The functions of Reserve Bank of India (RBI) is as important as the Ministry of Finance. RBI is not just a bank, it bank of banks.
When I was a child I always wanted to open a bank account in Reserve Bank of India.
The enormity and magnitude of its office building itself used to tell me that this bank is the best.
But as I grew up I began to realize that even my father (whom I considered as my epitome) did not had account in this bank.
I even never heard him talking about reserve bank of India.
But I used to hear the name of reserve bank of India in television news channels.
A doubt came to my mind that whether this is a bank at all?
I asked this question to my father and in simple terms he explained me that “Reserve Bank of India is Banker to Banks.
In nutshell I could make it that RBI is possible BOSS of all banks in India.
As a common man saves and lends money from banks like SBI, ICICI, HDFC etc, in the same way these banks saves and lends money from reserve bank of India“.
But this question always kept on nudging my head that what can be other functions of Reserve Bank of India (RBI).
#1. Monetary Authority
Out of all the functions of reserve bank of India (RBI), the most important is to act as a monetary authority.
It regulates the money supply in the economy.
Money is used to buy goods a services. When money supply is growing too fast, people will have more to spend.
This triggers demand while supply remains the same.
This results in increase in prices of goods/services.
This means higher INFLATION. Too much money flow in economy will result in high inflation.
RBI main function is to keep inflation in control. Inflation targets are set jointly by RBI and Finance Ministry.
Like, in USA inflation target is to keep it between 2-3%. In Indian, target is to keep it between 5-6%.
But India’s present inflation figures are higher.
One can say that to bring inflation down, supply of money shall be decreased (increase interest rates).
The answer is yes, but RBI cannot do it so easily.
The reason is, they have to consider economic GROWTH as well. India is one of the fastest growing economies of the world.
Billions of dollars is coming in India because of its growth prospects.
If growth slows down, all investment will vanish.
For India to become a developed nation, this money flow-in from world is a must.
Hence RBI cannot afford to slow-down India’s growth rate.
When supply of money is decreased, credit available in market becomes costlier.
This hampers the growth prospects of rising sectors.
To support growth, sufficient financing is essential.
But when interest rates increase, profitability calculation of projects also gets negatively-effected.
This may demotivate people/businessmen from taking investment decision.
- Keep prices stable and,
- Maintain flow of money to profitable sectors of industry.
RBI has to keep a balance between inflation and growth.
This job is like walking on a thread 100 feet above ground. Countries economy is dependent on what monetary policy is implemented by RBI.
RBI does this by regulating issue of bank notes and checking the credit policy (interest rates).
When a country/sector is growing it will need credit to fund its growth.
RBI role is to ensure that enough credit is available for India to meet its growth targets.
#2. Currency Manager
Reserve bank of India functions as managers of production and distribution of Indian currency.
RBI also has rights to destroy notes or coins which are not required any more.
The objective of RBI as currency manager is to keep the market optimally funded with notes and coins in quantity and quality.
Removal of bad quality notes and coins is also job of RBI. No other authority has the role of currency manager (not even the Finance Ministry of India).
Currency notes are currently printed in presses located in:
- Mysore and,
Some presses are owned by government of India and RBI.
Coins are minted only by government of India.
Coins now in circulation: Small Coins (50 paisa), Rupee Coins (1, 2, 5, and 10)
Notes now in circulation: Bank Notes in Rupees (10, 20, 50, 100, 500, and 1000)
#3. Banker to GOI & to Banks
Like SBI, ICICI, HDFC are banker to us, RBI is a banker to Government of India (GOI).
RBI maintains all accounts of GOI, make payments and receives payments on behalf of GOI.
Reserve Bank of India also functions as banker to all banks in India.
All banks like SBI, ICICI, HDFC, Axis, BOB, etc has accounts in Reserve Bank of India.
For RBI these are list of account holders, like we are for SBI and ICICI’s.
Reserve bank of India ensures smooth functioning of bank-to-bank transfers made between banks and also to public.
Fund transfers between operating banks is one of the main functions of RBI.
Like we are asked to maintain an average quarterly balance with our banks, RBI also restricts banks to maintain a per-specified reserve in RBI.
This is a part of mandatory policy to ensure that depositors money are safe.
If RBI does not keep this check, it may happen that banks issue too much loan.
In general, a bank shall not issue loan more than its deposit base.
This is where RBI role comes into play. They force banks to maintain certain deposits with RBI.
This helps is extreme situations. It may happen that some day large number of deposits are withdrawn.
In such a scenario, bank must have sufficient liquid cash.
#4. Creates Rules for Baking System
RBI works as a policy maker for banking system in the country.
It keeps a close eye on the operation procedure and implementation of banking systems by all banks.
In a country, if banking system fails, it will create a havoc.
If public’s hard earned money cannot be managed properly it will lead to a disaster.
Hence setting up clear and strict guidelines for banking system is essential.
The guidelines set by RBI makes banking system dependable, cost effective and efficient.
By use to banking system, we not only save and invest money but we also make various types of payments.
There are very strict payment terms norms for Indian banks making it most reliable.
One of the main functions of Reserve Bank of India is to establish and review payment term norms.
Not only this, it also checks and controls the interests offered by banks on savings accounts, terms deposits etc
#5. Manager of Foreign Exchange
Reserves Bank of India plays a vital role in foreign exchange management.
With the globalisation of Indian economy it is very vital to keep check on the valuation of Indian currency.
The strength of INR must be on comparable levels w.r.t. major currencies of the world.
Reserve bank of India takes part in Foreign Exchange Market by selling or purchasing foreign currencies .
The decision of selling and buying of a foreign currency is taken depending on their demand and supply.
It is also important to maintain a optimum level of foreign reserves in a country.
It is the function of Reserve bank of India to decide this optimum level and manage to maintain this level of reserves.