INTRODUCTION

RBI (Reserve Bank of India) is the central bank of India and a statutory body responsible for multiple tasks like
printing the currency notes and acting as a custodian to other primary banks of the nation. The RBI was formed
on the recommendation of the Hilton-Yong-Commission or commonly referred to as Royal Commission on
Indian currency and finance in April 1934. The main motive behind setting up RBI was to separate the currency
control from the government and provide other banking facilities. The working of RBI is regulated by the RBI
governor appointed by the central government of India and the Governor acts as the main decision-maker in
RBI.

HISTORY OF RESERVE BANK OF INDIA

The Reserve Bank of India was established following the Reserve Bank of India Act of 1934. Though privately
owned initially, it was nationalised in 1949 and since
then fully owned by Government of India. The Reserve Bank of India was founded on 1 April 1935 to respond
to economic troubles after the First World War. The
bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and
Finance, also known as the Hilton-Young Commission.

ROLE OF THE RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian rupee.
RBI is the regulator of entire Banking in India. RBI plays an important part in the Development Strategy of the
Government of India.
RBI regulates commercial banks and non-banking finance companies working in India. It serves as the leader of
the banking system and the money market. It
regulates money supply and credit in the country. The RBI carries out India's monetary policy and exercises
supervision and control over banks and non-
banking finance companies in India. RBI was set up in 1935 under the Reserve Bank of India Act, 1934.

FUNCTIONS OF RBI

Being a central bank of India, RBI serves a critical role in regulating the financial transactions in the country.
Some of the important functions of RBI are listed below:
• Issue of Bank Notes
• Bankers Bank
• Banker to the Government
• Controller of credit
• Manager of foreign exchange

ISSUER OF BANK NOTES

Like any other central bank, the RBI acts as a sole currency authority of the country. It issues notes of every
denomination, except one-rupee note and coins and small coins, through the Issue Department of the Bank.
One- rupee notes and coins and small coins are issued by the Government of India. In actuality, the RBI also
issues these coins on behalf of the Government of India. At present, notes of denominations of rupees two,
five, ten, twenty, fifty, one hundred and five hundred are issued by the RBI.
BANKER TO THE GOVERNMENT
The RBI acts as the banker to the government of India and State Governments (except Jammu and Kashmir). As
such it transacts all banking business of these Governments. As the Government’s banker, the RBI provides
short-term credit to the Government of India. This short-term credit is obtainable through the sale of treasury
bills. Not only this, the RBI also provides ways and means of advances (repayable with 90- days) to State
Government. It may be noted that the Central Government is empowered to borrow any amount it likes from
the RBI. The RBI also acts as the agent of the Government in respect of membership of the IMF and World
Bank.

BANKERS BANK

As bankers’ bank, the RBI holds a part of the cash reserves of banks, lends them funds for
short periods, and provides them with centralised clearing and cheap and quick remittance
facilities. In the early stages of the development of central banking, banks used to keep some
of their cash reserves voluntarily with a leading bank which gradually took over the role of a
central bank.

CONTROLLER OF CREDIT
The RBI controls the total supply of money and bank credit to sub serve the country’s interest. The RBI controls
credit to ensure price and exchange rate stability. To achieve this, the RBI uses all types of credit control instru-
ments, quantitative, qualitative and selective. The most extensively used credit instrument of the RBI is the
bank rate. The RBI also relies greatly on the selective methods of credit control. This function is so important
that it requires special treatment.

. MANAGER OF FOREIGN EXCHANGE

In India, all foreign currency flow must be done as per FEMA (Foreign Exchange Management Act). It is the RBI
who ensures that transactions happens as per FEMA. The bigger role of RBI is in ensuring that external trade
happens in a seamless manner. Whether, the trader is a resident Indian or a foreign national, they must be
able to deal in foreign exchange in an easy and transparent manner. 

CREDIT CONTROL METHODS OF THE RBI

It is one of the important function of RBI for controlling supply of money or credit.
There are 2 types of methods employed by the RBI to control credit creation:
1. Quantitative method
2. Qualitative method

Quantitative method :
1. BANK RATE
It is the rate of interest at which central bank lends funds to commercial banks. During excess demand or
inflationary gap, central bank increases bank rate. Borrowings become costly and commercial banks borrow
less from central bank. During deflationary gap central bank decreases the bank
rate. It is cheap to borrow from the central bank or the part of the commercial banks which in turn the
Commercial banks also decreases their lending rates.

2. OPEN MARKET OPERATIONS

The open market operations means buying and selling of bonds and shares by RBI is open market. It is also
called buying and selling of government security by the central bank from the public and commercial banks.

3. REPO RATE
The term 'Repo' stands for 'Repurchase agreement'. Repo is a form of short-term, collateral-backed borrowing
instrument and the interest rate charged for such borrowings is termed as repo rate. In India, repo rate is the
rate at which Reserve Bank of India lends money to commercial banks in India if they face a scarcity of funds.

4. REVERSE REPO RATE

Reverse repo as the name suggests is an opposite contract to the Repo Rate. Reverse Repo rate is the rate at
which the Reserve Bank of India borrows funds from the commercial banks in the country.
5. CASH RESERVE RATIO
It is the ratio of bank deposits that commercial bank has to keep with the central bank. At the time of inflation
the RBI increases the rate of CRR, similarly at the time of deflation RBI decreases the rate of CRR.

6. STATUTORY LIQUIDITY RATIO

Every bank required to maintain a fixed percentage of its assets in the form of cash or other liquid assets called
SLR. At the time of inflation the RBI increases the SLR, similarly at the time of deflation RBI decreases the rate
of SLR.

QUALITATIVE MEASURES
1. MARGIN REQUIREMENTS
It is the difference between the market value of loan
and the security value of loan. At the time of inflation the margin requirement value decreases by RBI for
discouraging people and commercial banks for approaching more and more amount of loan. On the
other hand at the time of deflation the RBI increases the value of margin just to encourage issuing of more
amount of loan to the commercial banks and general public.

2. MORAL SUASION
It refers to written or oral advices given by central bank to commercial banks to restrict or expand credit.

3. RATIONING OF CREDIT
It is the related to limiting the amount of credit, which
is issued by all the commercial banks. RBI fixes the size of issuing the credit according to the requirement of
the country.

CONCLUSION

The effectiveness of credit control measures in an economy depends upon a number of factors. First, there
should exist a well-organised money market. Second, a large proportion of money in circulation should form
part of the organised money market. Finally, the money and capital markets should be extensive in coverage
and elastic in nature. Extensiveness enlarges the scope of credit control measures and elasticity lends it
adjustability to the changed conditions. In most of the developed economies a favourable environment in
terms of the factors discussed before exists, in the developing economies, on the contrary, economic
conditions are such as to limit the effectiveness of the credit control measures.