Reserve Bank of India and its functions

1. Reserve
Bank of
India

2. What is RBI?
RBI is an institution of national importance and the pillar of the surging Indian
economy. It is a member of the International Monetary Fund (IMF).
•The concept of Reserve Bank of India was based on the strategies formulated by Dr.
Ambedkar in his book named “The Problem of the Rupee – Its origin and its
solution”.
•This central banking institution was established based on the suggestions of the
“Royal Commission on Indian Currency & Finance” in 1926. This commission was
also known as Hilton Young Commission.

3. •In 1949, the Reserve Bank of India was nationalized and became a member bank
of the Asian Clearing Union.
•RBI regulates the credit and currency system in India.
•The chief objectives of the RBI are to sustain the confidence of the public in the
system, protect the interests of the depositors, and offer cost-effective banking
services like cooperative banking and commercial banking to the people.

4. Functions of RBI
Monetary Management/Authority
One of the most important functions of RBI is the
formulation and execution of Monetary Policy and
securing monetary stability in India It functions the
currency and credit system to its advantage.

5. Supervision and Regulation of Banking
and Non-Banking Financial Institutions
RBI functions to protect the Interest of depositors
through an effective regulatory framework.
Keeping a keen eye over the conduct of banking
operations and solvency of the banks along with
maintaining the overall financial stability through
various policy measures.

6. Regulation of Foreign Exchange Market, Government Securities
Market, and Money Market
Foreign Exchange Market:
The Foreign Exchange Management Act 1999 came into light after the liberalization measures
introduced in 1991. FEMA 1991 replaced the FERA 1973 and came into effect in June 2022.
So now, the RBI is responsible to oversee the foreign exchange market in India. RBI supervises
and regulates the Foreign Exchange Market through the provision of the FEMA Act 1999.
Government Securities Market:
RBI regulates the trade securities issued by the Central and State governments. For regulation of
this, RBI derives its power from the RBI Act of 1934.
Money Market: Short-term and highly liquid debt securities are also regulated by RBI and for
this RBI derives its powers from the RBI Act 1934.

7. Foreign Exchange Reserve Management
Foreign exchange reserve includes-
•Foreign Currency Assets (FRAs)
•Special Drawing Rights (SDRs)
•Gold
RBI is the custodian of India’s foreign exchange
reserves. The legal provision regarding the
management of foreign exchange reserves is
mentioned in RBI Act 1934.

8. Bankers to Central and State Government
RBI acts as a banker to the government. RBI is the responsible
agency for receiving and paying money on behalf of the various
government departments.
RBI is also authorized to appoint other banks to act as its agent
and undertake banking business on the behalf of the government.
RBI maintains Central and State Government funds like
Consolidated Funds, Contingency Funds, and Public Account.
RBI also provides loans to the central/State/UT Government as a
banker to the government.

9. Advisor to the Government
RBI acts as an advisor to the government when called
upon to do so on financial and banking-related
matters.
Central and State Government’s Debt Manager
The debt management policy mainly aims at
minimizing the cost of borrowing and smoothening the
maturity structure of debt. RBI manages the public
debt and also issue new loans on behalf of central and
state government.

10. Banker to Banks
Banks open their current account with RBI to
maintain SLR and CRR.
RBI is a common banker for the different banks that
enables the settlement of interbank transfers of funds.
For special purposes or in need, RBI provides short-
term loans and advances to banks

11. RBI- Lender of last resort
That means RBI comes to rescue the banks that
are solvent (facing temporary liquid problems)
but have not gone bankrupt. RBI provides this
facility to protect the interest of depositors and
to prevent the possible failure of the bank.

12. RBI- Issuer of Currency
The RBI and the government are in charge of the
creation, manufacturing, and overall administration
of the national currency with the aim of releasing a
sufficient quantity of authentic and clean notes.
The Reserve Bank of India has given some bank
branches permission to set up currency chests in
order to simplify the circulation of rupee notes and
coins around the nation (A currency chest is a
storehouse where currency notes and rupee coins are
stocked on behalf of RBI)

13. Developmental Role
RBI’s developmental role includes creating
institutions to build financial infrastructure,
ensuring credit to the productive sector of the
economy, and expanding access to affordable
financial systems.