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Introduction. History. Functions. Roles of RBI. Credit Creation.

Established in April 1935 under the RESERVE BANK OF INDIAN ACT Head Quarters MUMBAI (Maharashtra). The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of currency reserves. Present Governor Duvvuri Subbarao.

It was set up on the recommendations of Hilton Young Commission It was started as share-holders bank with a paid up capital of 5 crores Initially it was located in Kolkata It moved to Mumbai in 1937 Initially it was privately owned

Since 1949, the RBI is fully owned by the Government of India. Its First governor was Sir Osborne A.Smith The First Indian Governor was Sir Chintaman D.Deshmukh

Monetary authority
Manager of exchange control Issuer of currency

Minimum Reserve System Principle of Currency Note Issue


Developmental role Related functions

Monetary authority

Main monetary authority of the country. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins

Manager of exchange control


The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves.

Minimum Reserve System - Principle of Currency Note Issue


RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'.

Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.

Related functions

The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. acts as their banker. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.

Development of banking system Development of financial institutions Development of backward areas Economic stability Economic growth Proper interest rate structure

The most important function of the central bank is to control credit by commercial banks. Money and credit represent a powerful force for good evil in the economy. Money cannot manage itself. So it is the duty of the central bank to ensure that money and credit is properly managed so that inflation and deflationary pressures can be controlled in the economy. In modern times bank credit has become the important source of money and commercial have unlimited power to expand or contract credit.

Methods of credit control are broadly divided into two:


Quantitative credit control methods:The quantitative methods aim to control the total quantity and cost of recreated by banks, whereas the qualitative methods control the use and direct of credit. The quantitative methods are traditional and indirect. They include bank rate policy, open market operations and variable reserve ratio.

Qualitative or selective credit control methods:The qualitative controls are direct which consist of regulation of consumer credit, margin requirements, rationing of credit, direct action, moral suasion and publicity.