Read this article to learn about the various functions of RBI (Reserve bank of India) in a detailed and pointwise manner…
In India, the reserve bank does not only have to do traditional work of the central bank but due to India being rudimentary country, the development work of that country also has to be done. The main functions of the reserve bank of India (RBI) are as follows:-
Functions of RBI (Reserve Bank)-
The reserve bank includes 3 main functions like:-
1. Traditional Functions.
2. Developmental Functions.
3. Credit Control Functions.
1. Traditional Functions:
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The traditional or first functions of RBI (reserve bank) can be divided into two parts:-
- Functions of central banking.
- Functions of general banking.
(i) Functions of Central Banking:
Reserve bank is a central bank of India. Its central banking related tasks are as follows:-
(a) Issue of Paper Currency:
In India, the reserve bank has a right to issue notes. There is a separate department for the printing of notes in the reserve bank, which is called the note-issuing department. According to the Reserve Bank of India Act, arrangements have been made to keep the reserve funds behind the notes in order to keep public confidence in the paper currency.
Notes are issued on the basis of minimum fund system since 1957. At present, the fund of at least Rs.200 crores is kept for this work. It contains gold of Rs. 115 crores and securities of Rs. 85 crores.
(b) Function as a Banker of Government:
The reserve bank also acts as the banker of central and provincial governments and provides the following services to the government in this form:-
(i) It receives rupees from different governments and governmental institutions and thus the amount of money that is deposited, and pays on the order of government.
(ii) The reserve bank also arranges the ‘public loans’ for the government like collecting the payment of loans, paying interest and the principal amount of loans or keep an accounting of loans.
(iii) It manages foreign exchange for governments and transfers governments kiosks.
(iv) The reserve bank also arranges the tenders for selling the treasury bill by the government on the necessity.
(c) Bank of Last Banks:
Due to being a central bank, the reserve bank works like the main banker of all the commercial banks and in case of this, the reserve bank conducts guidance, control, and organization of other banks.
They provide financial assistance in the form of the final debtor in the crisis period and gives the loan.
(d) Purchase and Sale of Foreign Exchange:
According to section 10 of the reserve bank act, the reserve bank purchases and sells of foreign exchange securities at the rates set by the central government to keep the pricing of rupees stable. This purchase is only can do with authorized persons and only in the office of Mumbai, Kolkata, Chennai, and Delhi.
The authorized persons are those people or organizations who have the right to purchase and sale of the exchange under the foreign exchange control act, 1949.
(e) Other Central Banking Related Functions:
The reserve bank performs some other functions related to central banking, which is as follows:- (i) Developing banking education, (ii) to collect financial information and data and publish them, (iii) Working of clearing home, (iv) Working of transfer of currency, (v) Work of export assistance, (vi) Function of currency conversion.
(ii) Functions of General Banking:
In addition to the above-mentioned activities, the reserve bank also performs the following ordinary banking tasks:-
(a) Accepting deposit.
(b) Purchase and sales of business and commerce bills.
(c) Purchase and sale of agricultural bills.
(e) Provide loan.
(f) Purchase and sales of foreign securities.
(g) Dealing with banks of other countries.
(h) To take a loan.
2. Developmental Functions:
The reserve bank also has various types of developmental work in planned economic development. It has also taken great interest in solving financial problems of the agricultural, industries, and small industries. It has also contributed to stabilizing the price level in the country.
We can study economic development-related activities of the reserve bank under the following topics:-
(a) Expansion of Banking Facilities:
The reserve bank is trying to expand the necessary banking facilities to avoid obstruction of the development of the rural economy at a high rate of interest. The reserve bank has taken several steps under the banking laws to strengthen the country’s capital markets and currency markets.
(b) Reserve Bank and Agricultural Credit:
Contribution to the reserve bank of India’s agricultural credit is very important. In addition to lending to the agricultural sector, the reserve bank does a lot more work related to agricultural credit, like, (i) Inspection of cooperative banks, (ii) To provide advice on agricultural credit, a permanent consultative committee is set up.
The reserve bank has entrusted the work-related agriculture form July 12, 1982, to National Agriculture and Rural Development Bank.
(c) Reserve Bank and Industrial Credit:
Although the reserve bank can not directly provide financial assistance to the industries, the reserve bank of India’s finance department has provided valuable support in the establishment of long-term debt-making institutions like Industrial finance corporation, state finance corporation, Industrial Credit and Investment Corporation, and Industrial development bank.
Thus, indirectly the reserve bank has done commendable work to provide financial support to the industries.
(d) Reserve Bank and Small Industries:
Small industries have an important place in the Indian economy. The reserve bank takes special care to provide financial assistance to small industries. In order to get financial assistance for the small scale industries, the reserve bank has started a credit guarantee scheme, 1960.
According to this scheme, the reserve bank guarantees loan given to small industries by banks and other credit institutions.
3. Credit Control Functions:
Being the central bank, the reserve bank has the right to control the credit. The reserve bank was given this right under the reserve bank of India act 1934 and the banking rules act 1949.
The methods of controlling the credit control adopted by the reserve bank will be studied under the following topics:-
- Quantitative credit control.
- Selective credit control.
(i) Quantitative Credit Control:
(a) Bank Rate:
Bank rate is the rate of interest on which the reserve bank gives other commercial banks a short term loan on the surety of honorable securities. Bank rate is the most important monetary instrument of credit control. When the reserve bank sees that the quantum of credibility is increasing in the market, it increases its interest rate.
According to the monetary policy announced by the reserve bank on April 29, 2003, the bank rate of 6 percent is effective till date.
(b) Open Market Operations:
RBI can also open the activities of the open market to control credit in the country. In order to control the quantum of credit due to the open market activity, the reserve bank is able to buy and sell the securities, first-class bills, and securities of the government.
(c) Cash Reserve Ratio:
According to the Reserve Bank Act 1934, every commercial bank has to deposit 5% of its demand deposits and 2% of its time deposits in the form of cash with the reserve bank.
(d) Statutory Liquidity Ratio:
It is mandatory for scheduled banks under section 24 of the banking regulation act to keep at least 25% of their total deposits and government securities. This is called the statutory liquidity ratio.
(ii) Selective Credit Control:
Using the general measures of credit control, the central bank regulates the quantum of credit while selective credit management regulates both the direction and quantity of credit by measures of control. There are mainly two objectives of selective credit control-
First, to ban credit facilities on essential things like oils, pulse, sugar, etc; Second, prevent prices of these items form improperly growing.
The following are the major methods of selective credit control adopted by the reserve bank:-
(a) Set a minimum price margin for loans based on certain securities or heritage.
(b) Fixation of the highest limit.
(c) Moral Suasion.
(d) Direct action.
These are the functions of RBI ( Reserve Bank of India)…