Unit-5

Reserve Bank of India

Topics covered:
-RBI -Meaning, Objectives and Functions.
-Credit Control – Meaning, significance and
types of Credit control measures of RBI.
-Role of RBI in the economic development of
India
• The Reserve Bank of India, abbreviated as the
RBI, is the Central Bank of India, meaning it is
the apex body in the Indian financial system.
• It is owned by the Union Ministry of Finance.
• It acts as a regulatory body, responsible for the
regulation of the Indian banking system as well
as the control, issuing, and maintaining money
supply in the Indian economy.
Major objectives
• To regulate the issue of banknotes
• To maintain reserves with a view to
securing monetary stability and
• To operate the credit and currency system
of the country to its advantage.
• To maintain price stability while keeping in
mind the objective of growth.
History of Reserve Bank of India
The Reserve Bank of India
was established to tackle
the economic turmoil that
occurred after World War-
I. The RBI was formed
based on recommendation
of Hilton young commission
and as per guidelines laid
down by DR. B.R
Ambedkar
The timeline of origin and
evolution of the Reserve
Bank of India (RBI) can be
seen beside:
 Branches and Offices of RBI
• Central Office of RBI
The Central Office of the Reserve Bank of India is the main office and headquarters of the RBI. This is
the office where the RBI Governor sits and the whole organization of the RBI is controlled from
• Zonal Offices of RBI
The RBI has 4 Zonal Offices, located in
• Kolkata – represents the East Region
• Mumbai – represents the West Region
• Delhi – represents the North Region
• Chennai – represents the South Region
• Regional Offices of RBI
The Reserve Bank of India (RBI) has about 22 regional offices, which play a crucial role in the
functioning of the RBI at the regional level. These offices are mostly located in the capital cities of
the states.
• Other Offices of RBI
The RBI has other offices in prominent cities across India, which perform specific tasks like:
• Specialized departments like rural planning or agricultural credit.
• Training centers for bankers.
• Oversight of specific financial institutions.
Structure of Reserve Bank of India (RBI)
 The functions of the Reserve Bank
• Monetary policy
• Regulation and supervision of the banking and non-banking financial institutions, including
credit information companies
• Regulation of money, forex and government securities markets as also certain financial
derivatives
• Debt and cash management for Central and State Governments.
• Management of foreign exchange reserves.
• Foreign exchange management—current and capital account management
• Banker to banks.
• Banker to the Central and State Governments.
• Oversight of the payment and settlement systems.
• Currency management.
• Developmental role.
• Research and statistics.
Major functions of the RBI can be seen
under the following 2 heads:
1.Monetary Functions of RBI:
Monetary Functions of the Reserve Bank of India include
those functions which are concerned with money and money
supply in the economy. Major functions coming in this
category include:
• Issuer of Bank Notes: The Reserve Bank of India has the
monopoly of issuing currency notes except for 1 Rupee
note and coins.
⚬ The 1 Rupee note and the coins of all denominations
are minted and issue by the Government of India,
not the RBI. But, they are circulated by the RBI.
⚬ The RBI issues currency notes under a system called
Minimum Reserve System.
• Banker to the Government: The RBI acts as a banking agent and financial
advisor to the Central as well as the State Governments. In this capacity, the
RBI:
⚬ Manages Government accounts and treasuries.
⚬ Keeps deposits of the Government.
⚬ Lends to the Governments without any interest for the short term
⚬ Buys and sells Government Securities (G-Secs) on the Government’s behalf.
⚬ Gives monetary and financial advice to the Governments.
• Bankers’ Bank: The RBI is the banker of all Scheduled commercial banks (SCBs).
In this capacity, it performs the following functions:
⚬ Keeps the reserves of banks in the form of Cash Reserve Ratio (CRR) with
itself.
⚬ Provides financial assistance to banks against mortgaged securities
⚬ Rediscounts Bills of Exchange.
• Lender of Last Resort: It also acts as a lender of last resort for the Scheduled
Commercial Banks (SCBs). Usually, banks and other financial institutions borrow
and lend among themselves to meet their financial needs. But, in times of crisis,
the SCBs approach the RBI to get financial assistance.

• Custodian and Manager of Foreign Exchange Reserves: In order to stabilize the

external value of Indian currency, the RBI maintains the reserves of foreign
currencies to stabilize the exchange rate.
⚬ This function of the RBI also helps promote international trade.

• Controller of Credit or Money Supply: It uses its monetary policy tools to control
the volume of money supply according to the economic situation of the nation.
⚬ This helps in controlling inflation and deflation and hence stabilizing the
general price level in the economy.
2. General Functions of RBI:
The General Functions of the RBI include functions related to general regulation and promotion of
the banking system so as to maintain the health and growth of the banking system in the country.
Major functions included in this category are as follows:
• Regulator of the Banks: The RBI Act of 1934 and the Banking Regulation Act of 1949 entrust the
RBI with the powers to regulate the banks in the country. In this capacity, the RBI performs
functions such as:
• Licensing banks,
• Prescribing minimum requirements of paid-up capital and reserves, etc.
• Promotional Functions: The RBI works towards the promotion of the Indian Financial System
through functions such as
• Enabling expansion of the Commercial Banks in terms of their branches in the country or
aboard,
• Promoting banking habits of people,
• Promoting financial inclusion,
• Consumer education and protection,
• Promoting Digital India initiatives in financial sector, etc.
 Credit Control
Meaning of Credit Control:
Credit control refers to the regulatory measures used by the Reserve Bank of India (RBI) to
influence the amount, cost, and allocation of credit in the economy. The main objective of credit
control is to maintain economic stability, curb inflation, and ensure that credit is allocated to
sectors that are crucial for the economy’s development.

Significance of Credit Control:

1.Inflation Management: By regulating the supply of money in the economy, the RBI can
control inflation. For instance, reducing the supply of credit can help in cooling down an
overheated economy, thereby controlling inflation.
2.Economic Stability: Credit control helps in stabilizing the economy by smoothing out the
fluctuations of boom and bust cycles. The RBI can increase the availability of credit during a
downturn to stimulate the economy and reduce it during a boom to prevent overheating.
3.Promoting Productive Sectors: Through credit control, the RBI can direct funds towards
priority sectors such as agriculture, small-scale industries, and infrastructure, ensuring
balanced and inclusive growth.
4.Financial Stability: By preventing excessive credit growth in speculative sectors like real estate
or stock markets, credit control measures help in reducing the risk of financial crises.
 Quantitative Methods

• Bank rate : This is the interest rate at which the central bank lends money to commercial banks
for a short period. By changing this rate, the central bank can influence the cost and availability
of credit in the economy. A higher bank rate makes borrowing more expensive and reduces
credit demand, while a lower bank rate makes borrowing cheaper and increases credit demand.

• Open market operations: These are the buying and selling of government securities by the
central bank in the open market. By doing this, the central bank can inject or withdraw
liquidity from the banking system. When the central bank buys securities, it pays money to the
sellers and increases their money supply, which can be used for lending. When the central bank
sells securities, it receives money from the buyers and reduces their money supply, which
reduces their lending capacity.

• Cash reserve ratio: This is the percentage of deposits that commercial banks have to keep with
the central bank as reserves. By changing this ratio, the central bank can affect the amount of
money that commercial banks can lend or invest. A higher cash reserve ratio means that
commercial banks have to keep more money with the central bank and have less money to lend
or invest, while a lower cash reserve ratio means that commercial banks have to keep less
money with the central bank and have more money to lend or invest.
• Repo rate: This is the interest rate at which the central bank lends money to commercial
banks for a short period. By changing this rate, the central bank can influence the cost and
availability of credit in the economy. A higher repo rate makes borrowing more expensive and
reduces credit demand, while a lower repo rate makes borrowing cheaper and increases
credit demand.

• Reverse repo rate: This is the interest rate which the central bank pays to commercial banks
on their deposits. By changing this rate, the central bank can influence the supply and return
of excess funds in the economy. A higher reverse repo rate makes depositing more attractive
and reduces money supply, while a lower reverse repo rate makes depositing less attractive
and increases money supply.

• Statutory Liquidity Ratio: This is the statutory liquidity ratio (SLR), which is the percentage
of deposits that commercial banks have to maintain in liquid assets such as cash, gold, or
government securities. By changing this ratio, the central bank can affect the amount of
money that commercial banks can lend or invest. A higher SLR means that commercial banks
have to keep more money in liquid assets and have less money to lend or invest, while a lower
SLR means that commercial banks have to keep less money in liquid assets and have more
money to lend or invest.
 Qualitative Methods

• Margin requirements: These are the minimum percentage of security or collateral that
commercial banks have to maintain against the loans. By changing these requirements, the
central bank can discourage or encourage lending for specific purposes. A higher margin
requirement means that commercial banks have to keep more security or collateral for a
given loan amount, which reduces lending capacity, while a lower margin requirement means
that commercial banks have to keep less security or collateral for a given loan amount, which
increases their lending capacity.

• Regulation of consumer credit: This is the imposition of restrictions on the terms and
conditions of loans for durable consumer goods. By doing this, the central bank can curb or
stimulate consumer spending and demand. For example, the central bank can impose higher
down payments, shorter repayment periods, or higher interest rates on loans for cars,
refrigerators, etc., to reduce consumer credit and spending, or it can relax these conditions to
increase consumer credit and spending.
• Control through directives: This is the issuance of orders or guidelines by the central bank to
commercial banks regarding their lending policies. By doing this, the central bank can
influence the quality and quantity of credit in the economy. For example, the central bank can
direct commercial banks to lend more to priority sectors such as agriculture, small-scale
industries, etc., or to limit their exposure to risky sectors such as real estate, stock market, etc.

• Credit rationing: This is the limitation of credit availability or credit ceiling for certain
sectors or borrowers. By doing this, the central bank can prevent excessive or speculative use
of credit in the economy. For example, the central bank can impose a maximum limit on the
amount of credit that commercial banks can lend to a particular sector or borrower like
housing sector, regardless of their demand or collateral.

• Moral suasion: These are the use of persuasion or appeal by the central bank to commercial
banks to follow its policies. By doing this, the central bank can appeal to the sense of
responsibility and cooperation of commercial banks in achieving the objectives of monetary
policy. For example, the central bank can request commercial banks to voluntarily reduce
their lending rates, increase their lending to priority sectors, etc., through speeches, press
releases, meetings, etc.
Role of RBI in Economic
Development
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