Explain the functions of Reserve Bank of India.

Answer: RBI is the central bank of India: bank of issue, banker to the government, bankers’ bank, lender of last resort, custodian of foreign exchange, controller of credit and promoter of development.

The Reserve Bank of India was established on 1 April 1935 and nationalised on 1 January 1949. Its main functions are:

1. Issue of currency notes: RBI has the sole right to issue currency notes (except one-rupee notes and coins issued by the Government of India). It follows the minimum reserve system.
2. Banker to the government: It keeps accounts of central and state governments, receives and makes payments on their behalf, manages public debt and gives them short-term loans (ways and means advances). It also advises the government on economic matters.
3. Bankers’ bank: Commercial banks keep a part of their reserves (CRR) with RBI. It provides them clearing house facility and financial help.
4. Lender of last resort: When commercial banks face a financial crisis, RBI gives them loans by rediscounting bills or against approved securities.
5. Custodian of foreign exchange reserves: RBI maintains the foreign exchange reserves of the country, manages the exchange rate of the rupee and administers FEMA.
6. Controller of credit: RBI regulates the volume and direction of credit through quantitative methods (bank rate, repo and reverse repo rates, open market operations, CRR, SLR) and qualitative methods (margin requirements, credit rationing, moral suasion, selective credit control).
7. Supervision and regulation of banks: It grants licences, inspects banks and regulates their working to protect depositors.
8. Promotional and developmental functions: It promotes agricultural and industrial finance, financial inclusion, digital payments, and has helped set up institutions such as NABARD, IDBI and EXIM Bank.
9. Collection of data and publication: It collects and publishes statistics on money, banking and the economy.