Reserve Bank of India: Its Role and Functions

Reserve Bank of India (RBI) is the central bank of India. It monitors, formulates and implements India’s monetary policy. Established in the year 1935, RBI was nationalized in the year 1949. Owned fully by the Government of India, Reserve Bank has 22 regional offices in various state capitals of India with its headquarters located in Mumbai. It has a majority stake in the State Bank of India.

Functions of the Reserve Bank of India

RBI formulates the monetary policy, thus regulating and supervising the economy of India. RBI is the supreme banking authority in India. It sets the guidelines according to which the banking operations and financial systems within the country functions.

The RBI issues currency notes and coins of various denominations. It destroys and exchanges soiled currencies to ensure that only good ones are in circulation.

RBI is the banker to the Government of India. The Reserve Bank performs merchant banking function for the central and the state governments. Also, all major banks bank with the RBI. The RBI maintains banking accounts of all scheduled banks in India.

As a regulator, RBI monitors the functioning of other banks; it tries to protect depositors’ interests and provides cost-effective banking services to the public. The Banking Ombudsman scheme setup by RBI, addresses the grievances of banks’ customers.

The Reserve Bank of India acts as the bankers’ bank. On the basis of eligible securities the scheduled banks can borrow money from the Reserve Bank of India. At times of need or stringency, by re-discounting bills of exchange, the banks can get financial accommodation from the RBI. Reserve Bank becomes not only the banker’s bank but also the lender of the last resort. In times of banking crisis, the Reserve Bank of India offers credit to the help the commercial banks recover.

RBI controls the monetary policy of India by controlling cash liquidity in the country. Frequent alteration of the values of financial tools like Cash Reserve Ratio (CRR), Repo Rate, Reverse Repo Rate, and Statutory Liquidity Ratio (SLR), restricts the cash flow within the country. As an anti-inflationary measure, RBI limits huge foreign capital inflows to stabilize the Rupee value.

RBI regulates the foreign exchange inflow and outflow, by the Foreign Exchange Management Act, 1999 of RBI. All money transfer out of India is subject to limits defined by the RBI. To maintain the exchange rate of Indian Rupee versus foreign currencies like the US Dollar, Euro, Pound sterling, and Japanese yen, RBI buys and sells foreign currencies.

The Reserve Bank of India has the power to influence the volume of credit created by banks in India, which means that it is the controller of credit. Carrying out open market operations or changing the Bank rate helps RBI to achieve this. Through quantitative and qualitative measures, it controls the credit operations of other banks.

The gold trade is also regulated by the Reserve Bank of India.

RBI has functioned as the backbone of the Indian financial system since its inception. It has given stability to the Indian economy when most of the other developing economies failed. With its prudent approach, RBI steered the economy effectively through the recent financial crisis.

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