1. Monopoly Power of Note Issue:

Like any other central bank, the RBI acts as a sole cur­rency authority of the country, ft issues notes of every denomination except one-rupee note and coins and small coins—through the Issue Department of the Bank.

One-rupee notes and coins and small coins are issued by the Government of India. In actuality, the RBI also issues these coins on behalf of the Gov­ernment of India.

At present, notes of denomi­nations of rupees two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand are issued by the RBI. It not only issues cur­rency but also exchanges or destroys currency and coins not fit for circulation. The objective of currency issue is merely to give the public adequate quantities of currency notes and coins and that too of good quality.

Prior to 1956, the principle of note issue of the RBI was based on the ‘proportional reserve system’. This system was replaced by the ‘minimum reserve system’ in 1956 under which the RBI was required to hold at least Rs. 115 crore worth of gold as backing against the currency issued. The rest (i.e., Rs. 85 crore) should be in foreign securities, so that— together with gold and foreign exchange reserve the minimum value of these assets is kept at Rs. 200 crore.

2. Bankers’ Bank:


As a regulator and su­pervisor of the country’s financial system, the RBI prescribes the broad parameters of bank­ing operations within which the entire bank­ing and financial system operates in the coun­try. The basic objective of this activity of the RBI is to (i) maintain public confidence in the country’s banking system, (ii) protect the interests of depositors, and (iii) provide cost- effective banking services to the public.

As a bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them funds for short periods. All banks are required to maintain a certain percentage (lying between 3 p.c. and 20 p.c.) of their total liabilities. The main objective of changing this cash reserve ratio by the RBI is to control credit.

The RBI provides financial assistance to commercial banks and State cooperative banks through rediscounting of bills of exchange. As the RBI meets the needs of the commercial banks and cooperative banks, the RBI func­tions as the ‘lender of the last resort’.

The RBI has been empowered by law to supervise, regulate and control the activities of commercial and cooperative banks. The RBI periodically inspects banks and asks them for returns and necessary information.

3. Banker to the Government:


The RBI acts as the banker to the Government of India and State Governments (except Jammu and Kash­mir). As such, it transacts all merchant bank­ing functions for these Governments.

The RBI accepts and pays money on behalf of the Government and carries out exchange remittances and other banking operations.

As the Government’s banker, the RBI pro­vides short-term credit to the Government of India. This short-term credit is obtainable through the sale of the treasury bills. Not only this, the RBI also provides ways and means of advances (repayable within 90 days) to State governments. It may be noted that the Cen­tral Government is empowered to borrow any amount it likes from the RBI.

The RBI also acts as the agent of the Gov­ernment in respect of membership of the IMF and the World Bank.


Furthermore, the RBI acts as the adviser of the Government not only on banking and fi­nancial matters but also on a wide range of economic issues (like financing patterns, mobilisation of resources, institutional arrange­ments with regard to banking and credit mat­ters, international finance), etc.

4. Controller of Credit:

As an apex bank of the country, the RBI has been empowered to formulate, implement and monitor its mon­etary policy with the objective of maintaining price stability (both internal and external) and ensuring adequate flow of credit to the pro­ductive sectors.

The RBI controls the total supply of money and bank credit to subserve the country’s in­terest. The RBI controls credit to ensure price and exchange rate stability. To achieve this, the RBI uses all types of credit control instru­ments quantitative, qualitative, and selec­tive. The most extensively used credit instru­ment of the RBI is the bank rate and now repo rate, cash, reserve ratio, etc. The RBI also re­lies on the selective methods of credit control. But, it has fallen into disuse during the reform era.

5. Exchange Management and Control:

One of the essential central banking functions per­formed by the RBI is that of maintaining the external value of rupee. The RBI has the au­thority to enter into foreign exchange trans­actions both on its own account and on be­half of the Government. The official external reserve of the country consists of monetary gold and foreign assets of the Reserve Bank, besides (Special Drawing Rights or) SDR hold­ings.

The Reserve Bank, as the custodian of the country’s foreign exchange reserves, is vested with the duty of managing the invest­ment and utilisation of the reserves in the most advantageous manner. Being a manager of foreign exchange, it manages the Foreign Exchange Management Act, (FEMA) 1999. As a manager of foreign exchange, the RBI helps in facilitating trade (external) and payment and aims at promoting orderly development and maintenance of the foreign exchange market in India.

6. Miscellaneous Functions:

The RBI col­lects, collates and publishes all monetary and banking data regularly in its weekly statements, in the RBI Bulletin (monthly), and in the Report on Currency and Finance (annually).

7. Promotional and Developmental Func­tions:

Apart from these traditional functions, the RBI performs various activities of promo­tional and developmental nature. It attempts to mobilise savings for productive purposes. This is done in various ways. For instance, the RBI has helped a lot in building the huge fi­nancial infrastructure that we see now.

This consists of such institutions as the Deposit In­surance and Guarantee Corporation (DIGC) (to safeguard the interests of depositors against bank failure), the Agriculture Refi­nance and Development Corporation (to meet the needs of agriculturists), IFCI, SFCs, IDBI, UTI (to meet the long and medium-term needs of industry), etc. As for cooperative credit movement, the RBI’s performance is really commendable. This has resulted in curbing the activities of moneylenders in the rural economy.

Thus, it is clear that the RBI is not a typical central bank as is traditionally understood. It is something more than a central bank. It regu­lates not only currency and credit but aids the development of the Indian economy by con­ducting various types of promotional activi­ties. As such, in the RBI we see many activi­ties combined into one.