Functions of the Reserve Bank of India (RBI)
RBI performs the following vital functions:
Issue of currency
The RBI has the sole authority to issue currency in India. However, it does not include small value currency like one rupee coins and notes.
Banker to the Government
As a banker to the Government, it performs the following functions.
- General banking: It accepts money and makes payment on the behalf of Central and State Governments and also carries out other banking operations.
- Manages public debt: It is responsible for the issue of new loans and advises the government on the quantum, timing and terms of new loans.
- Treasury bills: In order to control excessive liquidity in the economy, it sells treasury bills on behalf of the Central Government.
- Granting advances: It grants advances which are repayable within 90 days to the Central and State Governments.
- Advisor to the Government: It advises on matters relating to banking, finance and economic planning and resource mobilisation.
- The RBI controls and supervises the commercial banking system under the RBI Act, 1934 and Banking Regulation Act, 1949
- All scheduled banks have to maintain a certain minimum of Cash Reserve Ratio (CRR) with the RBI
- RBI provides financial assistance in the form of discounting eligible bills and loans and advances against approved securities to scheduled banks and state cooperative banks
- The RBI conducts inspection of the commercial banks and calls for necessary information from banks
Custodian of foreign exchange reserves
- RBI has the right to enter into foreign exchange transactions for its own account and on the account of the Government
- RBI borrows from IMF if the foreign exchange reserves are inadequate for meeting Balance of Payments problem (BOP)
- RBI enforces the provisions of Foreign Exchange Management Act (FEMA) there by administers exchange control of the country
- It maintains the external value of the rupee
Controller of credit
- It is the responsibility of the RBI to maintain stability in the prices as well as in overall economic performance. It is through controlling the supply of credit and cost of credit (rate of interest on it)
- To control inflation in the economy, the RBI tries to restrict the supply of credit by raising the bank rate and using other weapons of credit control
- To control deflation, it tries to expand credit by lowering the bank rate and CRR and also by buying securities in the open market
- It promotes the habit of banking and saving amongst people
- It promotes mobilization of savings throughout India
- It excludes the system of banking just territorially and functionally
- It promotes development by providing finance to agriculture, trade and small scale industries. However, this function has now been handed over to NABARD, EXIM bank and SIDBI respectively
Collection and publication of data
The RBI has to collect and compile statistical data relating to banking and other financial sectors of the economy.