Priyanshu Bhagwatkar

20FMUCHH010445
Section G

The Reserve Bank of India

The Reserve Bank of India is India’s central bank, which began its operations in 1935. It was
established with the objective of ensuring monetary stability and operating the currency and
credit system of the country to its advantage. RBI was started as a private shareholders’ bank,
the Reserve Bank was nationalised in 1949. A core function of the Reserve Bank in the last 75
years has been the formulation and implementation of monetary policy with the objectives of
maintaining price stability and ensuring adequate flow of credit to productive sectors of the
economy.

Functions of the Reserve Bank

The functions of the Reserve Bank today can be categorised as follows:

● Monetary policy - Over time, the objectives of monetary policy in India have evolved to
include maintaining price stability, ensuring adequate flow of credit to productive sectors
of the economy for supporting economic growth, and achieving financial stability.

● Regulation and supervision of the banking and non-banking financial institutions,

including credit information companies - Traditionally, the Reserve Bank’s regulatory and
supervisory policy initiatives are aimed at protection of the depositors’ interests, orderly
development and conduct of banking operations, and liquidity and solvency of banks.

● Regulation of money, forex and government securities markets as also certain financial
derivatives

● Debt and cash management for Central and State Governments - The Reserve Bank
manages the public debt and issues new loans on behalf of the Central and State
Governments. It involves issue and retirement of rupee loans, interest payment on the
loan and operational matters about debt certificates and their registration.

● Management of foreign exchange reserves - The Reserve Bank, as the custodian of the
country’s foreign exchange reserves, is vested with the responsibility of managing their
investment. The legal provisions governing management of foreign exchange reserves
are laid down in the Reserve Bank of India Act, 1934. The share of foreign currency
assets in the balance sheet of the Reserve Bank has substantially increased. With the
increased volatility in exchange and interest rates in the global market, the task of
preserving the value of reserves and obtaining a reasonable return on them has become
challenging.
● Foreign exchange management (current and capital account management) - The
Reserve Bank oversees the foreign exchange market in India. It supervises and
regulates it through the provisions of the Foreign Exchange Management Act, 1999. Like
other markets, the foreign exchange market has also evolved over time, and the
Reserve Bank has been modulating its approach towards its function of supervising the
market.

● Banker to banks - The Reserve Bank opens current accounts of banks with itself,
enabling these banks to maintain cash reserves as well as to carry out inter-bank
transactions through these accounts. Inter-bank accounts can also be settled by transfer
of money through electronic fund transfer systems, such as the Real Time Gross
Settlement System (RTGS).

● Banker to the Central and State Governments - Under the administrative arrangements,
the Central Government is required to maintain a minimum cash balance with the
Reserve Bank. Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore
on Fridays, as also at the end of March and July. All the State Governments are required
to maintain a minimum balance with the Reserve Bank, which varies from state to state
depending on the relative size of the state budget and economic activity.

● Oversight of the payment and settlement systems - The Reserve Bank, as the regulator
of financial systems, has been initiating reforms in the payment and settlement systems
to ensure efficient and faster flow of funds among various constituents of the financial
sector. The increasing monetisation in the economy, the country’s large geographic
expanse, people’s preference for paper-based instruments and rapid changes in
technology are among factors that make this task a formidable one.

● Currency management - The Reserve Bank carries out the currency management
function through its Department of Currency Management located at its Central Office in
Mumbai, 19 Issue Offices located across the country and a currency chest at its Kochi
branch . To facilitate the distribution of notes and rupee coins across the country, the
Reserve Bank has authorised selected branches of banks to establish currency chests.
There is a network of 4,281 Currency Chests and 4,044 Small Coin Depots with other
banks. Currency chests are storehouses where banknotes and rupee coins are stocked
on behalf of the Reserve Bank.

● Developmental role - The Reserve Bank is one of the few central banks that has taken
an active and direct role in supporting developmental activities in their country. The
Reserve Bank’s developmental role includes ensuring credit to productive sectors of the
economy, creating institutions to build financial infrastructure, and expanding access to
affordable financial services. Over the years, its developmental role has extended to
institution building for facilitating the availability of diversified financial services within the
country. The Reserve Bank today also plays an active role in encouraging efficient
 customer service throughout the banking industry, as well as extension of banking
service to all, through the thrust on financial inclusion.

● Research and statistics - The Reserve Bank has over time established a sound and rich
tradition of policy-oriented research and an effective mechanism for disseminating data
and information. Like other major central banks, the Reserve Bank has also developed
its own research capabilities in the field of economics, finance and statistics, which
contribute to a better understanding of the functioning of the economy and the ongoing
changes in the policy transmission mechanism.