What is RBI? (Reserve Banks of India)

What is Reserve Bank of India?

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 Calcutta 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 nationalization in 1949, the Reserve Bank is fully owned by the Government of India

Reserve bank of India

Objectives of RBI

It plays a more positive and dynamic role in the development of a country. The financial muscle of a nation depends upon the soundness of the policies of the central banking. The objectives of the central banking system are presented below:

  • The central bank should work for the national interest of the country.
  • The central bank must aim for the stabilization of the mixed economy.
  • It aims at the stabilization of the price level at average prices.
  • RBI should aim for the promotion of economic activities.

Functions of RBI

The RBI functions are based on the mixed economy. The RBI should maintain a close and continuous relationship with the Union Government while implementing the policies. If any differences arise, the government’s decision will be final. The main functions of the RBI are presented below:

  • Welfare of the public
  • To maintain the financial stability of the country.
  • To execute the financial transactions safely and effectively.
  • To develop the financial infrastructure of the country.
  • To allocate the funds effectively without any partiality.
  • To regulate the overall credit volume for price stability.

Authorities of RBI

  • Currency issuing authority
  • Monitoring authority
  • Banker to the Union Government
  • Foreign exchange control authority
  • Promoting authority.

1. Currency Issuing Authority:

The RBI has the sole authority to issue the currency notes and coins. It is the fundamental       right of the RBI. The coins and one rupee notes are issued by the Government of India and they are circulated through the RBI. The notes issued by the RBI issues by the RBI will have legal identity everywhere in India. The RBI issues the notes of the denomination of RS. 1000, 500, 100, 50, 20 and 10. The RBI has the authority to circulate and withdraw the currency from circulation. It has also the authority to exchange notes and coins from one denomination to other denominations as per the requirement of the public. The currency notes may be distributed throughout the country through its 15 full pledged offices, 2 branch offices, and more than 4000 currency chests. The currency chests are maintained by different banks in various locations. The RBI issues currency notes, based on the availability of balances of gold, bullion, foreign securities, rupees, coins and permitted bills.

2. Monitoring Authority:

The RBI has the full authority to control all the aspects of the banking system in India. The RBI is known as the Banker’s Bank. The banking system in India works according to the guidelines issued by the RBI. The RBI is the premier banking institute among the commercial banks. All the commercial banks, foreign banks and cooperative urban banks in India should obey the rules and regulations which are issued by the RBI from time to time. The RBI controls the deposits of the commercial banks through the CRR and the SLRs. Every bank should deposit a certain amount in the RBI. The commercial banks have the power to borrow the money from the RBI when they are in need of finance. Hence it is known as the lender of the last resort. The RBI has the authority to control the credit supply in the economy or monetary systems of the nation.

3. Banker to the Union Government:

Generally in any country all over the world the Central bank dominates the banking sector. It advises the government on monetary policies. The RBI is the bankers to the Union Government and also to the state governments in the country. It provides a wide range of banking services to the government. It also transfers the funds, collects the receipts and makes the payment on behalf of the Government. It also manages the public debts. The Government will not pay any remuneration or brokerage to the RBI for rendering the financial services. Any deficit or surplus in the Central Government account with the RBI will be adjusted by creation or cancellation of the treasury bills. The treasury bills are known as the Adhoc Treasury bills.

4. Foreign Exchange Regulation Authority:

The RBI’s another major function is to control the foreign exchange reserves position from time to time. It maintains the stability of the external value of the rupee through its domestic policies and forex market. The RBI has the full authority to regulate the market as discussed below:

  • To monitor the foreign exchange control.
  • To prescribe the exchange rate system.
  • To maintain a better relation between rupee and other currencies.
  • To interact with the foreign counterparts.
  • To manage the foreign exchange reserves.

5.Promoting Authority:

The RBI’s function is to look after the welfare of the financial system. It renders the promotion services to strengthen the country’s banking and financial structure. It helps in mobilizing the savings and diverting them towards the productive channel. Thus the economic development can be achieved. After the nationalization of the commercial banks, the RBI has taken a number of series of actions in various sectors such as agriculture sector, industrial sector, lead bank scheme and cooperative sector.