• Reserve Bank of India as a central monetary authority of India, like in any other Central Bank of any country, is empowered to guide, monitor, regulate, control and promote the past, present and future of the financial system of the country
• RBI is performing such functions since 1935 after its inception as empowered by the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.
• As a Central Bank of the country, the RBI performs a wide range of functions. Among various functions important are:
• Acts as the currency authority
• Controls money supply and credit
• Manages foreign exchange Serves as a banker to the government
• Builds up and strengthens the country’s financial infrastructure
• Acts as the banker of commercial banks
• Supervises banks.
Reserve Bank of India performs various functions to manage the monetary system of the country. These functions include:
1. Reserve Bank of India under the RBI Act, Section 22 is solely responsible for the issuance of currency notes excluding rupee one note which issued by Finance Secretary of the Government of India. RBI regulates the issuance of the notes in India mainly to bring confudence among people of genuineness, quality and credibility of money issued besidesbringing in uniformity in issuance of notes. Due to single authority there is effective control on ow of credit in and out of the market.
2. RBI acts as banker to commercial banks.
3. RBI conducts banking and financial operations of the Government of India and advises on various financial and economic issues.While handling the Government business, RBI maintains government accounts, advises on monetary matters including financial aspects, besides carrying out Government business as and when required.
4. It provides financial accommodation to cooperative banking sector for financing special sectors of the economy like agriculture etc.
5. Bank performs the function of controller of exchange value of rupee vs. US dollar.
6. As a guide and controller of banking and financial sector, RBI appoints CEOs of Banks and put its members of the Boards of the Bank to ensure proper Governance and sound banking practices.
7. As a developmental function, RBI promotes various specialized institutions. It has promoted IDBI (Industrial Development Bank of India), NABARD (National Bank for Agriculture & Rural Development), Small Industrial Development Bank of India (SIDBI), Deposit Insurance & Credit Guarantee Trust for Small and Medium Enterprises (DI & CGTSME) / Export Credit Guarantee Corporation of India (ECGC) etc.
8. RBI issues monetary policy twice a year to provide guidance to flow of credit and safety measures to the banking and financial sector. It issuesbusy season policy in October every year and slack season policy in May-June. This sets the tone for the money market as well as financial activities.
9. For good governance, RBI resorts to moral suasion on banking and financial sector.
10. It disseminates fiancial data on banking, economy and other aspects of monetary aspects.
11. RBI is sole authority to handle overall monetary and credit policy in the country.
12. To regulate the flow of credit in the economy RBI also resorts to selling and purchasing of short term or even long term securities.
13. RBI provides ‘ways and means’ credit facility to the Government of India and State Governments in order to overcome tight money position between payment and receipt of the client. The period of such ‘ways and means’credit is maximum 90 days (3 months) Such power to lend money to governments is given under section 17 (5) of Reserve Bank of India Act, 1934.
14. RBI also acts as a lender of the last resort, which means meeting the genuine financial requirements of commercial banks.
15. Management of raising of finance by the Government and issuance of new loans/advances on behalf of the Government of India / State Government is handled by the Public Debt Office of the Reserve Bank of India.
16. It regulates the credit flow in the market by using credit control instruments like bank rate, open market operations and power to vary reserve ratios like cash reserve ratio (CRR) and statutory liquidity ratio (SLR). These two ratios are most important tools for maintaining liquidity in the financial system, particularly banking system.
17. Bank Rate, CRR and SLR are some of the quantitative steps that RBI can take from time to time to control flow of money and to control inflation.