Role & Function Of Reserve Bank Of India

The Reserve Bank of India was established on April 1, 1935, under the Reserve Bank of India Act 1934. Its first Central office was established in Kolkatta, but after some time it moved to Mumbai in 1937, making it the RBI head office. The Governor of India sits at this office.

This was a private body during that time. But after the independence of India on 15 August 1947, RBI got nationalized by the new Government Structure of India, making it the first national bank. It is also known as the Central Bank of India. The name and function of the central bank vary from country to country.

What is the role of RBI in Indian economy?

RBI is a Central Banking Institution which controls the monetary policy and Indian Rupee of India. It has a direct link with the Government of India for developing strategy all around the country. 

It is an independent apex monetary authority which controls Banks and assists in some major financial services like storing foreign exchange reserves, controlling inflation, making monetary policy report, and so on. The power of RBI falls upon all types of banks in the nation and it also issues major and mandatory guidelines from time to time for the welfare of the financial services in India.

The preamble of Reserve Bank of India

The new preamble of RBI was adopted after the Independence of India. It tells about some basic and major objectives of RBI.

“to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

RBI money

Zonal Offices of RBI

RBI has four zonal offices in the country and they are also called regional representatives. It also has 20 Regional Offices and 11 suboffices all around the country. Each zonal office has five members which are appointed by the Government of India for four years tenure. The Government of India can take advice from central bank directors while appointing them. The 4 zonal offices are located in:

  • Mumbai for Western area
  • Kolkata for Eastern area
  • Chennai for Southern area
  • Delhi for Northern area

Working Structure of Reserve Bank Of India

The main committee of central bank is the central board of directors. The government of India appoints them for a tenure of four years. The chief head of the Reserve Bank Of India is the Governor. Presently, the post of Reserve Bank of India Governor is occupied by the economist Mr. Urjit Patel.

The central board of director has a governor, maximum 4 Deputy Governors, and 4 zonal directors who represent each zone. An Indian Administrative officer can be appointed as Deputy Governor of the Central Bank. 

The structure of Reserve Bank of India also contains two qualified economist and ten other directors from the various fields of central finance ministery of India. Two of the four deputy governors of the central bank are selected by executive directors of the Banks in India. One is selected from the public sector banks and other should be an economist.

Function Of Reserve Bank of India

As described in the preamble of the RBI, its main function is to regulate the issue of notes and keeping the reserves with a view to securing monetary stability in India. Apart from this, the central bank of any country performs many other functions to grow and look after the economy of the country. Below we have listed some major functions of Reserve Bank of India.

A) Issue Of Bank Notes:

All the currency notes circulated in India are issued by the RBI. It has a permanent and the sole right to issue currency notes. But the notes of one rupee are issued by the finance ministery of India. Although the truth is that the RBI issues the one rupee notes on behalf of the Finance Ministery of India. The notes issued by the RBI are under the legal tender throughout India. This means that the notes cannot be challenged by any bank, organization or financial company.

Up to 1956, the procedure of notes issued by the RBI was based on the proportional reserve system. But since 1956, RBI has opted for minimum reserve system by holding the gold worth of amount Rs. 115 Crores against the currency issued. Further 85 crores foreign security amount was added, which made the total to 200 crores. 

B) Banker’s Bank:

The central bank holds the cash reserve of commercial banks and lends them funds for an interval of time. All the banks of India have to maintain some percentage of their total liabilities with the Central Bank. It also gives financial assistance to all the Co-operative banks and Commercial banks. The Central Bank also has an authority to supervise and control the activities of Co-operative and Commercial Banks.

Indian Money

C) Banker to Government:

All transaction and banking needs of the Government are managed by the Reserve Bank Of India. It’s like a bank to the Government. It also maintains the Government’s Deposit accounts. The central bank takes the funds from the government and private organization on the behalf of the Indian Government and utilizes it for the growth of the Indian economy. One of the major function of RBI for the Government is to represent India at the platform of IMF (International Monetary Fund).

4) A controller of the Banking System:

The Central Bank has authority to control the financial system of the Nation. It supervises the Indian Banking system to ensure the financial stability and public confidence in the system. The Reserve Bank Of India executes various audit, surveillance, and scrutiny at a regular interval of time. The co-operative and commercial banks cannot implement their rules and regulations without a verification and supervision from the central bank.

5) Detection of Fake Currency:

Detection of Fake currency is a major challenge for RBI in present time. To curb the fake currency network, RBI has established a website (www.paisaboltanahi.rbi.org.in) to make people aware of fake currency notes circulated in the market. RBI is also responsible for detecting the black money in the market.

Black money is the amount of cash which is stored by the people to avoid tax. To curb the black money holders, Government of India had executed demonetization last year with the help of RBI. They had canceled the circulation of 500 and 1000 currency notes in the market.

6) Regulator of Credits:

The RBI con­trols the total supply of money and bank credit to sub-serve the country’s interests. The RBI con­trols credit to ensure price and exchange rate sta­bility. To achieve this the RBI uses both types of credit control instruments, quantitative and qualitative. At present, it relies greatly on the qualitative method of credit control. The credit control function is so important that it is treated separately.

7) Promotional and Developmental Func­tions:

Apart from all mandatory functions, the Reserve Bank Of India also performs various activities of promotional and developmental type. Its main motive is to enlist savings for productive purpose. It controls not only the currency and credit but also has a prominent role in building the economy of India by performing various promotional and development functions.

8) Financial Supervision:

RBI has a sole authority to initiate a strict supervision of the financial sector, which includes commercial banks, financial institutions, and non-banking finance companies. The board of directors meets every month to discuss inspection reports and other supervisory issues which are detected by the supervisory department.  

An audit Sub-Committee carries out the statutory audit and internal audit functions in banks and financial institutions. This committee includes deputy governor as the chairman and two Directors of the Central Board as members. All of these show the importance of RBI in running this country smoothly. 

Some Popular Banking Terms of RBI

There are a lot of banking related terms which we hear or observe in our day to day life, but we don’t know the exact meaning and definition of the same. As a responsible citizen of India, we should be aware of these terms. Knowing about the banking terms will be beneficial for your business and financial related plans.

Repo RateRepo Rate –

Repo Rate is like an interest rate which is set by the Reserve Bank of India to lend money to the banks for a short-term period. And the short-term period contains the maximum of 90 days. If the repo rate increases, borrowing from RBI becomes more expensive and if the Repo Rate decrease the borrowing becomes cheaper. The RBI brings variations in the Repo Rate according to the economy of the Nation.

Reverse Repo Rate – 

As the name suggests, the Reverse Repo Rate is opposite of the Repo Rate. If the RBI thinks, there is too much money floating in the market then he increases the Reverse Repo Rate and borrowing money from the RBI becomes more expensive. As a result, the banks lend their money back to the RBI instead of giving to the other people and companies.

Bank Rate – 

Bank rate is just another interest rate set by the RBI to lend money to the Banks for the longer term. Currently, the Bank Rate is 6.25%. Its main purpose is not only to control money in the market, but also if a bank fails to keep Statutory Liquidity Ratio (SLR) or Cash Reserve Ratio (CRR), then RBI will impose a penalty and it will be 300 bases above than the Bank Rate.

Open Market Operation – 

Open market operation is the activity of buying and selling of government securities in the open market to control the supply of money in the banking system.

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