For Daily Job Alert Join Our Whats App Channel
For Free Study Material Join Our Telegram Channel

RBI : Its functions & Role

The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank of India is the central Bank of India entrusted with the multidimensional role. It performs important monetary functions from issue of currency note to maintenance of monetary stability in the country. Initially the Reserve Bank of India was a private share holder’s company which was nationalized in 1949. Its affairs are governed by the Central Board of Directors appointed by the Government of India. Since its inception the Reserve Bank of India had played an important role in the economic development and monetary stability in the country.

The Royal Commission on Indian Currency and Finance appointed on August 25, 1925 has suggested the establishmentof the Central Bank in India, later the Indian Central Banking Enquiry Committee, 1931 stressed the establishment of the Central Bank in India. The Reserve of Bank was established on April 1, 1935 under the Reserve Bank of India Act, 1934.The main object of Reserve of India is,

“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 any credit system of the country to its advantage”

The Reserve Bank of India was established as a private share holder’s bank. The Central office of Reserve Bank of India was initially located in Calcutta which was later shifted to Bombay. The Reserve Bank of India issued first of its currency notes in January 1938 in denomination of Rs.5 and Rs.10 and later in the same year denomination of Rs.100, Rs.1000 and Rs.10000 were issued

Post Independence

The Reserve Bank of India was nationalized in the year 1949 through the Reserve Bank (Transfer of Public Ownership) Act, i948 and all shares were transferred to Central Government. The Reserve bank of India is constituted for the management of currency and for carrying the business of banking in accordance with provisions of the Act. It is a body corporate having perpetual succession, common seal and can be sued or sue in its name. The general supervision and direction of the affairs of the Reserve Bank is entrusted with Central Board of Directors.

Composition of Central Board

The Central Board consists of Governor, deputy Governor, Ten Director nominated by the Central Government and two Government official nominated by the Central Government. The deputy Governor and Director are eligible to attend meeting of the Central Board but are not entitled to vote. The Governor and deputy Governor hold office for term of five years and are entitled for a re-appointment. The Directors are appointed for a term of four and hold office during the pleasure of the president. The meeting of the Central Board is convened at least six times in a year.

Composition of Local Board

A local board is formed in each four zones consisting of five members which are appointed by the Central Government. There is Chairperson of the Board who is elected among the member. The members of the Board have a hold office for a term of four years and eligible for reappointment. The Local Board advice on matters referred to it by the Central Board and performs duties delegated to it by the Central Board.


Functions of RBI can be classified into following categories:
a) Traditional functions
b) Development functions

c) Supervisory functions


1. Issue of Currency Notes
As per the provisions of the Section 22 of the Reserve Bank of India Act 1934 the RBI has sole right or authority to issue currency notes except one rupee note and coins of smaller denomination. RBI can exchange these currency notes for other denominations.  RBI issues these currency notes ( 2, 5, 10, 20, 50, 100, 500, 1000) against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and government of India bonds etc.
2. Banker to other Banks
RBI also guide, help and direct other commercial banks in the country.RBI can control the volume of bank reserves. Every commercial bank has to maintain a part of their reserves with Its parent (RBI). If bank need fund they approach to RBI for fund, that is called Lender of the Last Resort.
3. Banter to The Government
RBI works as an agent of the central and state governments. On the behalf of government it makes payments, taxes and deposits etc. It also represent the government at international level also. It maintains government accounts and provide financial advice to the government. It also manages government public debts and maintains foreign exchange reserves on behalf of the government. RBI also provides overdraft facility to the government in case of financial shortage.
4. Exchange Rate Management
For maintenance of the external value of rupee, RBI prepares domestic policies. Also it need to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. For maintenance of exchange rate stability it has to bring demand and supply of foreign currency (U.S.) dollar close to each other.
5. Credit Control Function
Commercial banks creates credit according to demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. If credit creation is below the required limit then it harms the growth of the economy. As a central bank of India, RBI has to look for growth with price stability. Thus it creates the credit creation capacity of commercial banks by using various credit control tools.
6. Supervisory Function
RBI supervise the banking system in India. RBI has power to issue licence for setting up new banks, to open new branches, to decide minimum reserves. RBI inspects functioning of commercial banks in India and abroad. RBI also guide and direct the commercial banks in India. RBI can conduct audit any of the bank.


Developmental functions are described as under:
1. Development of the Financial System
The financial systems includes – financial institutions, financial markets and financial instruments. The sound and efficient financial system is necessary for rapid economic development of the nation.
RBI encourages the banking and non – banking institution for maintenance of sound and healthy financial system.
2. Development of Agriculture
As we know, India is an agrarian economy so RBI always give attention to agriculture sector by assessing credit needs of this sector. Regional Rural Banks (RRB), National Bank for Agriculture and Rural Development (NABARD) which are only for agriculture finance comes under the control of the RBI.
3. Industrial Finance
For economic development of country, Industrial development is necessary. As we know industries includes small industries, middle industries, large scale industries etc all these industries development is necessary for overall economic development of country. For this purpose RBI supports the industrial sector also. RBI had played the vital role for setting up of such industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.
4. Training Provision
RBI always tried to provide essential training to the staff of the banking industry. RBI has set up banker’s training college at several places. The training institute namely National Institute of Bank Management (NIBM), Bankers Staff College (BSC), College of Agriculture Banking (CAB) etc.
5. Data Collection
RBI always collects important statistical data on several topics such as interest rates, inflation, savings, investment, deflation etc. This data is very much useful for policy makers and researchers.
6. Publication of the Reports 
RBI has its separate publication division. This division collect and publish data on different sector of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI annual reports, Report on Trend and Progress of commercial banks. This information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits
RBI always takes necessary steps to promote the banking habits among people for economic development of country. RBI has set up many institutions such as Deposit Insurance Corporation 1962, UTI 1964, IDBI 1964, NABARD 1982, NHB 1988 etc. These organizations develop and promote the banking habits among the people.
8. Export Promotion
RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export – Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.


The supervisory functions of RBI are discussed as under:

1. Granting Licence to Banks

RBI grants licence to banks for carrying its business. RBI also provide licence for opening extension counters, new branches even to close down existing branches.
2. Bank Inspection
RBI has power to ask for periodical information from banks on various components of assets and liabilities.
3. Control Over NBFIs 
The non – bank financial institutions are not influenced by the working of a monitory policy. RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs.4. Implementation of Deposit Insurance Scheme
The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposit of small depositors. All bank deposits below Rs. 1 Lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.


Facts about RBI

1. India’s central banking institution/authority
2. Controls Monetary policy of the Indian rupee
3. Est. 1 Apr,1935 during the British Raj under RBI ACT 1934
4. Nationalized in 1st Jan,1949
5. Member bank of the Asian Clearing Union
6. Providing license to New Banks
7. It regulate, control & inspects the bank in India
8. Share capital fully paid initially owned by private shareholders
9. It plays an important part in the development strategy of the govt. of India
10. Consist of 21 members

  • 1 Governor
  • 4 Deputy Governor
  • 2 Finance Ministry Representative
  • 10 Govt. nominated directors to represent important elements from India’s economy
  • 4 Directors to represent local boards

Public Sector Bank

Those Bank in which Govt. share is 51% or above that is called Public Sector Bank.
Example : SBI, Allahabad Bank, Bank Of Baroda, Bank of India

Private Sector Bank

In which private Individual or Group of Private individual’s share is 51% or above.
Example : ICICI

Foreign Bank

Head office locate outside and Branches comes in India.

Example: FB, BOA , Catholic Bank

Types of foreign currency accounts

Public Sector Bank (PSB)

  • 1969 ‘s 14 Bank nationalised
  • 1981 ‘s again 6 Bank nationalised
  • 1993  2 merge bank New Bank of India & PNB
  •  19 + IDBI + SBI + 5 Associate Of SBI + Bhartiya Mahila Bank

Subsidiary of RBI

  • Fully owned by Govt.
  • national Housing Bank (NHB)
  • Insurance Credit & Depository
  • (NBARD) National Bank of Agric. & Rural Development

Monetary Policy

  • made by RBI
  • Main function of RBI
  • Monetary Policy review after 45 days

CRR ( Cash Reserve Ratio)

  • Every Bank need to maintain in the form cash
  • 4 % of NDTL ( Net Demand & Time Liability )

SLR ( Statutory Liquidity Ratio )

  • 20.00 % of NDTL
  • In the form of Gold, Govt. Securities which are easily converted into cash.

Repo Rate

  • When bank lends money from RBI certain interest has to paid by bank.
  • For Short Termmore than 2 days upto 90 days
  • There will be always minimum difference between  Repo Rate & Reverse Repo Rate is 1%

Reverse Repo Rate

  • When bank deposit surplus amount with RBI certain interest has to paid by RBI.

Marginal Standing Facility (MSF)

  • Same as Repo Rate ( Scheduled Bank borrow funds overnight from RBI)
  • Short term upto 90 days
  • upto 2 % of  NDTL

Bank Rate

  • long term
  • Same as Repo Rate

Base Rate

  • Fixed by RBI
  • Below it No loan can provided by any Bank
  • PLR(Prime Lending Rate)
  • Fixed by Bank
  • Loan provided by banks to his customers


Monetary Policy of RBI :

As discussed earlier, RBI executes Monetary Policy for Indian Economy. The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well. The main objectives of monitoring monetary policy are:

  • Inflation control
  • Control on bank credit
  • Interest rate control

The monetary policy (credit policy) of RBI involves the two instruments given in the flow chart below:

Quantitative Measures

Quantitative measures refer to those measures that affect the variables, which in turn affect the overall money supply in the economy.
Instruments of quantitative measures:Bank rates
Bank rate −The rate at which central bank provides loan to commercial banks is called bank rate. This instrument is a key at the hands of RBI to control the money supply in long term lending.

  • Increase in the bank rate will make the loans more expensive for the commercial banks; thereby, pressurizing the banks to increase the rate of lending. The public capacity to take credit at increased rates will be lower, leading to a fall in the volume of credit demanded.
  • The reverse happens in case of a decrease in the bank rate. This increases the lending capacity of banks as well as increases public demand for credit and hence will automatically lead to a rise in the volume of credit flowing in the economy.

Liquidity Adjustment Facility-

Reserve Bank of India’s  LAF helps banks to adjust their daily liquidity mismatches. LAF has two components – repo (repurchase agreement) and reverse repo.


(i) Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive.Repo rate is always higher than the reverse repo rate.


(ii) Reverse Repo Rate:  It is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks.The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.

LAF rates


(iii)Marginal Standing Facility (MSF):  is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12). The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio SLR.

The scheme has been introduced by RBI for reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.

Varying reserve ratios –

 The reserve ratio determines the reserve requirements that banks are liable to maintain with the central bank. These tools are:

(i) Cash Reserve Ratio (CRR)
It refers to the minimum amount of funds in cash( decided by the RBI) that a commercial bank has to maintain with the Reserve Bank of India, in the form of deposits. An increase in this ratio will eventually lead to considerable decrease in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply. Currently, it is 4%.


(ii) Statuary Liquidity Ratio (SLR)
SLR is concerned with maintaining the minimum percentage( fixed by RBI) of assets in the form of non-cash with itself. The flow of credit is reduced by increasing this liquidity ratio and vice-versa. As SLR rises the banks will be restricted to pump money in the economy, thereby contributing towards decrease in money supply. The reverse case happens if there is a fall in SLR, it increases the money supply in the economy.



Please enter your comment!
Please enter your name here