MAIN FUNCTIONS OF THE RESERVE BANK OF INDIA The RBI, like any other central bank, performs almost all traditional centralbanking functions. But, due ti the specific nature of the country’s underdevelopedeconomy it has undertaken some development and promotional functions also. Firstwe shall explain its general central banking functions.
General Central Banking Functions
Since the RBI was established on the model of the Bank of England, its generalbanking functions are very much similar to those of Bank of England. Thesefunctions are as follows:1.
Issues of currency notes
.Like any other central bank
the RBI has sole right to issue currencynotes.
Under the original Act, there was provision for issuing currency notesaccording to the
proportional reserve system.
This system beingrelatively less elastic, was not suited to the requirements of developmentplanning. Thus the original Act was amended and the proportional reservesystem of note issue was replaced by the minimum reserve system.According to the RBI (Amendment) Act, 1957 a minimum gold and foreignexchange reserve was to be of Rs.200 crore. Valve of gold was not to be atany time less than Rs115 crore. This provision released a large amount of foreign exchange which was earlier kept as part of reserve. Following thepolicy of other central banks the RBI ( Amendment) Act, 1957, empoweredthe RBI to dispense with the entire holding of foreign securities with the priorsanction of the central government. There is a division of work between the issue and the BankingDepartments of the RBI in respect of note issue. Currency notes are beingissue by the Issue Department on the basis of demand made by the BankingDepartment while making demand for currency notes has to transfergovernment or other approved securities to the Issue Department.
2.Banker to the government.The RBI renders useful service to the government in the capacity of its banker,agent and adviser.
The RBI has the obligation to transact thebanking business of the central and the state government. Thus it acceptsmoney on account of these governments makes payment on their behalf andcarries out other banking operations such as their exchange and remittances.It also undertakes the management of public debt and is responsible for theissue of new loans. For ensuring the success of the loan operations it activelyoperates in the gilt-edged market. The RBI has intimate knowledge of thefinancial market and thus offers useful advice to the government on thequantum and terms of new loans. Since the Treasury bill market is verynarrow, selling of Treasury bill on behalf of the government is relatively a lessimportant function of the RBI, the RBI is authorized to make ways and meansadvances to the government. These short term loans are repayable within 90days from the state of advance. Since the discharge of this function involvesreceipts and payments on behalf of both Central and the State governmentand not only in the capital cities, but also in many other towns, it hasappointed the State Bank Of India as its sole agent for transactinggovernment business.