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All You Need To Know About Central Banking: Functions of Reserve Bank of India Research Team | Posted On Wednesday, March 20,2019, 04:55 PM

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All You Need To Know About Central Banking: Functions of Reserve Bank of India



Functions of the Central Banks/RBI:

The Reserve Bank of India was established in the Year 1935 under the provisions of the Reserve Bank of India Act 1934. The RBI functions as the custodian and regulatory body for the financial system in India. It formulates guidelines and policies which are followed by all banks operating across the country.

The functions of RBI include overseeing monetary policy, issuing currency, managing foreign exchange, working as a banker to the government and as banker to scheduled commercial banks among others. It also works towards overall economic growth and maintaining financial stability in India.

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SEE ALSO:  Functions of the Central Banks

All You Need To Know About Central Banking: Functions of Reserve Bank of India

Issuing currency:

The Government of India has appointed the RBI as the authority for issuing currency notes. Section 22 of the Reserve Bank Act gives power to the RBI, to issue bank notes and regulates the circulation of money in the economy.

The coins are minted by the Government of India at mints, whereas the RBI functions as an agent to the government for handling and distribution of these coins. The Reserve Bank of India has a separate department known as the “issuing department” which is responsible for issuing currency notes.

Currently, there are four currency printing facilities. They are at Nasik, Dewas, Hyderabad and Mysore. The RBI works to prevent counterfeiting of currency notes by regularly screening and upgrading security features of the currency.

Banker to the Central and State Governments:

Among the various functions of the RBI, this is one of the key functions. The RBI acts as the banker to the Central and the State government. As banker to the government, the RBI carries out various functions which are as follows:

  • The RBI maintains government accounts. It receives and makes payment on behalf of the government.
  • It also carries out various transactions, banking operations and exchange remittances.
  • It helps the government regulate the financial system and manage public debt.
  • The RBI helps the government raise money from the public by issuing bonds and government approved securities.
  • Accepts deposits, collects cheques and drafts deposited in the government accounts.
  • Provides short term loans and foreign exchange resources to the government.
  • Maintains the accounts of various Government Departments.
  • It represents the government at the IMF and World Bank.
  • The Reserve Bank also provides funds to the Central and State governments to manage temporary shortfall of funds. The funds sanctioned and the tenure of these advances is governed by the agreements between RBI and the respective authorities.

Banker of banks and Lender of the Last Resort:

The RBI functions as a banker to all scheduled Commercial Banks. According to the rules, every scheduled bank is required to maintain a certain percentage of cash reserves with the RBI known as CRR or cash reserve ratio. The CRR is one of the components of the monetary policy of RBI, which is used to regulate the money supply, inflation level and liquidity in the country. The scheduled bank requires maintaining a cash balance which should be a minimum of 3% of the total demand and time liabilities (NDTL) of the bank.

All the scheduled commercial banks maintain accounts with RBI, which helps them in clearing and settling inter-bank transactions smoothly and swiftly. Maintaining accounts with RBI helps meet statutory reserve requirements. RBI also serves as a lender of last resort to all banks.

Credit Controller:

Controlling credit in the economy is one of the most important functions of the RBI. Credit control helps achieve the objective of controlling inflation through establishing price stability and financial stability. Credit control also helps in the economic development. It boosts the economy by facilitating the flow of bank credit to different sectors in the economy.

As discussed, credit forms the most important part of supply of money. As the supply of money has some important implications on economic stability, the need for credit control is obvious. So, credit is controlled by the reserve bank in accordance with the economic policies and priorities of the government.

Handles Exchange Rates and is the Custodian of the Foreign Exchange Reserve:

The Reserve Bank serves as the custodian of India’s Foreign Exchange Reserves. The Reserve Bank helps in maintaining sufficient foreign exchange reserves for stability in foreign exchange rates. This helps attain stability in the foreign exchange market and money market in India.

The functions of RBI (as the custodian of foreign exchange reserves), includes buying and selling of foreign currencies to maintain stability in the exchange rates. The country’s reserve of international currency enables the RBI to deal with crisis connected with adverse balance of payments position.

Collecting and Publishing Data:

The RBI is also authorized with the collection and publication of data related to the economic, financial, and banking sectors. The Reserve Bank conducts surveys for collecting data from various fields, scrutinizes the problems related to currency, inflation and money supply and observes the trends of the capital market, Trade and Industry and the development and performance of the economy vis-a-vis international standards.

The functions of RBI also include analysing the budgets of the State and the Central government. It undertakes periodic publication of reports regarding the functioning of various banks. It also publishes reports on currency and finance, trends and progress of banking and financial sectors in India and the progress of the Economy. It is also entrusted with computing and statistically analyzing India’s balance of payments (BoP) data.

Monitors Commercial Banks:

This is one of the most important functions of RBI. It works towards regulating and supervising the financial system. The financial system in India includes institutions like the Scheduled Commercial Banks, Regional Rural Banks, Local Area Banks, Corporative Banks and other financial institutions like Development Financial Institutions (DFIs) and Non-Banking Financial Companies (NBFCs).

The RBI has the power to regulate banks and their workings as stated by the provisions of the banking regulations act. The primary objective of the RBI Act is to safeguard the interests of the depositors and maintain their safety in the banking and financial system of the nation.

Clearing House:

One of the key functions of RBI is to serve as the clearing house for scheduled banks, which have statutory accounts with the RBI. Commercial banks have surplus cash reserves deposited with the RBI. So, for banks it is easier to deal with interbank claims and settle their transactions among various banks easily and economically.

The Reserve Bank of India has its clearing house offices in 14 places in India. Some of the cities where it has its own clearing houses are Mumbai, Bangalore, Kolkata, Chennai, Nagpur, Hyderabad, New Delhi, Patna and Kanpur. In other places, the clearing house function is carried out within the premises of SBI and its Associate Banks. Currently, there are 578 centres that are run by SBI.

Measures of Credit Control:

There are two methods used by the RBI to control credit in India. They are:

  • Qualitative method
  • Quantitative method

Quantitative Method:

Quantitative credit control means control of the quantity of credit in the economy. The various quantitative tools are:


CRR is one of the most commonly used tools by the RBI as a quantitative tool of credit control. The ratio specifies minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves, either in cash or as deposits with the central bank. 


The ratio of liquid assets to the demand and time liabilities is referred to as the Statutory Liquidity Ratio.

Bank rate: Bank rate is the amount of interest that RBI charges to banks, for sanctioning long-term loans. Currently the bank rate is 6.5% applicable from 7th of February onwards.

Repo rate: the rate at which banks borrow money from the RBI by pledging surplus government securities is known as Repo rate. The present repo rate is 6.25%.

Reverse repo rate: Reverse repo rate is the rate at which the RBI borrows money from the commercial banks. The reverse repo rate is 6%.

Open market operations: Open market operation is the activity of buying and selling government securities in the open market, to control the supply of money in banking system.

SEE ALSO: Statutory Liquid Ratio

Qualitative Method:

These measures are applicable to the financial and banking sector, alike. Qualitative methods are used to control the manner of channelizing cash and credit in the Economy. Some of the qualitative tools functioning in the economy are:

Marginal requirement: The marginal requirement of a loan is the current value of security offered for a loan or the value in totality of the loans granted. 

Selective credit control: RBI can specifically instruct banks not to sanction loans to traders in certain commodities. This prevents speculations/ hoarding of commodities using money borrowed from banks.

Moral suasion: This method is also called moral persuasion. RBI persuades commercial banks to follow direct order on the flow of credit.

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