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Functions of RBI

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. The functions of RBI are as follows-
Controls Monetary Policy- RBI executes Monetary Policy for Indian Economy. The RBI formulates, implements and monitors the monetary policy. The Monetary Policy Committee (MPC) is entrusted with the task of fixing the benchmark policy interest rate (repo rate) for inflation targeting. The main objectives of monitoring monetary policy are:
• Maintaining price stability while keeping in mind the objective of growth
• Inflation control (containing inflation at 4%, with a standard deviation of 2%)
• Control on bank credit
• Interest rate control
There are two types of instrument which are used to control the monetary policy. The first instruments are called direct instruments which include cash reserve ratio and liquidity ratio. The others are called indirect instruments which include liquidity adjustment ratio, repo rate, reverse repo rate, bank rates, open market operations etc.
Issuer of currency- Management of currency is one of the core and central banking functions of the Reserve Bank. RBI issues and exchanges currency as well as destroys currency & coins not fit for circulation to ensure that the public has an adequate quantity of supplies of currency notes and in good quality. Along with the Government of India, the Reserve Bank is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes.
Banker to Government- As banker to the government the Reserve Bank manages the banking needs of the government. It has to-maintain and operate the government’s deposit accounts. It collects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank.
Banker to Banks- An important role and function of RBI is to maintain the banking accounts of all scheduled banks and acts as the banker of last resort. The Reserve Bank opens current accounts of banks with itself, enabling these banks to maintain cash reserves. The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks. The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
Regulator and supervisor of the financial system- RBI lays out parameters of banking operations within which the country’s banking and financial system functions for- A) maintaining public confidence in the system, B) protecting depositors’ interest ; C) providing cost-effective banking services to the general public. The objective of this function is to protect the interest of depositors through an effective prudential regulatory framework for orderly development and conduct of banking operations, and to maintain overall financial stability through various policy measures.
Foreign Exchange Management- The Reserve Bank oversees the foreign exchange market in India. It supervises and regulates it through the provisions of the Foreign Exchange Management Act, 1999. This Act empowered the Reserve Bank, and in certain cases the Central Government, to control and regulate dealings in foreign exchange payments outside India, export and import of currency notes and bullion, transfer of securities between residents and non-residents, acquisition of foreign securities, and acquisition of immovable property in and outside India, among other transactions.
Developmental Role- The Reserve Bank is one of the few central banks that has taken an active and direct role in supporting developmental activities in their country. The Reserve Bank’s developmental role includes ensuring credit to productive sectors of the economy, creating institutions to build financial infrastructure, and expanding access to affordable financial services.
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