As a
central bank, the Reserve Bank has significant powers and duties to perform.
For smooth and speedy progress of the Indian Financial System, it has to
perform some important tasks. Among others it includes maintaining monetary and
financial stability, to develop and maintain stable payment system, to promote
and develop financial infrastructure and to regulate or control the financial
institutions.
Issuer
of currency
Except
for issuing one rupee notes and coins, RBI is the sole authority for the issue
of currency in India. The Indian government issues one rupee notes and coins.
Major currency is in the form of RBI notes, such as notes in the denominations
of two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand.
Earlier, notes of higher denominations were also issued. But
, these notes were demonetized to discourage users from indulging in black-market operations.
, these notes were demonetized to discourage users from indulging in black-market operations.
RBI
has two departments - the Issue department and Banking department. The issue
department is dedicated to issuing currency. All the currency issued is the
monetary liability of RBI that is backed by assets of equal value held by this
department. Assets consist of gold, coin, bullion, foreign securities, rupee
coins, and the government’s rupee securities. The department acquires these
assets whenever required by issuing currency. The conditions governing the
composition of these assets determine the nature of the currency standard that
prevails in India.
The
Banking department of RBI looks after the banking operations. It takes care of
the currency in circulation and its withdrawal from circulation. Issuing new
currency is known as expansion of currency and withdrawal of currency is known
as contraction of currency.
Banker
to the Government
RBI
acts as banker, both to the central government and state governments. It
manages all the banking transactions of the government involving the receipt
and payment of money. In addition, RBI remits exchange and performs other
banking operations.
RBI
provides short-term credit to the central government. Such credit helps the
government to meet any shortfalls in its receipts over its disbursements. RBI
also provides short term credit to state governments as advances.
RBI
also manages all new issues of government loans, servicing the government debt
outstanding, and nurturing the market for government’s securities. RBI advises
the government on banking and financial subjects, international finance, financing
of five-year plans, mobilizing resources, and banking legislation.
Managing
Government Securities
Various
financial institutions such as commercial banks are required by law to invest
specified minimum proportions of their total assets/liabilities in government
securities. RBI administers these investments of institutions.
The
other responsibilities of RBI regarding these securities are to ensure -
- Smooth functioning of the market
- Readily available to potential buyers
- Easily available in large numbers
- Undisturbed maturity-structure of interest rates because of excess or deficit supply
- Not subject to quick and huge fluctuations
- Reasonable liquidity of investments
- Good reception of the new issues of government loans
Banker
to Other Banks
The
role of RBI as a banker to other banks is as follows:
- Holds some of the cash reserves of banks
- Lends funds for short period
- Provides centralized clearing and quick remittance facilities
RBI
has the authority to statutorily ensure that the scheduled commercial banks
deposit a stipulated ratio of their total net liabilities. This ratio is known
as cash reserve ratio [CRR]. However, banks can use these deposits to meet
their temporary requirements for interbank clearing as the maintenance of CRR
is calculated based on the average balance over a period.
Controller
of Money Supply and Credit
In a
planned economy, the central bank plays an important role in controlling the
paper currency system and inflationary tendency. RBI has to regulate the claims
of competing banks on money supply and credit. RBI also needs to meet the
credit requirements of the rest of the banking system.
RBI
needs to ensure promotion of maximum output, and maintain price stability and a
high rate of economic growth. To perform these functions effectively, RBI uses
several control instruments such as -
- Open Market Operations
- Changes in statutory reserve requirements for banks
- Lending policies towards banks
- Control over interest rate structure
- Statutory liquidity ration of banks
Exchange
Manager and Controller
RBI
manages exchange control, and represents India as a member of the international
Monetary Fund [IMF]. Exchange control was first imposed on India in September
1939 when World War II started and continues till date. Exchange control was
imposed on both receipts and payments of foreign exchange.
According
to foreign exchange regulations, all foreign exchange receipts, whether on
account of export earnings, investment earnings, or capital receipts, whether
of private or government accounts, must be sold to RBI either directly or
through authorized dealers. Most commercial banks are authorized dealers of
RBI.
Publisher
of Monetary Data and Other Data
RBI
maintains and provides all essential banking and other economic data,
formulating and critically evaluating the economic policies in India. In order
to perform this function, RBI collects, collates and publishes data regularly.
Users can avail this data in the weekly statements, the RBI monthly bulletin,
annual report on currency and finance, and other periodic publications.
Developmental
and Promotional role of RBI
Along
with the routine traditional functions, central banks especially in the
developing country like India have to perform numerous functions. These
functions are country specific functions and can change according to the
requirements of that country. The RBI has been performing as a promoter of the
financial system since its inception. Some of the major development functions
of the RBI are maintained below.
Development
of the Financial System : The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and
efficient financial system is a precondition of the rapid economic development
of the nation. The RBI has encouraged establishment of main banking and
non-banking institutions to cater to the credit requirements of diverse sectors
of the economy.
Development
of Agriculture : In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It
has successfully rendered service in this direction by increasing the flow of
credit to this sector. It has earlier the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks (RRBs).
Provision
of Industrial Finance : Rapid industrial growth is the key to faster
economic development. In this regard, the adequate and timely availability of
credit to small, medium and large industry is very significant. In this regard
the RBI has always been instrumental in setting up special financial
institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.
Provisions
of Training : The RBI has always tried to provide essential training to
the staff of the banking industry. The RBI has set up the bankers' training
colleges at several places. National Institute of Bank Management i.e NIBM,
Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are
few to mention.
Collection
of Data : Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several topics. It
includes interest rate, inflation, savings and investments etc. This data
proves to be quite useful for researchers and policy makers.
Publication
of the Reports : The Reserve Bank has its separate publication division.
This division collects and publishes data on several sectors of the economy.
The reports and bulletins are regularly published by the RBI. It includes RBI
weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial
Banks India., etc. This information is made available to the public also at
cheaper rates.
Promotion
of Banking Habits : As an apex organization, the RBI always tries to
promote the banking habits in the country. It institutionalizes savings and
takes measures for an expansion of the banking network. It has set up many institutions
such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964,
NABARD-1982, NHB-1988, etc. These organizations develop and promote banking
habits among the people. During economic reforms it has taken many initiatives
for encouraging and promoting banking in India.
Promotion
of Export through Refinance : The RBI always tries to encourage the
facilities for providing finance for foreign trade especially exports from
India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit
Guarantee Corporation of India (ECGC) are supported by refinancing their
lending for export purpose.
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