The following points highlight the top seven functions of the Reserve Bank of India (RBI).
Function # 1. Monopoly of Note Issue:
Like any other central bank, the R.B.I, acts as the sole currency authority of the country. It issues notes of every denomination, except one-rupee notes and all types of coins through the Issue Department of the Bank.
One-rupee notes and all types of coins are issued by the Government of India. In truth, the R.B.I, 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 R.B.I.
Prior to 1956, the principle of note issue of the R.B.I was based on proportional reserve system. This system was replaced, by the minimum reserve system in 1956 under which the R.B.I, 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. Bankers’ Bank:
As bankers’ bank, the R.B.I, 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% and 15%) of their total liabilities with the R.B.I. The main objectives of changing this cash reserve ratio by the R.B.I, is to control credit.
The R.B.I provides financial assistance to commercial banks and State co-operative banks through rediscounting of bills of exchange. As the R.B.I, meets the need of funds of commercial banks, the R.B.I, functions as the ‘lender of the last resort’.
The R.B.I has been empowered by law to supervise, regulate and control the activities of commercial and cooperative banks. The R.B.I periodically inspects banks and asks them for returns and necessary information.
Function # 3. Banker to the Government:
The R.B.I acts as the banker to the Government of India and all State Governments (except Jammu and Kashmir). As such it transacts all banking business of these Governments.
(i) The R.B.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 R.B.I./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 R.B.I, 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 from the R.B.I.
The R.B.I, also acts as the agent of the Government in respect of membership of the IMF and the World Bank.
Furthermore, the R.B.I, 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.
Function # 4. Controller of Credit:
The R.B.I controls the total supply of money and bank credit to sub-serve the country’s interest. The R.B.I, controls credit to ensure price and exchange rate stability. To achieve this the R.B.I, uses both types of credit control instruments—quantitative and qualitative (selective). At present the R.B.I, relies greatly on the selective methods of credit control. (The credit control function is so important that it will be treated separately.)
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. R.B.I has a very important role to play in this area.
The R.B.I 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, foreign assets of the R.B.I, and special drawing’ rights (SDRs). The R.B.I., 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.
Function # 6. Miscellaneous Functions:
The K B.I. collects, and publishes all monetary and banking data regularly in the R.B.I. Bulletin (monthly) and in the Report on Currency and Finance (annually).
Function # 7. Promotional and Developmental Functions:
Apart from all the traditional functions, the R.B.I, performs various activities of promotional and developmental nature. It attempts to mobilise savings for productive purposes. This is done in various ways. For instance, R.B.I, has helped a lot in building the country’s huge financial infrastructure.
This consists of such institutions as the Deposit Insurance Corporation (to safeguard the interests of depositors against bank failure), the National Bank for Agriculture and Rural Development (to meet the needs of farmers and rural people), IFCI, SFCs, IDBI, UTI (to meet the long and medium-term needs of industry), etc. In co-operative credit movement, the R.B.I.’s role is praiseworthy. The movement, initiated by the R.B.I., has resulted in curbing the activities of rural moneylenders to a considerable extent.
Thus, the R.B.I, is not just a typical central bank. It is something more than that. It regulates not only currency and credit but aids the development of the Indian economy by conducting various types of promotional activities.