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Indian Economy / Banking and Insurance

Powers and Functions of RBI

The Reserve Bank of India (RBI) is the Central Bank of our country. The powers and functions of RBI include issuing currency notes, controlling the credit through its monetary policy, custodian of foreign exchange, Banker to the Government, etc. RBI was established on 1st April, 1935 in Kolkata in accordance with the Reserve Bank of India Act, 1934. It was moved permanently to Mumbai in 1937. It has 4 zonal offices and the four RBI zonal offices are located at Mumbai, Delhi, Kolkata and Chennai.

If we consider the RBI structure, it is headed by a Governor, who is being assisted by 4 deputy Governors, below whom there will be Executive Directors and Managers at different levels and then the supporting staff. The tenure of Governor and deputy Governors is 3 years and it can further be extended up to another 2 years after that.

Functions of RBI

The importance of RBI is huge in India as it does many functions. The traditional functions of RBI are

  • Issuing of Currency Notes

    One of the most important functions of Reserve Bank of India is that it has the exclusive right to issue banknotes, which bear the signature of RBI Governor except the one rupee currency note. The one rupee note contains the signature of Finance Secretary and is being issued by the Ministry of Finance.

  • Banker to the Banks

    It is the main non-monetary function of RBI. RBI guides and directs all the commercial banks and Non-Banking Finance Companies in the country. Every commercial bank will have to maintain a part of their reserves in the form liquid cash with the RBI.

    The commercial banks approach the RBI in times of exigency to survive from financial difficulties and the RBI comes to their rescue and hence called Lender of the Last Resort.

    The powers of RBI under Banking Regulation Act, 1949 include inspecting any bank and its books, ask for its accounts, conduct special audit, ask to initiate insolvency procedure for a defaulting bank, etc.

  • Custodian of Foreign Exchange Reserves

    The RBI has the custody of India's foreign exchange reserves and through these RBI reserves, it acts when there is a depreciation in Rupee value and when there exists crisis in balance of payments position. It is one of the important monetary functions of RBI.

  • Banker to the Government

    The RBI handles the banking requirements of the Government of India by operating and maintaining the Government's deposit accounts. It makes payments and receives funds on behalf of the Government. It is represented as Government's agent at the World Bank and the International Monetary Fund (IMF).

  • Controller of Credit

    Credit plays an important role in supply of money, which in turn impacts the economic stability of the country. So, control of credit is an important activity in any Economy.

    Description about the functioning of RBI is not complete if it is not discussed about the role of Reserve Bank of India in control of credit. Credit is controlled by the Reserve Bank of India through its Monetary and Credit Policy in accordance with the economic precedences of the Government. So, the role of RBI in Indian Economy is very important.

RBI Monetary and Credit Policy

  • RBI announces the annual monetary and credit policy every year during the last week of April. It also reviews the implementation of the policy for every two months and revises the rates and ratios like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Repo Rate and Reverse Repo Rate and also initiates suitable measures for sound economic growth and for containing the inflation.

  • The major objectives of the policy are -
    • Ensuring macroeconomic and financial stability
    • Containing inflation for sustaining growth momentum
    • Regulating the credit by taking into consideration of the money supply and inflationary pressure

  • Statutory Liquidity Ratio - Statutory Liquidity Ratio (SLR) is the percentage of time and demand liabilities (deposits) of commercial banks to be maintained in liquid assets like government securities, gold, cash, etc. This should remain with the respective bank. It is an important tool of monetary policy. SLR has become a major instrument for financing the public debt (Government borrowing).

  • Cash Reserve Ratio - Cash Reserve Ratio (CRR) is the cash which the commercial banks keep with the RBI as a percentage of time and demand liabilities. It is a monetary tool to regulate the money supply. The more the CRR value, the less will be the money available for lending.

  • Repo Rate - It is the interest rate at which the central bank infuses the cash into the banking system by lending the money for a short period.

  • Reverse Repo Rate - It is the interest rate at which the central bank absorbs the excess cash from the banking system for a short term. It is less remunerative to park surplus money for banks and thereby encouraging the banking system to lend more to the productive sectors.

Extra Information

  • Non performing Assets - Non performing Assets (NPA) are those accounts of the borrowers who have defaulted in payment of either interest or principal for more than 90 days. With NPAs, the bank's profitability diminishes since the banks will not be able to lend the money.

  • Treasury Bills - As part of the powers and functions of RBI, Treasury Bills are issued by Reserve Bank of India and they are part of the money market. These Bills facilitate the short term borrowing programme to take care of deficit financing by the Government. Currently, they are issued with 91 days, 182 days and 364 days of maturity.