RBI and its functions

Hello friends, here you will read about RBI and its functions. Reserve Bank of India (RBI) was set up under RBI act, 1934 on Ist April 1935. Initially, its headquarter was in Calcutta, later after in 1937, its headquarter was permanently shifted to Mumbai.

Present governor of RBI is Mr. Shaktikanta Das, he is 25^th governor of RBI.

RBI was nationalised on January 1949. Vimal Jalan committee recommended that part of surplus money can be transferred to government by RBI.

Some important facts about Reserve bank of India (RBI) :-

a) First governor of RBI was Sir Osborne Smith.

b) First Indian governor of RBI was C.D. Deshmukh(Chintaman Dwarkanath Deshmukh).

Functions of RBI :-

1) Issue of currency/notes :-

According to RBI act, 1934 ,initially proportional reserve system was used for issuance of currency under which RBI had to maintain 40% reserve of gold and  foreign exchange for issue of currency.

Now, since 1956, minimum reserve system(MRS)  is in use for issuance of currency by RBI. According to minimum reserve system, RBI is required to maintain at least  a reserve of 200 crore rupees at all the times. Out of this 200 crore rupees, 115 crore rupees should be in form of gold bullion or gold reserves and remaining 85 crore rupees should be in form of foreign currencies/exchanges.

Following this system of minimum reserve, RBI can print unlimited amount of currency to tackle the needs of economy.

2) Banker to the government :-

Here, RBI performs 3 functions mainly banker, agent and advisor to the government.

a) As a banker : It makes payment on the behalf of government.

b) As a agent : It buys and sells the government securities.

c) As a advisor : Whenever there is monetary and financial issue, so to solve the issue, RBI governor and finance minister co-ordinates.

3) Bank of the banks :-

Also called as lender of the last resort for all the banks who are in crisis situation. Here, RBI provides 2 facilities to the banks such as :

a) First it provides loan to the banks.

b) Second it provides remittance facility, which means sending money from one place to other. For eg. Branch of any bank can submit surplus money to RBI Mumbai and if that bank wants that money at Delhi branch, so RBI provides that submitted money to Delhi branch of that particular bank.

Note : This remittance facility is for scheduled banks only. (Scheduled bank means those banks which are included in the 2^nd schedule of RBI.)

Extra note : As soon as banks became schedule bank, they have to maintain CRR (Cash reserve ratio).

4) Regulation of foreign exchange :-

a) RBI is responsible for buying and selling of currency of IMF (International monetary fund) member countries.

b) RBI is the custodian of foreign exchange reserve of country.

Note : Owner of foreign exchange kept with RBI is India, neither government, nor RBI.

c) To keep the exchange rate stable. Here stable means within a band for eg. within a band of Rupee 76 to 80.

For eg. if dollar crosses this upper band, so RBI acts by selling dollar, as a result dollar increases in the forex market hence price of dollar falls and its price become stable. On the contrary, if dollar crosses lower band or dollar becomes cheaper like if it comes equal to Rs. 75,74,73 etc., so RBI will buy $ which results in the shortage of dollar in the market, so price of dollar increases, hence it become stable again.

Note : If dollar are less in market, so their demand will increase, hence their price will increase and vice-versa.

d) Regulation of transaction in foreign exchange under FEMA(foreign exchnage managemenr act).

Structure of foreign exchange kept with RBI :

5) Credit control :-

Credit means loan. Under this bank’s lending and people’s borrowing capacity are targeted. RBI does this credit control by various tools such as Repo rate, Reverse repo rate, bank rate, CRR (Cash reserve ratio), SLR (Statutory liquidity ratio), OMO (Open market operations) etc.

6) Custodian of cash reserves of the commercial banks :-

 Here, all the commercial bank are required to maintain a cash reserves with the RBI at a rate called as CRR(cash reserve ratio). This CRR is decided by RBI while formulating its monetary policy. This cash reserve is taken by RBI so as to help the banks in time of crisis.

Note : RBI never gives interest to the banks on the cash reserves maintained by these banks with the RBI.