CENTRAL BANK OF INDIA RBI

N. PREMKUMAR

Introduction
The origins of the Reserve Bank of India can be traced to 1926, when the Royal Commission on
Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the
creation of a central bank for India to separate the control of currency and credit from the
Government and to augment banking facilities throughout the country. The Reserve Bank of
India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating
in the start of operations in 1935. Since then, the Reserve Bank’s role and functions have
undergone numerous changes, as the nature of the Indian economy and financial sector
changed Starting as a private shareholders’ bank, the Reserve Bank was nationalized in 1949. It
then assumed the responsibility to meet the aspirations of a newly independent country and its
people. The Reserve Bank’s nationalisation aimed at achieving coordination between the
policies of the government and those of the central bank.

Functions of RBI
 Monetary policy

One of the most important functions of central banks is formulation and execution of monetary
policy. In the Indian context, the basic functions of the Reserve Bank of India as enunciated in
the Preamble to the RBI Act, 1934 are:“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.” Thus, the Reserve Bank’s mandate
for monetary policy flows from its monetary stability objective .Essentially, monetary policy
deals with the use of various policy instruments for influencing the cost and availability of
money in the economy .As macroeconomic conditions change, a central bank may change the
choice of instruments in its monetary policy. The overall goal is to promote economic growth
and ensure price stability
Issuer of currency

Management of currency is one of the core central banking functions of the Reserve Bank for
which it derives the necessary statutory powers from Section22 of the RBI Act, 1934. Along with
the Government of India, the Reserve Bank is responsible for the design, production and overall
management Of the nation’s currency, with the goal of ensuring an adequate supply of clean
and genuine notes. In consultation with the Government, the Reserve Bank routinely addresses
security issues and targets ways to enhance security features to reduce the risk of
counterfeiting or forgery of currency notes. The Paper Currency Act of 1861 conferred upon the
Government of India the monopoly of note issues, thus ending the practice of private and
presidency banks issuing currency. Between 1861 and 1935, the Government of India managed
the issue of paper currency. In 1935, when the Reserve Bank began operations, it took over the
function of note issue from the Office of the Controller of Currency, of Government of India

 Bankers to the state and central government

Since its inception, the Reserve Bank has undertaken the traditional central banking function of
managing the government’s banking transactions. The Reserve Bank of India Act, 1934 requires
the Central Government to entrust the Reserve Bank with all its money, remittance, exchange
and banking transactions in India and the management of its public debt. The Government also
deposits its cash balances with the Reserve Bank. The Reserve Bank may also, by agreement,
act as the banker to a State Government. Currently, the Reserve Bank acts as banker to all the
State Governments in India, except Jammu & Kashmir and Sikkim. It has limited agreements for
the management of the public debt of these two State Governments .As a banker to the
Government, the Reserve Bank receives and pays money on behalf of the various Government
departments. As it has offices in only27 locations, the Reserve Bank appoints other banks to act
as its agents for under taking the banking business on behalf of the governments. The Reserve
Bank pays agency bank charges to the banks for undertaking the government business on its
behalf. The Reserve Bank has well defined obligations and provides several services to the
governments. The Central Government and State Governments may make rules for the receipt,
custody and disbursement of money from the consolidated fund, contingency fund, and public
account.

 Banker to banks
Banks are required to maintain a portion of their demand and time liabilities as cash reserves
with the Reserve Bank, thus necessitating a need for maintaining accounts with the Bank.
Further, banks are in the business of accepting deposits and giving loans. Since different
persons deal with different banks, in order to settle transactions between various customers
maintaining accounts with different banks, these banks have to settle transactions among each
other. Settlement of inter-bank obligations thus assumes importance. To facilitate smooth
operation of this function of banks, an arrangement has to be made to transfer money from
one bank to another. This is usually done through the mechanism of a clearing house where
banks present cheques and other such instruments for clearing. Many banks also engage in
other financial activities, such as, buying and selling securities and foreign currencies. Here
Too, they need to exchange funds between themselves. In order to facilitate smooth inter-bank
transfer of funds, or to make payments and to receive funds on their behalf, banks need a
common banker. In order to meet the above objectives, in India, the Reserve Bank provides
banks with the facility of opening accounts with itself. This is the ‘Banker to Banks’ function of
the Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) at the
Regional offices. The Department of Government and Bank Accounts oversees this function and
formulates policy and issues operational instructions to DAD
 Regulation and supervision of the banking and non-banking financial
institutions, including credit information companies
The Reserve Bank’s regulatory and supervisory domain extends not only to the Indian banking
system but also to the development financial institutions(DFIs), non-banking financial
companies (NBFCs), primary dealers, credit information companies and select segments of the
financial markets. In respect of banks, the Reserve Bank derives its powers from the provisions
of the Banking Regulation Act, 1949, while the other entities and markets are regulated and
supervised under the provisions of the Reserve Bank of India Act, 1934. The credit information
companies are regulated under the provisions of Credit Information Companies (Regulation)
Act, 2005.As the regulator and the supervisor of the banking system, the Reserve Bank has a
critical role to play in ensuring the system’s safety and soundness on an ongoing basis. The
objective of this function is to protect the interest of depositors through an effective prudential
regulatory framework for orderly development and conduct of banking operations, and to
maintain overall financial stability through various policy measures.

 Management of foreign exchange reserves

The Reserve Bank, as the custodian of the country’s foreign exchange reserves, is vested
with the responsibility of managing their investment. The legal provisions governing
management of foreign exchange reserves are laid down in the Reserve Bank of India Act,
1934

 Foreign exchange management

The Reserve Bank oversees the foreign exchange market in India. It supervises and regulates it
through the provisions of the Foreign Exchange Management Act, 1999. Like other markets, the
foreign exchange market has also evolved over time, and the Reserve Bank has been
modulating its approach towards its
function of supervising the market

 Market operations

The Reserve Bank operationalises its monetary policy through its operations in government
securities , foreign exchange and money markets

 Developmental role
The Reserve Bank is one of the few central banks that has taken an active and direct role in
supporting developmental activities in their country. The Reserve Bank’s developmental role
includes ensuring credit to productive sectors of the economy, creating institutions to build
financial infrastructure, and expanding access to affordable financial services. Over the years, its
developmental role has extended to institution building for facilitating the availability of
diversified financial services within the country. The Reserve Bank today also plays an active
role in encouraging efficient customer service throughout the banking industry, as well as
extension of banking service to all, through the thrust on financial inclusion

Conclusion

The Reserve Bank’s role and functions have undergone numerous changes, as the nature of the
Indian economy and financial sector changed. Functions of RBI were expanded largely. Initially
it was doing the function as issuer of currency. Now it became of controller of economy. RBI
developed strong control over banking sector and thus preventing Indian banking system from
various negative issues