Role / Dimensions of the Central Bank of the Country
The Reserve Bank of India is the Central and apex banking institution in India.
It is a state-owned organization that functions as a corporate body with special powers and obligations for serving the national interest.
Reserve Bank of India Act, 1934 : governs the Reserve Bank functions
Banking Regulation Act, 1949: governs the financial sector
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Preamble of RBI
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
Functions and Responsibilities of RBI
To issue and manage currency
To serve as a banker to the government
To act as bankers’ bank
To supervise and control commercial and cooperative banks and other financial institutions.
To promote the development and healthy functioning of financial institutions and markets.
To manage the rupee exchange rate and foreign exchange reserves, and
To regulate or control money and credit
Objectives – w.r.t Monetary policy of the RBI
Controlled expansion of bank credit
Promotion of fixed investment
Restriction of inventories
Promotion of exports and food procurement operations
Equitable distribution of credit
Techniques followed at RBI
The RBI has all the traditional techniques
Open Market Operations,
Selective and Quantitative Credit Control
Over the years, the use of many techniques, such as OMO, Bank Rate, SLR has been influenced by consideration of debt management and government finance
Distribution and regulation have been the key concepts underlying the RBI’s monetary management Policy.
Special issues related to RBI
During the post 1991 period, the RBI has promoted greater market orientation in the financial system and it has moved out of micro regulation.
The Bank rate and other interest rates are being emphasized now as the potential instruments of monetary policy in India.
The RBI has still a long way to go before it can be called an autonomous Central Bank; the signing of agreements between the Bank and the GOI is only a beginning in the process of attaining autonomy.
The RBI stance on the CRR technique is not “convincing”; it is neither desirable nor possible to discard or deactivate this technique in India.
Banks have a special place in the Indian Financial system, and it is not in the interest of the effectiveness of monetary policy to allow their role to be undermined.
It cannot be stated with certainty that the demand for money function in India is stable. The relevance of money supply as the target of monetary policy, therefore, should not be overemphasized.
The need for sterilizing the higher level of foreign capital flows and the need to contain volatility have determined the goals, targets, and techniques of monetary policy in India after 1991.
The reforms in credit regulation have shifted to “ micro regulation” to macro-management”.
The monetary authorities have adopted a modified “inflation targeting” in India ie they have adopted a “middle ground” approach in which they try to ensure easy availability of credit for industrial revival, while keeping a constant vigil over the price level.
The old multiple indicators and multiple-instruments monetary policy has continued in late 1990s and after 2000, the operating procedure of monetary policy now comprises OMOs, LAF, Bank Rate, Repo Rate and CRR.
The introduction of LAF has been one of the most important innovations in the Indian money market as a technique of monetary policy in t and after the year 2000.
The LAF technique has been actively used since its introduction; the repo and reverse repo rides have been frequently changed over a wide range and the amount of liquidity absorbed through it has been large.