The following points highlight the seven main functions of the RBI. The functions are: 1. Monopoly of Note Issue 2. Banker’s Bank 3. Banker to the Government 4. Controller of Credit 5. Exchange Management and Control 6. Miscellaneous Functions 7. Promotional and Developmental Functions.
Function # 1. Monopoly of Note Issue:
Like any other central bank, the RBI acts as a sole currency authority of the country. It 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 and five hundred are issued by the RBI.
Prior to 1956, the principle of note issue of the RBI was based on 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 crores worth of gold as backing against the currency issued.
The rest (Rs. 85 crores) should be in foreign securities, so that together with gold and foreign exchange reserve the minimum value of these assets is Rs. 200 crores.
Function # 2. Banker’s Bank:
As 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 per cent and 15 per cent) 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 need of funds of commercial banks, the RBI functions as the Tender 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.
Function # 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 banking business of these Governments.
These are the following:
(i) Accepts and pays money on behalf of the Government.
(ii) It 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 treasury bills. Not only this, the RBI also provides ways and means of advances (repayable with 90- days) to State Government. 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 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, arrangements with regard to banking and credit matters, international finance) etc.
Function # 4. Controller of Credit:
The RBI controls the total supply of money and bank credit to sub serve 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. The RBI also relies greatly on the selective methods of credit control. This function is so important that it requires special treatment.
Function # 5. Exchange Management and Control:
One of the essential central banking functions performed by the Bank is that of maintaining the external value of rupee. The external stability of the currency is closely related to its internal stability the inherent economic strength of the country and the way it conducts its economic and monetary affairs.
Domestic, fiscal and monetary policies have, therefore, an important role in maintaining the external value of the currency. Reserve Bank of India has a very important role to play in this area.
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 reserves of the country consist of monetary gold and foreign assets of the Reserve Bank, besides SDR holdings. The Reserve Bank, as the custodian of the country’s foreign ex- change reserves, is vested with the duty of managing the investment and utilisation of the reserves in the , most advantageous manger.
Function # 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).
Function # 7. Promotional and Developmental Functions:
Apart from these traditional function, 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, RBI has helped a lot in building the huge financial infrastructure that we see now.
‘This consists of such institutions as the Deposit Insurance Corporation (to safeguard the interests of depositors against bank failure), the Agricultural 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 in really commendable. This has resulted in curbing the activities of moneylenders in the rural economy.
Thus, it is clear that 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 RBI we see many activities combined into one.