Role of Central Bank

By Dr. Manmeet kaur

  The central bank of India is the Reserve Bank of India (RBI) and
was established on 1st April, 1935 under the RBI Act 1934.
 It is equipped with wide powers to oversee and control the
banking structure.
 RBI is fully owned by the government of India and governed by the
RBI central board and members appointed by the central Government
of India.
 RBI performs various supervisory and promotional functions. It has
the monopoly power of issuing notes and has a responsibility to
maintain monetary stability by formulating monetary and credit
policy.
 Board for Financial Supervision (BFS) constituted in November
1994, as a committee of the Central Board of Directors of the
Reserve Bank of India aims at upgrading the quality of the
statutory audit and internal audit functions in banks and financial
institutions.

 The board is required to meet normally once every month. It

considers inspection reports and other supervisory issues placed
before it by the supervisory departments.

 The BFS also oversees the functioning of the Department of

Banking Supervision (DBS), the Department of Non-Banking
Supervision (DNBS) and the Financial Institutions Division (FID).

 The Banking Ombudsman Scheme has been formulated by the

Reserve Bank of India (RBI) for effective addressing of complaints
by bank customers.
 1. Inflation Control
 To maintain inflation at 4%.
 With a Band of + -2% 2021-2026.

 2. Printing of Currency Notes

 Notes are printed by RBI except Rupee 1 note but Coins are
minted by Government of India.
 Approval has to be taken by Government of India.
Functions Of
RBI 3. Banker to the Govt.
 Budget is decided by government and deficit is taken care by the
domestic market from banks in India.
 RBI maintains the internal Debt of government like G-securities.

Govt RBI
Investors
(G-sec) (Auction G-sec)
 4. Credit Control / Monetary Policy
 Monetary policy committee is formed with 6 members headed by
RBI governor using a set of monetary policy tools like repo rate,
reverse repo rate, open market operations etc.
5. Banker to Banks:
 Short term loans provided to banks at repo rate
Functions Of  Regulator to banks : New branches, ATM etc.
RBI  Bank of last Resort: Emergency situation will approach RBI and
take assistance.
6. Manager To Forex Reserves:
 Maintain foreign exchange reserves by purchasing foreign
currency, gold and others.
  Payment and settlement systems play an important role in improving overall
economic efficiency.

2. Regulator and supervisor of the

payment and settlement systems  The Payment and Settlement Systems Act, 2007 (PSS Act) gives the Reserve Bank
oversight authority, including regulation and supervision, for the payment and
settlement systems in the country.

 In this role, the RBI focuses on the development and functioning of safe, secure and
efficient payment and settlement mechanisms.

 Two payment systems, National Electronic Fund Transfer (NEFT) and Real Time
Gross Settlement (RTGS) allow individuals, companies and firms to transfer funds
from one bank to another.

 These facilities can only be used for transferring money within the country.
 NEFT operates on a deferred net settlement (DNS) basis and settles
transactions in batches.

 The settlement takes place for all transactions received, until a

particular cut-off time.

 It operates in hourly batches - there are twelve settlements from 8 am

to 7 pm on weekdays and six between 8 am and 1 pm on weekends.

 Any transaction initiated after the designated time would have to wait
until the next settlement time.

 In RTGS, transactions are processed continuously, all throughout the

business hours.

 RBI's settlement time is 9 am to 4:30 pm on weekdays and 9 am to 2 pm

on weekends.
  Just as individuals need a bank to carry out their financial
transactions effectively and efficiently, governments also need a
bank to carry out their financial transactions.

3. Banker and debt manager to  The RBI serves this purpose for the Government of India (GoI).
government

 As a banker to the GoI, the RBI maintains its accounts, receive

payments into and make payments out of these accounts.

 The RBI also helps the GoI to raise money from the public via
issuing bonds and government-approved securities.

 In some cases, the state governments also approach the RBI.

  Objective - To facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange
market in India.

4. Managing foreign exchange  The central bank manages to achieve different goals of the
Foreign Exchange Management Act, 1999.

 The RBI manages forex and gold reserves of the nation.

 The RBI's Financial Markets Department (FMD) participates in

the foreign exchange market by undertaking sales/purchases of
foreign currency to ease volatility in periods of excess demand
for/supply of foreign currency.

 Being a custodian to the country's reserves, enables the Reserve

Bank to deal with crisis scenarios related to adverse balance of
payments position.
  Other than the Government of India, the Reserve Bank of India is
the sole body authorised to issue banknotes in India.

 The bank also destroys banknotes when they are not fit for
5. Issuer of currency circulation.

 All the money issued by the central bank is its monetary liability,
i.e., the central bank is obliged to back the currency with assets
of equal value, to enhance public confidence in paper currency.

 The objectives are to issue banknotes and give the public

adequate supply of the same, to maintain the currency and
credit system of the country to utilise it in its best advantage,
and to maintain the reserves.
  The RBI maintains the economic structure of the country
so that it can achieve the objective of price stability as
well as economic development.

 For the, RBI uses four facilities:

❖The Security Printing and Minting Corporation of India
Limited (SPMCIL), a wholly owned company of the
Printing of notes Government of India, has printing presses at Nashik
(Maharashtra) and Dewas (Madhya Pradesh).
❖The Bharatiya Reserve Bank Note Mudran Private
Limited (BRBNMPL), owned by the RBI, has printing
facilities in Mysore (Karnataka) and Salboni (West Bengal).

 For the minting of coins, SPMCIL has four locations at

Mumbai, Noida, Kolkata and Hyderabad.
  Whilst coins and INR 1 notes are minted by and issued by
the Government of India (GoI), the RBI works as an agent
5. Issuer of currency
of GoI for the distribution and handling of coins.

 RBI also works to prevent counterfeiting of currency by

regularly upgrading security features of currency.

 The RBI is authorised to issue notes with face values of up

to INR 10,000 and coins up to INR 1,000.
  Reserve Bank of India works as a central bank where
commercial banks are account holders and can deposit
6. Banker's bank money i.e. it grants financial accommodation to them. It
acts as the lender of the last resort by providing emergency
advances to the banks.

 As banker's bank, the RBI facilitates the clearing of cheques

between the commercial banks and helps the inter-bank
transfer of funds.
  RBI has the responsibility of regulating the nation's
financial system.
7. Regulator of the banking system
 As a regulator and supervisor of the Indian banking
system, it strives to ensures financial stability & public
confidence in the banking system.

 RBI uses methods like on-site inspections, off-site

surveillance, scrutiny & periodic meetings to supervise
new bank licences, setting capital requirements and
regulating interest rates.
8. Detection of fake currency  To curb the counterfeit money problem in India, RBI has
launched a website to raise awareness among masses
about fake banknotes in the market.

 www.paisaboltahai.rbi.org.in provides information about

identifying fake currency.
  The central bank has to perform a wide range of promotional
functions to support national objectives and industries.

9. Developmental role  The RBI faces a lot of inter-sectoral and inflation-related

problems.

 Some of these problems are results of the dominant part of the

public sector.

 Key tools in this effort include Priority Sector Lending such as

agriculture, micro and small enterprises (MSE), housing and
education.

 RBI works towards strengthening and supporting small local

banks and encourage banks to open branches in rural areas to
include large section of society in the banking ecosystem.
  The general superintendence and direction of the RBI is
entrusted with a 21-member central board of directors
✓the governor;
✓four deputy governors;
Constitution of CBD

✓two finance ministry representatives (usually the Economic

Affairs Secretary and the Financial Services Secretary);
✓ten government nominated directors to represent important
elements of India's economy; and
✓four directors to represent local boards headquartered at
Mumbai, Kolkata, Chennai and New Delhi.

 Each of these local boards consists of five members who

represent regional interests, the interests of co-operative and
indigenous banks.
Why are
Central Bank  https://www.youtube.com/watch?v=sEbS8aYIUkI
rising interest
rates?