RBI & its role in the economy

In the last post we had covered about banking and banking structure in India. This post we will talk about RBI and its role in the economy.

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

As the central bank of the country, the RBI performs a wide range of functions; particularly, it:

1. Acts as the currency authority – The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security feature. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise and places the indent with the various presses through the Government of India.

The Reserve Bank derives its role in currency management on the  basis of the Reserve Bank of India Act, 1934. All the currency notes except one rupee note are issued by RBI. The RBI act permits RBI to issue notes in the denominations of rupees 2, 5, 10, 20, 50, 100, 500, 1000, 5000, 10000. Currently 5000 and 10000 rupee notes are not in circulation.

2. Controls money supply and credit – RBI controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. RBI takes into account the following monetary policies to control money supply and credit –

a)      Open Market Operations

b)      Cash Reserve Ratio

c)       Statutory Liquidity Ratio

d)      Bank Rate Policy

e)      Repo Rate and Reverse Repo Rate

Each of the five points will be discussed in detail in a separate post.

3. Manages foreign exchange – RBI ensures that short term fluctuations in trade do not affect the exchange rate. In order to maintain stability in exchange rates, RBI enters into foreign exchange transactions

4. Serves as a banker to the government –RBI acts as the banker, agent and advisor to the Government of India. It accepts payment for the account of the union and also makes payment on the behalf of government.

5. Acts as the banker of banks – As the bankers’ bank, RBI holds a part of the cash reserves of banks, lends the banks funds for short periods, and provides them with centralised clearing and cheap and quick remittance facilities.

6. Supervises banks – RBI exercises powers of supervision, regulation and control over commercial banks. The bank’s regulatory functions relating to banks cover their establishment (i.e. licensing), branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation.

 

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