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Roles and Responsibilities of RBI

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The Reserve Bank of India is the Central Bank of India and the regulator of India’s Banking System. It helps the government in its role as a business facilitator. It serves as the leader of the banking system and the money market. It regulates the money supply and credit in the country. The RBI carries out India’s monetary policy and exercises supervision and control over banks and non-banking finance companies in India. 

Background

The Reserve Bank of India was established in 1935 under the provisions of the Reserve Bank of India Act, 1934 in Calcutta to respond to economic troubles after the First World War. It eventually moved permanently to Mumbai. Though originally privately owned, was nationalized on January 1, 1949.

The general superintendence and direction of the RBI are entrusted with the 21-member central board of directors: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors to represent important rudiments of India’s economy; and four directors to represent local boards headquartered at Bombay, Calcutta, Madras, and New Delhi. Each of these local boards consists of five members who represent regional interests, the interests of co-operative and indigenous banks.

Major Functions and Roles of RBI

The RBI performs a plethora of functions for the smooth functioning of the Indian economy and to regulate the banking system in the country. The various functions of the RBI can be divided into traditional, promotional/developmental, and supervisory functions.

Traditional Functions

These are the fundamental functions associated with every central bank in a country.

  1. Issue of Notes – The RBI is the only authorized body that can issue currency in the country. So they have a monopoly to print, distribute, and regulate the flow of currency in the economy. The RBI follows the system of the Minimum Reserve System during issuing currency.  Under the Minimum Reserve System, the RBI has to keep a minimum reserve of Rs 200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the total Rs 200 crores, Rs 115 crore should be in the form of gold coins or gold bullion and rest in the form of foreign currencies.
  2. It acts as the Banker’s Bank – Reserve Bank of India also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks. It provides financial assistance to these banks like short-term loans and advances. The RBI also will dictate interest rates and the CRR limits to the commercial banks, thus controlling the credit in the country. It also acts as the lender of the last resort by providing emergency advances to the banks.
  3. It acts as the Banker to the Government – It doubles as the Banker, Agent, and Adviser to the Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government. It can also make advances and provide loans to the government whenever necessary.
  4. It acts as the Custodian of Foreign Reserves – The Reserve Bank buys and sells foreign currencies and also protects the country’s foreign exchange funds. This is done to stabilize the foreign exchange rate. RBI also manages forex under the Foreign Exchange Management Act, 1999 (FEMA). Thus, it facilitates external trade and payment and promotes the development of the foreign exchange market in India. Therefore it acts as the custodian of foreign exchange reserves in the country. 
  5. It acts as the controller of credit – RBI tries to maintain price stability in the country which is essential for economic development. To do so, it implements the Monetary Policy of India. Monetary Policy refers to the process employed by RBI to control availability & cost of currency and thus keeping Inflationary & deflationary trends low and stable. RBI adopts various measures to regulate the flow of credit in the country. The measures can be categorized into – Quantitative (Cash Reserve Ratio, Statutory Liquidity Ratio, Bank Rate, Repo Rate, Reverse Repo Rate, and Open Market Operation), and Qualitative (Loan to Value or Margin Requirements, Selective credit control, and Moral Suasion).

Promotional/Developmental Functions

These include developmental functions to promote the financial system of the country that might include certain non-monetary functions as well.

  1. Development of the financial system – RBI promotes the development of financial systems in the country. The Reserve Bank encourages the growth of financial institutions, instruments, and markets. It boosts all the banking and non-banking financial institutions to maintain a sound and healthy financial system.
  2. Promotion and the Expansion of the Banking System – The RBI has worked tirelessly to promote banking habits amongst various strata of society. It has also encouraged the territorial and functional expansion of the banking system in the country. Various institutions like Deposit and Insurance Corporation (1962), the Industrial Development Bank of India (1964), the Unit Trust of India (1964), the Investment Corporation of India (1972), the NABARD in 1982, and National Housing Bank (1988) have been set up for the same.
  3. Supports various sectors in the country – RBI supports various sectors including industry, agriculture and cooperative sectors, and has taken several initiatives for their promotion. It supports small scale industries by ensuring increased credit supply. It has also set up various industrial finance institutions like ICICI Limited, IDBI, and SIDBI. It has also provided financial facilities to the agricultural sector through NABARD and regional rural banks. The former provides short term and long term credit facilities to the agricultural sector. The RBI has also been involved in extending indirect finance to the state cooperative banks.
  4. Promotes export through refinance facility – RBI refinances the export credit given by the banks to the exporters. It takes quarterly reports of the financing from the banks and refinances them for this, so this way banks can give export incentives to the exporter. It is mainly done through the Export Credit and Guarantee Corporation (ECGC) and the EXIM Bank. ECGC provides insurance on export receivables whereas EXIM banks provide long-term finance to project exporters

Supervisory Functions

  1. These include non-monetary functions for the supervision of banks and the promotion of a sound banking system in the country. 
  2. Granting of License – RBI has the grower to grant licenses to banks to carry of their business. Thus, RBI has the authority to provide a license for the opening of new branches, opening extension counters, and also for closing down existing branches. This is mainly done to prevent any needless competition between various banks in a region.
  3. Inspection and Enquiry of Banks – The Banking Regulation Act 1949 and the RBI Act of 1934 empowers Reserve Bank to inspect and enquire banks in various matters. It can inspect loans and advances, deposits, and investment functions to ensure that financial institutions and banks carry out their operations in a proper and fair manner. It also does a periodical inspection once or twice a year and keeps a check on the assets and liabilities of the banks. It takes necessary steps to increase the efficiency of the commercial banks, and for the implementation of policy changes and schemes for the improvement of the banking system.
  4. Implements Deposit Insurance Scheme – RBI has implemented the deposit Insurance Scheme to ensure the protection of deposits of small depositors. All types of bank deposits including savings, fixed, and recurring with commercial banks and cooperative banks are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC). The deposit insurance coverage cap is now at 5 lakhs.

Thus, the Reserve Bank of India plays a multi-faceted role by executing multiple functions to meet the challenge of an increasingly complex economy. India is one of the fastest-growing economies in the world and the importance played by RBI in its growth is of crucial importance.

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Giri Aravind

Student, National University of Advanced Legal Studies

Giri is a huge finance buff. An enthusiast of IP, corporate law, he is a writer by day and a reader by night.  For any Clarifications, feedback, and suggestion, you can reach him at giriaravindonline@gmail.com

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