Reserve Bank of India (RBI) And Its Functions

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 Kolkata 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.

Main Functions

Monetary Authority:

• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability while keeping in mind the objective of growth.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

• Issues, exchanges and destroys currency notes as well as puts into circulation coins minted by Government of India.
• Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role

• Performs a wide range of promotional functions to support national objectives.

Regulator and Supervisor of Payment and Settlement Systems:

• Introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.
• Objective: maintain public confidence in payment and settlement system

Related Functions

• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
• Banker to banks: maintains banking accounts of all scheduled banks.

FAQs on Reserve Bank of India

1. What is the Reserve Bank of India (RBI)?

Ans: The RBI is India’s central bank. It was established in 1935. The bank regulates India’s financial system. It designs monetary policy. Currency issuance is one of its responsibilities. It manages foreign exchange reserves. The RBI acts as a banker to the government as well as the banks.

2. What are the functions of the RBI in relation to the banking sector?

Ans: The RBI oversees the banking sector carefully. It grants licenses to banks. It defines rules for how they operate. The bank keeps a close watch on their performance. The RBI takes steps to correct banks when required. It also works to maintain the stability of the financial system. This is particularly important for protecting the interests of those who deposit their money in banks.

3. What is the primary objective of the RBI’s monetary policy?

Ans: The main goal of the RBI’s monetary policy is price stability. At the same time it seeks to encourage economic growth. Its ambition is to control inflation. The aim is to keep inflation within a designated range. This is calculated using the Consumer Price Index (CPI).

4. What is the composition of the Monetary Policy Committee (MPC)?

Ans: The Monetary Policy Committee comprises six people. These individuals make important decisions about monetary policy. This includes setting interest rates. Three of these members are from the RBI itself. The remaining three members are external (appointed by the Government of India).

5. What is the role of the RBI in regulating non-banking financial institutions (NBFCs)?

Ans: The RBI lays down operational rules for NBFCs (Non-banking Financial Institutions). Its guidelines cover capital adequacy as well as risk management. This central bank also has powers to inspect NBFCs. Furthermore it can supervise them as needed. When considered necessary the RBI can take steps to maintain an NBFC’s integrity. 

RBI and the Economy of India:

After the Central Government of India and the Ministry of Finance, its Reserve Bank of India plays the most crucial role in driving the economy of India. RBI extends its services to the other commercial banks of India and thus these banks provide banking services to the netizens. Also, RBI provides a safe and secure banking infrastructure to people living in India. The RBI tries to keep the repo rate as low as possible to ensure the proper cash flow in the market so that people invest more money in the development works. RBI jointly with the central government of India provides ease in foreign trade so that it attracts more FDI (Foreign Direct Investment).

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