Functions of RBI (The India's Central Bank)

Reserve Bank of India being an apex court of the center enjoys enormous
power and functions under banking system in India. It has monopoly over the
issue of bank-notes and monetary system of the country. These power and
functions as to issue of bank notes and currency system are governed by the
Reserve Bank of India Act, 1934. Besides it the Banking Regulation Act, 1949
also empowers certain power and Function of the Reserve Bank.
• Main Functions of RBI
Main functions are those functions which every central bank of each nation
performs all over the world. Basically, these functions are in line with the
objectives with which the bank is set up. It includes fundamental functions of the
Central Bank. They comprise the following tasks.
1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly
of issuing currency notes except one rupee note and coins of smaller
denomination. These currency notes are legal tender issued by the RBI. Currently
it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has
powers not only to issue and withdraw but even to exchange these currency notes
for other denominations. It issues these notes against the security of gold bullion,
foreign securities, rupee coins, exchange bills and promissory notes and
government of India bonds.
2. Banker to other Banks: The RBI being an apex monitory institution has
obligatory powers to guide, help and direct other commercial banks in the
country. The RBI can control the volumes of banks reserves and allow other
banks to create credit in that proportion. Every commercial bank has to maintain
a part of their reserves with its parent's viz. the RBI. Similarly, in need or in
urgency these banks approach the RBI for fund. Thus, it is called as the lender
of the last resort.
3. Banker to the Government: The RBI being the apex monitory body has to
work as an agent of the central and state governments. It performs various
banking function such as to accept deposits, taxes and make payments on behalf
of the government. It works as a representative of the government even at the
international level. It maintains government accounts, provides financial advice
to the government. It manages government public debts and maintains foreign
exchange reserves on behalf of the government. It provides overdraft facility to
the government when it faces financial crunch.
4. Exchange Rate Management: It is an essential function of the RBI. In order
to maintain stability in the external value of rupee, it has to prepare domestic
policies in that direction. Also, it needs to prepare and implement the foreign
exchange rate policy which will help in attaining the exchange rate stability. In
order to maintain the exchange rate stability, it has to bring demand and supply
of the foreign currency (U.S Dollar) close to each other.
5. Credit Control Function: Commercial bank in the country creates credit
according to the demand in the economy. But if this credit creation is unchecked
or unregulated then it leads the economy into inflationary cycles. On the other
credit creation is below the required limit then it harms the growth of the
economy. As a central bank of the nation the RBI has to look for growth with
price stability. Thus, it regulates the credit creation capacity of commercial banks
by using various credit control tools.
6. Supervisory Function: The RBI has been endowed with vast powers for
supervising the banking system in the country. It has powers to issue license for
setting up new banks, to open new branches, to decide minimum reserves, to
inspect functioning of commercial banks in India and abroad, and to guide and
direct the commercial banks in India. It can have periodical inspections an audit
of the commercial banks in India.
• Developmental / Promotional Functions of RBI
Along with the routine traditional functions, central banks especially in the
developing country like India have to perform numerous functions. These
functions are country specific functions and can change according to the
requirements of that country. The RBI has been performing as a promoter of the
financial system since its inception. Some of the major development functions of
the RBI are maintained below.
1. Development of the Financial System: The financial system comprises the
financial institutions, financial markets and financial instruments. The sound and
efficient financial system is a precondition of the rapid economic development of
the nation. The RBI has encouraged establishment of main banking and non-
banking institutions to cater to the credit requirements of diverse sectors of the
economy.
2. Development of Agriculture: In an agrarian economy like ours, the RBI has
to provide special attention for the credit need of agriculture and allied activities.
It has successfully rendered service in this direction by increasing the flow of
credit to this sector. It has earlier the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance: Rapid industrial growth is the key to faster
economic development. In this regard, the adequate and timely availability of
credit to small, medium and large industry is very significant. In this regard the
RBI has always been instrumental in setting up special financial institutions such
as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.
4. Provisions of Training: The RBI has always tried to provide essential training
to the staff of the banking industry. The RBI has set up the bankers' training
colleges at several places. National Institute of Bank Management i.e NIBM,
Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are
few to mention.
5. Collection of Data: Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several topics. It includes
interest rate, inflation, savings and investments etc. This data proves to be quite
useful for researchers and policy makers.
6. Publication of the Reports: The Reserve Bank has its separate publication
division. This division collects and publishes data on several sectors of the
economy. The reports and bulletins are regularly published by the RBI. It includes
RBI weekly reports, RBI Annual Report, Report on Trend and Progress of
Commercial Banks India., etc. This information is made available to the public
also at cheaper rates.
7. Promotion of Banking Habits: As an apex organization, the RBI always tries
to promote the banking habits in the country. It institutionalizes savings and takes
measures for an expansion of the banking network. It has set up many institutions
such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964,
NABARD-1982, NHB-1988, etc. These organizations develop and promote
banking habits among the people. During economic reforms it has taken many
initiatives for encouraging and promoting banking in India.
8. Promotion of Export through Refinance: The RBI always tries to encourage
the facilities for providing finance for foreign trade especially exports from India.
The Export-Import Bank of India (EXIM Bank India) and the Export Credit
Guarantee Corporation of India (ECGC) are supported by refinancing their
lending for export purpose.
• Supervisory Functions of RBI
 The reserve bank also performs many supervisory functions. It has authority
to regulate and administer the entire banking and financial system. Some of its
supervisory functions are given below.
1. Granting license to banks: The RBI grants license to banks for carrying its
business. License is also given for opening extension counters, new branches,
even to close down existing branches.
2. Bank Inspection: The RBI grants license to banks working as per the
directives and in a prudent manner without undue risk. In addition to this it can
ask for periodical information from banks on various components of assets and
liabilities.
3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced
by the working of a monitory policy. However, RBI has a right to issue directives
to the NBFIs from time to time regarding their functioning. Through periodic
inspection, it can control the NBFIs.
4. Implementation of the Deposit Insurance Scheme: The RBI has set up the
Deposit Insurance Guarantee Corporation in order to protect the deposits of small
depositors. All bank deposits below Rs. One lakh are insured with this
corporation. The RBI work to implement the Deposit Insurance Scheme in case
of a bank failure.
• Reserve Bank of India's Credit Policy
The Reserve Bank of India has a credit policy which aims at pursuing higher
growth with price stability. Higher economic growth means to produce more
quantity of goods and services in different sectors of an economy; Price stability
however does not mean no change in the general price level but to control the
inflation. The credit policy aims at increasing finance for the agriculture and
industrial activities. When credit policy is implemented, the role of other
commercial banks is very important. Commercial banks flow of credit to different
sectors of the economy depends on the actual cost of credit and arability of funds
in the economy.