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Primary Functions of the Reserve Bank of India

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12 views3 pages

Primary Functions of the Reserve Bank of India

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sablawat1996
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Organizational Structure of the Reserve Bank of India:

The organizational structure of the Central Bank of India, the Reserve Bank, is as follows: The main
managing authority of the bank is the Central Board of Directors, which consists of the following
21members–

1. The Governor

2. Four Deputy Governors

3. Fourteen Directors

4. Two Government Officials

Among these, the Governor and the Deputy Governors are appointed by the Central Government for a
maximum period of five years, and the fourteen Directors, four of which are nominated from each of
the four Local Boards, in accordance with the RBI Act, for a period of maximum four years, but can
be re-elected. The Deputy Governors are responsible for specific operations of the bank. The RBI also
consists of Local Boards responsible for region specific control and monitoring. These are divided
into four parts – Northern, Southern, Eastern and Western with headquarters in New Delhi, Chennai,
Kolkata and Mumbai respectively. These Local Boards consists of five members with a Chairman.

Primary Functions of the Reserve Bank of India

Major functions of the RBI are as follows:

1. Issue of Bank Notes:


The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are
issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited
legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it
brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to
control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith
of the public in the paper currency.

2. Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the government. It has
to-maintain and operate the government’s deposit accounts. It collects receipts of funds and makes
payments on behalf of the government. It represents the Government of India as the member of the
IMF and the World Bank.

3. Custodian of Cash Reserves of Commercial Banks:


The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash
reserves of the commercial banks.

4. Custodian of Country’s Foreign Currency Reserves:


The Reserve Bank has the custody of the country’s reserves of international currency, and this enables
the Reserve Bank to deal with crisis connected with adverse balance of payments position.

5. Lender of Last Resort:


The commercial banks approach the Reserve Bank in times of emergency to tide over financial
difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of
interest.

6. Central Clearance and Accounts Settlement:


Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to
deal with each other and settle the claim of each on the other through book keeping entries in the
books of the Reserve Bank. The clearing of accounts has now become an essential function of the
Reserve Bank.

7. Controller of Credit:
Since credit money forms the most important part of supply of money, and since the supply of money
has important implications for economic stability, the importance of control of credit becomes
obvious. Credit is controlled by the Reserve Bank in accordance with the economic priorities of the
government.

Secondary Functions

India being the fastest growing economy in the world, India is expected to play a major role in the
world affairs by many countries. RBI being the banking institutional head of India has to be a part of
global institutions. It has to transform the quality and size of banks in India to the level of banks in
developed countries. Such functions get prominence in current scenario.

1. India’s Representative in World Financial Institutions


In order to maintain consistency and harmony with international banking standards the RBI is
associated with Basel Committee on Banking Supervision (BCBS, Switzerland) since 1997. RBI
represents Government of India in International Bank for Reconstruction and Development (IBRD i.e.
World Bank) and International Monetary Fund (IMF) in which India is a member since December 27,
1945.

2. Regulator and Supervisor of Indian Banking System

The broad guidelines for all banking operations in the country are formulated by the RBI. The RBI
has power to issue licenses, control and supervise commercial banks under the RBI Act, 1934 and the
Banking Regulation Act, 1949. It conducts inspection of the commercial banks and calls for returns
and other necessary information from them.

3. Monetary Authority

The RBI formulates implements and monitors the monetary policy of the country in order to maintain
price stability, controlling inflationary trends and economic growth. It provides advices to the
Government concerning agricultural finance, resource mobilization for implementing plans and
legislation affecting banking and credit and international finance.

4. Closely Monitoring Economic Parameters

Broad economic parameters such as employment level, price levels and production levels, trade
cycles, foreign investment flows, balance of payments, financial markets, etc., are closely monitored
by the RBI in order to achieve economic stability and growth. The Board of Financial Supervision (a
committee of the Central Board of Directors) of the RBI meets at least once in a month (at times every
day) to closely monitor all these current developments in the country.

5. Promptly Responding to New Challenges

Whenever challenges arose before Indian Banking System, RBI attend them by issuing Master
Circulars and by organizing committees to analyse, review and strengthen Indian Banking. A wealth
of information can be found in every Master Circular or committee report. Example: Gopalakrishnan
Committee on “Information security, Electronic Banking”, April, 2010

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