In 1921, the Govt. of India established the Imperial Bank as the central bank of India. But it was not very successful. Upon the recommendation of the Central Banking Enquiry Committee, on April 1, 1935, the Reserve Bank of India began working. The entire share capital of RBI was initially owned by private shareholders. It was nationalised in 1949. Its head office is in Mumbai and it has branches in New Delhi, Kolkata, Chennai, Bangalore, Kanpur, Ahmedabad, Hyderabad, Patna and Nagpur. The State Bank of India works as its Agent in the cities where the RBI does not have an office.
The Preamble of the RBI Act, 1934 states that, “Whereas it is expedient to constitute a Reserve Bank of India to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in (India) and generally to operate the currency and credit system of the country to its advantage.”
Role of Reserve Bank of India
The Preamble prescribes the objective of the Reserve Bank of India in the following lines:
“…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
Thus RBI plays the most important role in:
securing monetary stability in India and
operating the currency and credit system of the country.
Apart from these two role plays, RBI being the central monetary authority plays a very significant role in the Indian Economy.
Guarantor of Price Stability
Being the monetary authority of the economy, RBI is responsible for implementing, formulating and monitoring the monetary policy of India. Keeping this authority in mind the RBI is required to maintain price stability and ensure adequate flow of credit to productive sectors.
Regulator and Supervisor of the Financial System
The Supreme financial body sets down broad parameters of banking operations within which the country’s banking and financial system operates. This reasonably helps in maintaining public confidence in the system. It in turn protects depositors’ interest and provides lucrative banking services to the public.
Manager of Exchange Control
The RBI is responsible for managing the Foreign Exchange Management Act, 1999. It is the nodal agency which facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.
Issuer of Currency
It is the only supreme body which issues and exchanges or destroys currency and coins not fit for circulation. This facilitates in giving the public adequate quantity of currency notes and coins and in good quality.
The RBI since its inception performs a wide range of promotional functions to support national objectives and generate goodwill among the citizens of the country.
Functions of RBI
Issue of Currency: The RBI has the sole right to issue currency notes. To issue notes, it follows a minimum reserve system. The Bank also exchanges notes and coins of one denomination into those of other denominations as demanded by the public.
Banker to Government: The Reserve Bank of India acts as the banker to the central government as also to the governments of the constituent units of India’s federal system. Banks transact the banking business of the Government of India and accordingly perform the following functions: accept money on account of the government, make payment on its behalf, and carry out exchange remittance and other banking operations, including the management of public debt. The RBI plays an important role in financing government expenditure.
Banker’s Bank: RBI has extensive powers to control the commercial banking system. All scheduled banks are under a statutory obligation to maintain a certain minimum of cash reserve which is to be decided by the RBI against their demand and time liabilities. With this, the RBI determines the deposits/credit creating ability of the bank. RBI is not only a banker’s bank but it also works as a lender of last resort.
Controller of Credit: The RBI functions as the controller of credit. As such, it regulates the quantity of credit and the rate at which it is made available. It does this through the use of general and selective controls.
Exchange Management and Control: The RBI is required to stabilise the external value of the rupee. For this purpose, it functions as the custodian of the nation’s foreign exchange reserves. It is obligatory for the RBI to buy and sell currencies of all the members of the IMF. In this field the RBI has following dimensions:
To administer the ‘foreign exchange control’.
To choose the exchange rate system and fix or manage the exchange rate between the rupee and other currencies.
To exchange reserve.
To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union and other countries, and with international financial institutions such as the IMF, World Bank and the Asian Development Bank.
The role of the RBI as a participant in the foreign exchange market, and as a stabiliser of the market and of the rupee exchange rate has become all the more important with the introduction of the floating exchange rate system and the rupee convertibility on trade, current and capital accounts.
Collection and Publication of Data: The RBI has been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy.
Supervisory Function: The RBI has a wide power of supervision and control over commercial and co-operative banks relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorised to carry out periodical inspection of banks and to call for returns and necessary information from them.
The RBI performs many development and promotional functions. It has done valuable work in aiding development and in promoting saving and banking habits. The RBI established Deposit Insurance Corporation of India in 1962 to provide securities to depositors against frequent bank failures. The RBI played an important role in the establishment of UTI, IFCI, SFC, IDBI, and Agriculture Refinance Corporation, etc.
Promoter of the Financial System: The RBI delivers various promotional and development services to strengthen the country’s banking and financial structure.
Money Market: In order to increase the strength and viability of the banking system, it carried out a programme of amalgamations and mergers of weak banks with the strong ones.
With the help of a statutory provision for licensing and branch expansion of banks, the RBI has been trying to bring about an appropriate geographical distribution of bank branches. In order to ensure the security of deposits with banks, the RBI in 1962, took the initiative to create the Deposits Insurance Corporations.
Agriculture Sector: The RBI directs and increases the flow of credit to the agricultural sector. It has appointed a separate deputy governor in charge of rural credit. It has conducted many studies and research on the problem of rural credit. It has created a data base on rural credit through various surveys.
Industrial Finance: The RBI has either created or has advised and helped in creation of many development institutions and financial institution at the centre and state level. These include IDBI, SIDBI, NHB, NCB and UTI.