Explain the functions of the central bank of India?
Published: 04th March 2011
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Functions of Reserve Bank Of India
*Introduction
~ 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 country’s monetary & banking structure.
~ The RBI supervise & controls the banking & monetary system that includes the commercial & co-operative banks in the country.
*Functions:
~ The RBI carries out two main functions:
1) Monetary functions.
2) Non monetary functions.
1] MONETARY FUNCTIONS OF THE RBI
!) 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.
!!!) Banker’s 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.
2) NON – MONETARY FUNCTIONS OF THE RBI
!)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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