Explain the functions of the central bank of India?

Published: 04th March 2011
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Functions of Reserve Bank Of India


~ The Reserve Bank Of India Act, 1934 gave rise to the establishment of the Reserve Bank Of India on April 1, 1935

~ It was nationalised in 1949 when it became the central bank of India.

~ It enjoys the apex position in the countryís monetary & banking structure.

~ The RBI supervise & controls the banking & monetary system that includes the commercial & co-operative banks in the country.


~ The RBI carries out two main functions:

1) Monetary functions.

2) Non monetary functions.


!) Issue of Currency Notes

~ The Government of India has authorized the RBI to enjoy a monopoly over note issue.

~ Thus the RBI issues notes of all denomination except the One rupee note (which is no longer in circulation) that is directly issued by the Government.

~ Every note issued is backed by an asset of equal value.

~ The assets can be in the form of gold, foreign currencies & securities.

!!)Banker to the Government:

~ The RBI acts as the banker to the Government by performing the following functions:

^ Transacting all the banking business of the Central Government & the State Governments.

^ Transacting purchase/sale of foreign currencies for the Government.

^ Granting temporary & extra-ordinary (during emergencies) advances to the Government.

~ The RBI also act as the agent of the government by performing following functions:

^ Managing public debt

^ Issuing new notes

^ Maintaining exchange rate stability

^ Maintaining relations with other financial institutions (international) like World Bank, IMF, Asian Development Bank, etc.

~ Moreover, it is also an advisor to the Government as it advises the Government regarding:

^Provision of loans.

^ Preparation of financial budgets.

^ Framing financial schemes.

^Resource mobilization.

^Measures to control inflation.

!!!) Bankerís Bank: The RBI acts as a banker to all the other banks in the country as it performs the following functions:

~ Lender of the last resort:

^ RBI solves the liquidity crisis of commercial banks by providing funds.

^ These funds are usually arranged by rediscounting the bills of commercial banks.

~Custodian of Cash Reserve:

^ Commercial banks must maintain a CRR with the RBI.

^ These reserves can be used by the banks during liquidity crisis.

^ CRR also helps to increase/decrease the money supply in the country.

~ Clearing House

^The RBI is a clearing house of all commercial banks.

^ It helps clearing interbank transactions.

!v) Controller of Credit

~ The RBI controls the credit in the economy by regulating the volume of credit & money supply in the country.

~ Various quantitative & qualitative measures are applied to regulate credit & money supply.

~ Quantitative measures include:

^ Increasing/decreasing bank rate

^ Increasing/decreasing CRR & SLR.

^ Increasing/decreasing Repo rate & Reverse Repo rate.

^ Open market operations.

~ Qualitative Measures include:

^ Issuing directives to banks.

^ Ceiling on level of credit.

^ Margin requirements, etc.

V) Custodian of Foreign Exchange Reserve:

~ Foreign Exchange Reserves can be maintained in the form of gold, foreign currency & special drawing rights

~ A higher level of Foreign Exchange Reserves is an indicator of a sound Balance of Payments position and is instrumental in maintaining exchange rate stability.


!)Supervision of Banks:

~ The RBI controls and supervises the working of all commercial bank in the country.

!!)Promotional and Developmental Functions:

~ The RBI promotes and develops various sectors through different institutions.

~ These include setting up of NABARD [National Bank for Agricultural and Rural Development] and the EXIM[Export-Import] Bank of India.

!!!) Data Collection and Publication:

~ The RBI collects various data on economic matters and publishes them in various forms.

~ Such information is useful to business firms and other organisations.

!v) Research:

~The RBI conducts research in banking and economic matters.

~It is useful to Government authorities to frame various macro-economic policies.

v) Clearances:

~The RBI gives clearance to various projects involving financial matters.

~It includes clearing joint ventures abroad and investing proposals in foreign countries.

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