A central bank, sometimes known as a monetary authority or a reserve bank, is
an organisation that regulates the production of currency in an economy, as well
as the interest rate and exchange rates. Furthermore, central banks also
regulate their own country's corporate banking sector. Central banks include the
European Central Bank (ECB) and the Federal Reserve Bank of the United States.
Reserve Bank of India is the Central Bank of our country. It is empowered with
the regulation and production of our currenecy.
The Reserve Bank of India (RBI) was formed on April 1, 1935, during the British
Raj, in accordance with the criteria of the Reserve Bank of India Act, 1934.
Following India's independence in 1947, the RBI was nationalised in 1949.
The RBI is an important aspect of the Government of India's development agenda.
It is a bank that is a member of the Asian Clearing Union.
The RBI's general supervision and direction is delegated to the 21-member
Central Board of Directors.
Traditional Functions Of RBI:
Traditional functions are those that any central bank would have to do out.
These tasks are essentially in line with the goals for which the RBI was
They include the following responsibilities:
- Currency Notes:
Except for one rupee note and coins of smaller denominations,
the RBI has the absolute rights, autonomy, or monopoly of issuing currency
notes. The RBI issues legal tender currency notes in denominations of Rs. 2, 5,
10, 20, 50, 100, 500, and 1,000. The RBI has controls in place to issue and
withdraw money notes, as well as trade them between divisions. It issues these
notes in exchange for gold bullion, foreign securities, rupee coins, trade bills
and promissory notes, and Legislative Assembly of India bonds.
- Banker to other banks:
The RBI, as the apex institution, is obligated to
guide, assist, and direct other banks and financial institutions in the economy.
The RBI can control the amount of money that a bank holds and allow different
banks to make credit to that extent. Each bank is required to keep a portion of
its reserves with the RBI. As a result, when these banks are in desperate need
of funds, they approach the RBI. Along these lines, it is referred to as a
lender of last resort.
- Banker to the Government:
For both the central and state governments, the
RBI functions as an agent. It carries out a variety of banking functions, such
as authorizing to receive payments from the government for taxes, payments, and
deposits. It also represents the government on an international market. It is in
charge of managing government finances and giving the government financial
recommendations. Additionally, it maintains foreign currency reserves on behalf
of the government and handles its public obligations. The overdraft facility is
available to the government in times of financial difficulty.
- Exchange rate management is a critical function of the Reserve Bank of
India. To keep the rupee's external value stable, domestic policies must be
prepared in this direction. It must also develop and implement a foreign
exchange rate policy that contributes to exchange rate stability. To
accomplish this, the RBI must bring foreign currency demand and supply
- Credit Control Function:
The country's commercial banks make credit decisions
based on economic demand. However, if this credit creation is not checked or
regulated properly, the economy may enter an inflationary cycle. On the other
hand, if credit creation falls below the required level, the economy's growth suffers.The RBI, thus, must aim for growth that has stable prices & controls the
credit creation capacity of other commercial banks with the help of numerous
credit control tools.
- Supervisory Function:
The RBI has been given significant powers to oversee
the country's financial industry. It has the authority to provide licences for
the establishment of new banks, to create new branches, to determine minimum
reserves, to examine the operations of commercial banks in India and overseas,
and to advise and steer commercial banks in India. It may be subjected to
frequent inspections and audits by various commercial banks.
Developmental / Promotional Functions Of RBI:
In addition to its conventional tasks, the RBI is required to execute a number
of other functions that are nation specific and vary depending on the needs of
the economy. Since its inception, the RBI has fulfilled its role as a promoter
of the financial system.
The RBI's key development functions are as follows:
- Financial System Development:
Financial institutions, financial markets, and financial goods make up the
financial system. The fast expansion of the economy requires a sound and
efficient monetary system. In order to fulfil the credit
requirements of diverse economic sectors, the RBI has promoted the formation of
significant banking and non-banking enterprises.
- Agriculture Development:
Because India is an agrarian country, the RBI must
pay special attention to the credit needs of agriculture and allied activities.
By expanding the flow of credit, the RBI has been successful in meeting the
demands of the agricultural sector. Some of the RBI's efforts in this direction
include Regional Rural Banks (RRBs), Agriculture Refinance & Development
Corporation (ARDC), and the National Bank for Agriculture & Rural Development (NABARD).
- Industrial Finance:
Rapid industrial expansion is the key to accelerating
economic development. For this, the RBI has provided enough and timely credit to
small, medium, and big industries, and has always contributed to the
establishment of specific financial institutions such as ICICI Ltd., IDBI, SIDBI,
and EXIM BANK.
- Training Provisions:
The RBI has always attempted to offer critical training
to banking industry personnel. It has created bankers' training institutes
around the country, including the National Institute of Bank Management, Bankers
Staff College, College of Agriculture Banking, and others.
- Data Collection:
As the premier financial institution, the RBI must gather,
process, and distribute statistics data on a wide range of issues. These contain
information on interest rates, inflation, and savings and investments. These
statistics are valuable to policymakers and scholars.
- Report Publication:
The RBI has a separate publication section that collects
and publishes data on many sectors of the economy. These reports and bulletins
are issued on a regular basis. This material is also available to the general
public at a lower cost.
- Promotion of Banking Habits:
The RBI is continually working to improve the
nation's banking habits. It institutionalizes deposits and works to grow the
banking network. It established various organizations, including as the Deposit
Insurance Corporation in 1962, UTI in 1964, IDBI in 1964, NABARD in 1982, and
NHB in 1988, to develop and encourage banking practices in the economy.
- Export Promotion via Refinance:
The RBI aims to stimulate the provision of
facilities for providing credit for overseas commerce, particularly exports from
India. EXIM Bank India and the Export Credit Guarantee Corporation of India (ECGC)
are aided by refinancing their export lending.
Supervisory Functions Of RBI
The RBI also performs many supervisory functions. It has authority to control &
manage the entire banking & financial system.
Some of its supervisory functions
are given below:
- Bank licences:
The RBI issues licences to banks in order for them to conduct
business. Licenses are also granted for the establishment of expansion counters
or new branches, as well as the closure of any existing branches.
- Bank Inspection:
The RBI grants permission to banks to fill in according to
directives in a reasonable and risk-free manner. Regardless, it may request
periodic data from banks on various asset and liability categories.
- Non-Bank Financial Institutions (NBIFs):
NBIFs are unaffected by the
operation of monetary policy. However, the RBI has the authority to give orders
to NBFIs about their operations on a regular basis. It can control the NBFIs by
- Implementing the Deposit Insurance Scheme:
The Reserve Bank of India
established the Deposit Insurance Guarantee Corporation to cover the deposits of
small depositors.The RBI also works to implement the Deposit Insurance Scheme in
case of a bank failure.
Tools Of The Central Bank
The RBI loans to financial institutions against recognised securities through
its discounting window to assist banks in meeting long-term depositor demands
and margin requirements. The interest rate charged by the RBI to banks for this
reason is known as the bank rate. If the RBI wishes to expand market liquidity
and supply of money, it will lower the bank rate; if the RBI wants to decrease
market liquidity and money supply, it will raise the bank rate.
As the RBI
conveys its attitude through changes in repo rates, the Bank Rate has lost its
significance as a monetary policy instrument (the rate at which banks borrow
short-term funds. Bank rate is now utilised as a penalty rate that banks must
pay for failing to satisfy the statutory Cash Reserve Ratio (CRR).
Cash Reserve Ratio - Reserve Requirement (CRR)
Every commercial bank in the country must keep a minimum cash reserve with the
RBI. The CRR for designated banks ranges from 5% to 25%, as recommended by the
RBI to ensure the economy's monetary stability. The CRR is used to increase or
decrease the money supply. When the CRR rises, banks are required to keep a
considerable portion of their deposits with the RBI. This reduces the amount of
their deposits and causes them to lend less. As a result, the money supply will
Statutory Liquidity Ratio (SLR)
Along with CRR, banks must retain a specific level of liquid assets with the RBI
in the form of gold, cash, and authorised securities. A high liquidity ratio
encourages banks to keep a large amount of their reserves liquid, reducing their
ability to provide loans and advances. This has a deflationary effect. A greater
SLR would direct bank funds away from loans and advances and toward investments
in government and authorised securities.
In well-developed financial systems, central banks use open market operations (OMO),
or the purchasing and sale of government securities in the financial markets by
the central bank, to sway the amount of cash reserves with banking industry, and
thus the volume of lending activities they can make to the industrial and
service sectors. These are exchanged in the open money market at economy
Repo Rate And Reverse Repo Rate
The interest rate at which the RBI lends to commercial banks in return for
government assets is known as the repo rate. Banks can receive a payment at a
lesser cost when the repo rate falls, but banks are deterred from doing so when
the repo rate rises since it becomes more burdensome. The interest rate at which
the RBI borrows money from commercial bank is known as the reverse repo rate.
Banks' cost of borrowing and lending increases in response to an increase in the
reverse repo rate. As a result, people are discouraged from borrowing money and
are encouraged to deposit it instead. Low inflation is the outcome of reduced
credit demand and availability due to high interest rates.
What Is Open Market Operation (OMO)?
OMO refers to the purchasing and selling of government securities by the Reserve
Bank of India in order to control market liquidity and potentially boost govt
It is one of the primary instruments of monetary policy via which the RBI
injects liquidity into the market and can be used to sterilise capital movements
(managing excess inflow of capital). Liquidity Adjustment Facility (LAF) to
control liquidity and Market Stabilization Scheme (MSS) to manage long-term
surplus liquidity are effective mechanisms for OMOs. The LAF system is made up
of two rates: repo and reverse repo. The repo rate is used to inject liquidity
on a daily basis, while the reverse repo rate is used to absorb securities on a
The bills are dated securities that are acquired and traded in OMOs. Because of
the liquidity crisis, the RBI is now acquiring bonds from the market.
OMO In India
Prior to the 1991 financial reforms, the RBI's primary instruments for
controlling the money supply and interest rates in the market were the CRR and
SLR. However, these characteristics quickly lost their significance, and the
application of OMO increased enormously since these are judged comparable
successful in correcting market liquidity.
In India, the Reserve Bank of India executes OMO in two ways:
- Outright Purchase (PEMO):
Through PEMO, the RBI purchases and sells securities in order to increase or
contract the money supply over time.
- Repurchase Agreement (REPO):
The RBI uses REPO to buy and sell securities
with the option to repurchase them.
Established in 1935, RBI is India's central banking organisation and manages the
country's monetary policy. The traditional duties of the RBI include currency
issuance, financing to banks and the government, managing exchange rates,
regulating credit, and performing supervisory duties.
Development of the
Financial System, Development of Agriculture, Provision of Industrial Finance,
Provision of Training, Collection of Data and Publication of Reports, Promotion
of Banking Habits, and Promotion of Export via Refinance are the development and
promotion tasks of the RBI. The RBI's supervisory duties include: issuing licences to banks, conducting bank inspections, exercising control over
non-banking financial institutions, and putting the Deposit Insurance Scheme
into effect. The rate at which the RBI loans to commercial banks is known as the
Every commercial bank is required by the RBI to maintain CRR, which
stands for Cash Reserve Ratio. SLR is the minimal level of liquid assets that
banks are required to keep, such as gold, cash, and authorized securities. The
Open Market Operation (OMO), which the RBI conducts to control market liquidity
and may boost government borrowing, entails purchasing or selling of government
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H. K. and Riddick, L. A. (eds.), Survey of International Finance, Oxford
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