominations:Rs.2,5,10,20,50100,and500.Theresponsibilityof

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Function
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the Bank is not only to put currency into, or withdraw it from, the circulation but also to exchange

SocietyForHumanResourceManagementCode
OfEthics

notes and coins of one denomination into those of other denominations as demanded by the public.

CodeOfEthicsForGovernmentService

AllaffairsoftheBankrelatingtonoteissueareconductedthroughitsIssueDepartment.

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Banker,AgentandFinancialAdvisortotheState:
As a banker agent and financial advisor to the State, the Reserve Bank performs the following

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functions:
Itkeepsthebankingaccountsofthegovernment.
Itadvancesshorttermloanstothegovernmentandraisesloansfromthepublic.
Itpurchasesandsellsthroughbillsandcurrenciesonbehalftothegovernment.
Itreceivesandmakespaymentonbehalfofthegovernment.
Itmanagespublicdebtand
Itadvisesthegovernmentoneconomicmatterslikedeficitfinancingpricestability,management
ofpublicdebts.etc.
BankertotheBanks:
It acts as a guardian for the commercial banks. Commercial banks are required to keep a certain
proportion of cash reserves with the Reserve bank. In lieu of this, the Reserve bank provide them
various facilities like advancing loans, underwriting securities etc. The RBI controls the volume of
reserves of commercial banks and thereby determines the deposits/credit creating ability of the
banks.ThebanksholdapartoralloftheirreserveswiththeRBI.Similarly,intimesoftheirneeds,
the banks borrow funds from the RBI. It is, therefore, called the bank of last resort or the lender of
lastresort.
CustodianofForeignExchangeReserves:
ItistheresponsibilityoftheReservebanktostabilizetheexternalvalueofthenationalcurrency.The
Reserve Bank keeps golds and foreign currencies as reserves against note issue and also meets
adverse balance of payments with other counties. It also manages foreign currency in accordance
withthecontrolsimposedbythegovernment.
Asfarastheexternalsectorisconcerned,thetaskoftheRBIhasthefollowingdimensions:
ToadministertheforeignExchangeControl
Tochoose,theexchangeratesystemandfixormanagestheexchangeratebetweentherupee

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andAsianDevelopmentBank.

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The RBI is the custodian of the countrys foreign exchange reserves, id it is vested with the

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responsibility of managing the investment and utilization of the reserves in the most advantageous
manner. The RBI achieves this through buying and selling of foreign exchange market, from and to
schedulebanks,which,aretheauthorizeddealersintheIndian,foreignexchangemarket. The Bank
managestheinvestmentofreservesingoldcountsabroadandthesharesandsecuritiesissuedby
foreigngovernmentsandinternationalbanksorfinancialinstitutions.
LenderoftheLastResort:
At one time, it was supposed to be the most important function of the Reserve Bank. When
Commercial banks fail to meet obligations of their depositors the Reserve Bank comes to their
rescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meeting
directly or indirectly all legitimate demands for accommodation by the Commercial Banks under
emergencyconditions.
BanksofCentralClearance,SettlementandTransfer:

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Thecommercialbanksarenotrequiredtosettlethepaymentsoftheirmutualtransactionsincash,It
is easier to effect clearance and settlement of claims among them by making entries in their
accountsmaintainedwiththeReserveBank,TheReserveBankalsoprovidesthefacilityfortransfer

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tomoneyfreeofchargetomemberbanks.
ControllerofCredit:
In modern times credit control is considered as the most crucial and important functional of a
ReserveBank.TheReserveBankregulatesandcontrolsthevolumeanddirectionofcreditbyusing
quantitative and qualitative controls. Quantitative controls include the bank rate policy, the open
marketoperations,andthe variable reserve ratio. Qualitative or selective credit control, on the other
hand includes rationing of credit, margin requirements, direct action, moral suasion publicity, etc.
Besides the above mentioned traditional functions, the Reserve Bank also performs some
promotional and supervisory functions. The Reserve Bank promotes the development of agriculture
andindustrypromotesruralcredit,etc.TheReserveBankalsoactsasanagentfortheinternational

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institutionsasI.M.F.,I.B.R.D.,etc.

2013(109)

SupervisoryFunctions:

2012(60)

In addition to its traditional central banking functions, the Reserve Bank has certain non monetary

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functions of the nature of supervision of banks and promotion of sound banking in India. The
supervisoryfunctionsoftheRBIhavehelpedagreatdealinimprovingthemethodsoftheiroperation.
TheReserveBankAct,1934,andBankingRegulationAct,1949havegiventheRBIwidepowersof:

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A striking feature of the Reserve Bank of India Act was that it made agricultural credit the Banks

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special responsibility. This reflected the realisation that the countrys central bank should make
specialeffortstodevelop,underitsdirectionandguidance,asystemofinstitutionalcreditforamajor

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sector of the economy, namely, agriculture, which then accounted for more than 50 per cent of the

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independence. Over the years, the Reserve Bank has helped to evolve a suitable institutional

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infrastructureforprovidingcreditinruralareas.

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Reserve Bank has power to increase this percentage up to 15. These banks must have capital and
reserves of not less than Rs.5 lakhs. The accumulation of these balances with the Reserve Bank
placesitinapositiontousethemfreelyinemergenciestosupportthescheduled banks themselves
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thatis,bythepurchaseandsaleofsecuritiesorbillsinthemarket.TheReservebankhasanother

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instrumentofcontrolintheformofthebankrate,whichitpublishesfromtimetotime.

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Further, the Bank has been given the following special powers to control banking companies under

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theBankingCompaniesAct,1949:
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