History Role and Functions of Reserve Bank Of India (RBI)

Reserve Bank of India (RBI) is the central bank of India entrusted with a

multidimensional role which includes implementation of monetary policy and

maintaining monetary stability in the country. RBI was established on 1st April

1935 under the Reserve Bank of India Act, 1934. RBI was set up after the

recommendations of Hilton young Commission which had submitted its report in

the year 1926. Later on, in 1931 the Indian Central banking enquiry committee

had also recommended for the establishment of the central bank in India.

Initially, Reserve Bank of India was established as a private shareholders bank,

but it was nationalized after independence in the year 1949 through the Reserve

Bank (Transfer of public ownership) act, 1948.

Functions of RBI :-

Primary or Traditional Functions of RBI

1) NOTE ISSUING AUTHORITY

2) BANKER TO THE GOVERNMENT

3) BANKER’S BANK

4) LENDER OF THE LAST RESORT

5) CREDIT CONTROL

6) CUSTODIAN OF FOREIGN EXCHANGE RESERVE

7) COLLECTION OF DATA AND PUBLICATION

1) NOTE ISSUING AUTHORITY :-

The Reserve Bank has a monopoly for printing the currency notes in the

country. It has the sole right to issue currency notes of various denominations

except one rupee note (which is issued by the Ministry of Finance).

2) BANKER TO THE GOVERNMENT :-

Reserve Bank manages the banking needs of the government. It maintain and

operate the government’s deposit accounts. It collects receipts of funds and make

payments on behalf of the government. performs merchant banking function for

the central and the state governments; also acts as their banker.

3) BANKER’S BANK :-

The Reserve Bank performs the same functions for the other commercial bank

as the other banks ordinarily perform for their customers. RBI lends money to all

the commercial banks of the country. All banks operating in the country have

account with the Reserve Bank.

4) LENDER OF THE LAST RESORT :-

The commercial banks approach the Reserve Bank in times of emergency to

tide over financial difficulties, and the Reserve bank comes to their rescue though

it might charge a higher rate of interest.

5) CREDIT CONTROL :-

Credit control is a major weapon of RBI used to control Demand & Supply of

money in the economy The RBI undertakes the responsibility of controlling credit

created by commercial banks. RBI uses two methods to control the extra flow of

money in the economy. These methods are quantitative and qualitative

techniques to control and regulate the credit flow in the country. When RBI
observes that the economy has sufficient money supply and it may cause an

inflationary situation in the country then it squeezes the money supply through its

tight monetary policy and vice versa.

6) CUSTODIAN OF FOREIGN EXCHANGE RESERVE :-

For the purpose of keeping the foreign exchange rates stable, the Reserve Bank

buys and sells foreign currencies and also protects the country’s foreign exchange

funds. RBI sells the foreign currency in the foreign exchange market when its

supply decreases in the economy and vice-versa.

7) COLLECTION OF DATA AND PUBLICATION :-

RBI collects data about interest rates, inflation, deflation, savings, investment

etc. which is very helpful for researchers and policymakers. It publishes data on

different sectors of the economy through its Publication division. It publishes

monthly bulletin, weekly reports, annual reports, reports on trend and progress of

commercial bank etc.

1. Monetary functions of RBI :

The RBI holds the authority to issue and manage the currency of India.

It formulates and implements monetary policies to maintain price stability,

manage inflation, and control money supply. By setting the repo rate and reverse

repo rate, the RBI influences borrowing costs and, in turn, the money supply in the

economy.

2. Regulator and Supervisor :

The function of RBI as the apex regulator and supervisor of the Indian financial

system.

It oversees banks, non-banking financial companies (NBFCs), and other financial

institutions, ensuring their soundness, stability, and adherence to prudential

norms.

This role bolsters consumer confidence and safeguards the integrity of the

financial system.

3. Banker to the Government and Banks:

The RBI serves as the banker to both the Central and State governments. It

manages government funds, facilitates transactions, and manages public debt.

Additionally, it provides banking services to other banks, acting as the lender of

last resort during financial crises.

4. Controller of Credit :

The RBI influences the credit flow in the economy to achieve desired economic

outcomes. It formulates credit policies and regulates the lending practices of banks,

controlling the availability and cost of credit for various sectors.

5. Foreign Exchange Management :

As the custodian of India's foreign exchange reserves, the RBI manages the

exchange rate of the Indian rupee, facilitating international trade and maintaining

external stability. It devises policies to promote and regulate foreign exchange

transactions.

6. Developmental Role :

The functions and the role of RBI plays a pivotal role in promoting financial

inclusion and development. It supports initiatives that enhance banking services

accessibility, strengthen payment systems, and foster innovations in the financial

sector.
 Indian Money Market

What is the Money Market?

The money market is the financial market where short-term financial assets

with a maturity period of one year or less are traded. It deals with highly liquid and

low-risk financial instruments that are traded on stock exchanges.

The primary purpose of the money market is to offer short-term financing to

borrowers such as private investors, governments, and others. It's an essential part

of the economy that encourages the efficient flow of funds between those with

excess funds and those who require financing.

According to RBI, the money market means” the center for dealings mainly of

short term character, in monetary assets, and its meats the short term requirements

of borrowers and provides liquidity or cash to lenders”

Money Market Instruments are short-term financial instruments or securities that

are issued by the Government or financial institutions to meet their short-term

borrowing needs and are generally repaid in less than a year. Examples and types

of money market funds are commercial papers, T-bills, promissory notes,

certificates of deposit, etc.

The instrument of the money market :-

There are multiple types of money market instruments available, each of them

aiming to boost the total productive capacity and hence, the GDP of the country. it

also provides secure returns to the investors looking for low-risk investment

opportunities for a short tenure.

The list of money market instruments traded in the money market are:-

1. Treasury bill (T-Bills):

When the government is in need of short-term funds, then they issue treasury

bills through RBI are known to be one of the safest money market instruments

available. however, treasury bills carry zero risks. i.e. are zero risk instruments. it is

just like a promissory note or finance bill having a maturity of a maximum of one

year. the treasury bills do not pay any interest but are available at a discount to face

value at the time of the issue.

2. Call money market (CMM):

It is short -term loan market. the main lenders of the fund in the call money

market are SBI, LIC, GIC, UTI, IDBI, NABARD, and other financial institutions,

and the main borrowers are the scheduled commercial banks. it is also called the

inter-bank call money market. the interest rates in the market are market-driven

and hence highly sensitive to demands and supply. also, the interest rates have

been known to fluctuate by a large % at certain times.

3. Commercial bill (CB):

It is also called a trade bill. it is a promise to pay a fixed specified amount in the

specified period by the purchaser of the goods to the seller.

Commercial bills, also a money market instrument, work more like the bill of

exchange. businesses issue them to meet their short-term money requirements.

4. Certificate of deposit:

A certificate of deposit or CD is a negotiable term deposit accepted by

commercial banks.it is usually issued through a promissory note.

CD’S Can be issued to individuals, corporations, trusts, etc. also, and the CD’S can

be issued by scheduled commercial banks at a discount. and the duration of these

varies between 3 months to 1 year. the same, when issued by a financial institution,

is issued for a minimum of 1 year and a maximum of 1 year, and a maximum of 3

years.

Functions of Money Market :-

1. Financing Trade:

Money Market plays crucial role in financing both internal as well as

international trade. Commercial finance is made available to the traders through

bills of exchange, which are discounted by the bill market. The acceptance houses

and discount markets help in financing foreign trade.

2. Financing Industry:

Money market contributes to the growth of industries in two ways:

(a) Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills, commercial

papers, etc.

3. Liquidity of Investment:

Stock exchanges provide liquidity of investment to the investors. Investors can

sell out any of their investments in securities at any time during trading days and

trading hours on stock exchanges. Thus Stock exchanges provide liquidity of

investment. The on-line trading and online settlement of demat securities

facilitates the investors to sell out their investment and realize the proceeds within

a day or two. Even investors can switch over their investment from one security to

another according to the changing scenario of capital market.

4. Investment Priorities:

Stock exchanges facilitate the investors to decide his investment priorities by

providing him the basket of different kinds of securities of different industries and

companies. Investor can sell stock of one company and buy a stock of another

company through stock exchange whenever he wants. He can manage his

investment portfolio to maximize his wealth.

5. Profitable Investment:

Money market enables the commercial banks to use their excess reserves in

profitable investment. The main objective of the commercial banks is to earn

income from its reserves as well as maintain liquidity to meet the uncertain cash

demand of the depositors. In the money market, the excess reserves of the

commercial banks are invested in near-money assets (e.g. short-term bills of

exchange) which are highly liquid and can be easily converted into cash. Thus, the

commercial banks earn profits without losing liquidity.

6. Self-Sufficiency of Commercial Bank:

 Developed money market helps the commercial banks to become self-

sufficient. In the situation of emergency, when the commercial banks have scarcity

of funds, they need not approach the central bank and borrow at a higher interest

rate. On the other hand, they can meet their requirements by recalling their old

short-run loans from the money market.

7. Investment Safety:

Stock exchanges through their by-laws given by Securities and Exchange

Board of India (SEBI). Transparent procedures try to provide safety to the

investment in industrial securities. Government has established the National

stock Exchange (NSE) and over the counter Exchange of India (OTCEI) or

investor’s safety. Exchange authorities try to curb speculative practices and

minimize the risk for common investor to preserve his confidence.

8. Help to Central Bank:

Though the central bank can function and influence the banking system in the

absence of a money market, the existence of a developed money market smoothens

the functioning and increases the efficiency of the central bank. Money market

helps the central bank in two ways:

(a) The short-run interest rates of the money market serve as an indicator of the

monetary and banking conditions in the country and, in this way, guide the

central bank to adopt an appropriate banking policy,

9. Indicator of Industrial Development:

Stock exchanges are the symbolic indicators of industrial development of a

nation (i.e. Productivity, efficiency, economic- status). A prospect of each industry

and every unit in an industry is reflected through the price fluctuation of

industrial on stock exchanges. Stock exchanges Sensex and price fluctuations of

securities of various companies tell the entire story of changes in industrial sector.
10. Barometer of National development of Economy:

Stock exchanges are taken as a Barometer of national development of the

economy of a country. Each economy is economically symbolized (indicators) by

its most significant stock exchange. New York stock Exchange, London stock

Exchange, Tokyo stock Exchange and Bombay stock Exchange are considered as

barometers of U.S.A, United Kingdom, Japan and India respectively. At both

national and international level these stock exchanges represent the progress and

conditions of their economies.

11. Borrowings by the government:

The money market helps the government in borrowing short term funds at

very low interest rates. The borrowing is done on the basis of treasury bills. But in

case the government resorts to deficit financing or to print more currency or to

borrow from the central bank, it will merely raise the money supply over and

above the needs of the economy and hence the price level will boost up. Thus, it is

clear that the money market is very useful for the government since it meets its

financial needs.

12. Savings and investment:

Another point of importance of the money market is that it helps in promoting

liquidity and safety of financial assets. By doing so it can help in encouraging

savings and investment. The saving and investment equilibrium or equilibrium of

demand and supply of loanable funds helps in the allocation of resources.