Role of RBI

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what is the role of rbi

what is the role of rbi?

The Reserve Bank of India, which serves as the nation’s central bank and regulatory authority for the banking industry, is owned by the Government of India’s Ministry of Finance.

The Reserve Bank of India has been recognized for its significant contribution to development, particularly in the field of agriculture. Additionally, the Bank played a crucial role in establishing important institutions such as the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India (UTI), the Industrial Development Bank of India (IDBI), the National Bank of Agriculture and Rural Development (NABARD), and the Discount and Finance House of India.

Its responsibilities are managing the supply and issuance of Indian rupees, overseeing foreign exchange matters, supervising monetary policy, printing currency, acting as the government’s banking institution, and providing loans to authorized commercial banks.

These efforts help to strengthen the financial infrastructure of the nation and promote institutional development.

Different roles played by RBI are as under:

1. Traditional Role

In its traditional role, the Reserve Bank of India fulfils functions that align with the objectives for which the bank was established. These functions encompass the fundamental responsibilities of a central bank.

2. General banking role

The RBI, although not a commercial bank, performs specific general functions which include:

  1. Accepting Deposits of Central and State Governments: The RBI is authorized to accept deposits from the central and state governments, acting as their banker and facilitating their financial operations.
  2. Lending Money to Central and State Governments: The RBI has the authority to lend funds to the central and state governments to meet their financial requirements, ensuring the smooth functioning of government operations.
  3. Dealing with Bills and Promissory Notes: The RBI engages in the buying and selling of bills and promissory notes, which helps in regulating the money market and managing liquidity in the economy.
  4. Dealing in Agriculture Bills: The RBI is involved in the handling of agriculture bills, providing financial support and stability to the agricultural sector.
  5. Dealing in Foreign Securities: The RBI participates in transactions involving foreign securities, facilitating international financial operations and managing the country’s foreign exchange reserves.
  6. Dealing in Precious Metals: The RBI may engage in transactions related to precious metals, which can include activities such as buying, selling, and holding gold reserves as a part of its asset management strategy.
  7. Dealing with Banks of Other Countries: The RBI maintains relationships and conducts transactions with banks of other countries, facilitating international financial cooperation and promoting global monetary stability.

3. Central banking role

As a central bank, RBI performs different roles which are as follows:

  • Banker to the government

The Reserve Bank of India (RBI) serves as a banker, agent, and financial advisor to the government. As the government’s banker, the RBI manages the government’s accounts. Acting as an agent, it handles the buying and selling of securities on behalf of the government. In its advisory role, the RBI formulates policies to regulate the money market.

Additionally, the central bank provides loans to the government using government securities or treasury bills as collateral. When the government’s expenses exceed its revenue, it often turns to the RBI for loans. This practice by RBI is known as “Deficit Financing through borrowing from the RBI.”

Also Read: Why can’t RBI Print Unlimited Notes?

  • Banker’s Bank

The Reserve Bank of India (RBI) functions as a Bankers’ Bank, establishing a relationship with other banks similar to how a commercial bank interacts with its customers. It accepts deposits from commercial banks and provides them with loans.

The interest rate at which the central bank lends to commercial banks for a short period is referred to as the “Repo Rate.” On the other hand, the rate at which commercial banks can deposit their excess funds with the RBI is known as the “Reverse Repo Rate.” Typically, the Reverse Repo Rate is kept 1% lower than the Repo Rate as a standard practice.

  • Note Issuing Authority

The RBI holds the exclusive authority to issue currency notes, except for one rupee note, which is issued by the Ministry of Finance. It is responsible for issuing currency notes of all denominations. To regulate note issuance, the RBI follows a minimum reserve system. Since 1957, it has maintained reserves of gold and foreign exchange worth Rs. 200 crores, with a requirement of at least Rs. 115 crores in gold.

  • Lender of Last Resort

Occasionally, banks may encounter a crisis of confidence when depositors begin to worry that the bank might deplete its cash reserves. Consequently, they withdraw their deposits over what the bank can handle at that moment. During such circumstances, the central bank plays the role of a lender of last resort. It provides loans to the bank to help them manage the crisis of confidence.

  • Clearing House

The RBI serves as a clearing house, facilitating the convenient settlement of interbank obligations. This system eliminates the need for direct cash transfers between banks, thereby reducing the overall cash requirement.

  • Custodian of Foreign Exchange

We can say that RBI is the custodian of India’s foreign exchange reserve. Additionally, it employs a strategy known as ‘managed floating’ to maintain stability in the exchange rate within the international money market. Managed floating involves the buying and selling of foreign exchange to achieve a stable exchange rate for the domestic currency.

4. Regulatory Role

Regulations are implemented to safeguard the interests of depositors, ensure the organized growth and management of banking operations, and promote the overall well-being and stability of the banking system.

  • Monetary policy/ credit control policy

Monetary policy refers to the strategies employed by a country’s central bank to regulate and manage the supply, cost, and allocation of money and credit.

 The primary goal is to achieve optimal levels of output, employment, price stability, balance of payment equilibrium, or other objectives set by the government. The main objective of monetary regulation is to attain economic growth while maintaining stability.

The RBI implements various measures to control the money supply in the economy, mainly focusing on credit supply by commercial banks. This is why the RBI’s monetary policy is often referred to as a credit control policy, and these measures are known as instruments of monetary policy.

5. Supervisory Role

In its supervisory capacity, the RBI ensures that commercial banks adhere to its directives, specifically concerning Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The RBI has the authority to modify CRR and SLR as necessary. It oversees that commercial banks comply with these changes, aiming to achieve the desired targets.

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6. Developmental Role

This role encompasses enhancing the quality of the banking system in India and ensuring the availability of credit to the productive sectors of the economy.

The RBI undertakes various promotional functions to support national objectives. To aid the development of agriculture, the RBI maintains an Agricultural Credit Department, which researches on agricultural credit-related issues. Additionally, the RBI establishes institutions such as NABARD and IDBI to strengthen the country’s financial infrastructure. The RBI also strives to expand access to affordable financial services and promotes financial education and literacy.

In conclusion,

The Reserve Bank of India (RBI) serves as India’s central bank and regulatory authority for the banking sector. It plays different roles that include managing currency supply, overseeing monetary policy, acting as the government’s banker, and promoting institutional development. From its traditional functions to its regulatory and developmental roles, the RBI plays a crucial part in ensuring financial stability and driving economic growth in India.


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