What are the Objectives and Functions of Reserve Bank of India?

Reserve Bank of India : What are the Objectives and Functions of RBI. It is India’s central Bank. The Central bank of a country executes multiple functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank of government and as a banker of scheduled commercial banks, etc. It also works for an overall economic growth of the country. The Reserve Bank of India was established in 1935 with the provision of Reserve Bank of India Act, 1934.Though privately owned initially, in 1949 it was nationalized and since then fully owned by Government of India (GoI).

The broad objectives of the Reserve Bank are:

Regulating the issue of currency in India;
keeping the foreign exchange reserves of the country;
establishing the monetary stability in the country; and
developing the financial structure of the country on sound lines consistent with the national socio-economic objectives and policies

The preamble of the Reserve Bank of India describes its main functions as:

1. An issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has a number of advantages:

(i) it brings uniformity in notes issue;

(ii) it makes possible effective state supervision;

(iii) it is easier to control and regulate credit in accordance with the requirements of the economy; and

(iv) it keeps the faith of the public in the paper currency.

2. Bankers’ Bank:

As a regulator and supervisor of the country’s financial system, the RBI prescribes the broad parameters of banking operations within which the entire banking and financial system operate in the country. The basic objective of this activity of the RBI is to

(i) maintain public confidence in the country’s banking system,

(ii) protect the interests of depositors, and

(iii) provide cost- effective banking services to the public.

As a bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them funds for short periods. All banks are required to maintain a certain percentage (lying between 3 p.c. and 20 p.c.) of their total liabilities. The main objective of changing this cash reserve ratio by the RBI is to control credit.

The RBI provides financial assistance to commercial banks and State cooperative banks through rediscounting of bills of exchange. As the RBI meets the needs of the commercial banks and cooperative banks, the RBI functions as the ‘lender of the last resort’.

The RBI has been empowered by law to supervise, regulate and control the activities of commercial and cooperative banks. The RBI periodically inspects banks and asks them for returns and necessary information.

3. Banker to Government:

The Reserve Bank acts as the banker, agent, and adviser to Government of India:

(a) It maintains and operates government deposits,

(b) It collects and makes payments on behalf of the government,

(d) It sells for the Central Government treasury bills of 91 days duration,

(e) It makes ‘Ways and Means’ advances to the Central and State Governments for periods not exceeding three months,

(f) It provides development finance to the government for carrying out five-year plans,

(g) It undertakes foreign exchange transactions on behalf of the Central Government,

(h) It acts as the agent of the Government of India in the latter’s dealings with the International Monetary Fund (IMF), the World Bank, and other international financial institutions, (i) It advises the government on all financial matters such as loan operations, investments, agricultural and industrial finance, banking, planning, economic development, etc.

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4. Custodian of Exchange Reserves:

The Reserve Bank is the custodian of India’s foreign exchange reserves. It maintains and stabilizes the external value of the rupee, administers exchange controls and other restrictions imposed by the government, and manages the foreign exchange reserves. Initially, the stability of exchange rate was maintained through selling and purchasing sterling at fixed rates.

But, after India became a member of the international Monetary Fund (IMF) in 1947, the rupee was delinked with sterling and became a multilaterally convertible currency. Therefore the Reserve Bank now sells and buys foreign currencies, and not sterling alone, in order to achieve the objective of exchange stability. The Reserve Bank fixes the selling and buying rates of foreign currencies. All Indian remittances to foreign countries and foreign remittances to India are made through the Reserve Bank.

5. Lender of 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.

6. Exchange Management and Control:

One of the essential central banking functions performed by the RBI is that of maintaining the external value of rupee. The RBI has the authority to enter into foreign exchange transactions both on its own account and on behalf of the Government. The official external reserve of the country consists of monetary gold and foreign assets of the Reserve Bank, besides (Special Drawing Rights or) SDR holdings.

The Reserve Bank, as the custodian of the country’s foreign exchange reserves, is vested with the duty of managing the investment and utilization of the reserves in the most advantageous manner. Being a manager of foreign exchange, it manages the Foreign Exchange Management Act, (FEMA) 1999. As a manager of foreign exchange, the RBI helps in facilitating trade (external) and payment and aims at promoting orderly development and maintenance of the foreign exchange market in India.

7. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through bookkeeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.

The Reserve Bank also performs various ordinary banking functions:

(a), It accepts deposits from the central government, state governments, and even private individuals without interest,

(b) It buys, sells and rediscounts the bills of exchange and promissory notes of the scheduled banks without restrictions,

(c) It grants loans and advances to the central government, state governments, local authorities, scheduled banks and state cooperative banks, repayable within 90 days,

(d) It buys and sells securities of the Government of India and foreign securities,

(e) It buys from and sells to the scheduled banks foreign exchange for a minimum amount of Rs. 1 lakh,

(f) It can borrow from any scheduled bank in India or from any foreign bank,

(g) It can open an account in the World Bank or in some foreign central bank.

(h) It accepts valuables, securities, etc., for keeping them in safe custody.

(i) It buys and sells gold and silver.

Promotional and Developmental Functions:

Besides the traditional central banking functions, the Reserve Bank also performs a variety of promotional and developmental functions:

(a) By encouraging the commercial banks to expand their branches in the semi-urban and rural areas, the Reserve Bank helps (i) to reduce the dependence of the people in these areas on the defective unorganized sector of indigenous bankers and money lenders, and (ii) to develop the banking habits of the people

(b) By establishing the Deposit Insurance Corporation, the Reserve Bank helps to develop the banking system of the country, instills confidence of the depositors and avoids bank failures,

(d) Since its inception, the Reserve Bank has been mating efforts to promote institutional agricultural credit by developing cooperative credit institutions.

(e) The Reserve Bank also helps to promote the process of industrialization in the country by setting up specialized institutions for industrial finance,

(f) it also undertakes measures for developing bill market in the country.

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