CHAPTER I

Role and Functions of Reserve Bank of India

The RBI, as the central bank of the country, is the centre of the Indian financial and
monetary system. As an institution, it has been guiding, monitoring, regulating, controlling, and
promoting the destiny of the Indian financial system. However, it is an oldest among the central
banks in the developing countries. It started functioning from April 1, 1935 on the terms of the
Reserve Bank of India Act, 1934. It was a private shareholders institution till January 1949, after
which it became a State-owned institution under the Reserve Bank of India Act, 1948. The share
capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private
shareholders in the beginning. The Government held shares of nominal value of Rs. 2, 20,000.

The Bank is managed by a Central Board of Directors, four Local Boards of Directors,
and a committee of the central board of directors. The functions of the Local Boards are to
advise the Central Board on matters referred to them. The final control of the Bank vests in the
Central Board which comprises the Governor, four Deputy Governors, and fifteen Directors
nominated by the Central government.

The internal organizational set-up of the Bank has been modified and expanded from time
to time in order to cope with the increasing volume and range of the Banks activities. The
principle of the internal organization is functional specialization with adequate coordination.
During the war and post-war years, the major preoccupation of the Bank was facilitation
of war finance, repatriation of sterling debt and planning and administration of exchange control.
The issues relating to regulation and supervision of banks came to occupy centre-stage in the
backdrop of a number of bank failures. The Banking Companies Act was enacted in 1949 to
empower the Reserve Bank with supervisory control over banks in order to ensure their
establishment and operation along sound lines. The Reserve Bank of India was nationalized on
January 1, 1949.
With the launch of Five-Year Plans in 1951, the Reserve Banks functions became more
diversified in terms of Plan financing, establishment of specialized institutions to promote
savings and investment in the Indian economy and to meet credit requirements of the priority
sectors. This was a novel feature for any central bank at that point of time. The Agricultural
Refinance Corporation was set up in 1963 for extending medium and long-term finance to
agriculture. Other institutional developments included setting up of the Industrial Finance
Corporation of India (1948), the Industrial Development Bank of India (1964) and Unit Trust of
India (1964). The role of monetary and credit policy in maintaining price stability was explicitly
emphasized for the first time in the First Five Year Plan. Plan financing by the Reserve Bank
evolved as deficit financing which took the form of system of issuance of ad hoc Treasury Bills.
This arrangement of financing the Government was intended to be temporary but acquired a
permanent character over time.
Devaluation of the rupee in June 1966 and nationalization of fourteen private sector banks
in July 1969 multiplied the responsibilities of the Reserve Bank. The move helped to bridge the
gaps in credit availability in many rural and urban areas and ensured sufficient funds availability
to the preferred sectors. In terms of the outcome, this phase succeeded in mobilizing private
savings through the banks and paved the way for nationalization of six more private sector banks
in 1980.

For conserving foreign exchange reserves, the Government re-examined the provisions of
the Foreign Exchange Regulation Act, (FERA) 1947 and introduced changes in 1973 which
incorporated necessary changes for effective implementation of Government policy and
removing difficulties in the working of the existing legislation. In the light of concerns about
capital outflows, reinforced by repeated stress on balance of payments due to drought, war and oil
shocks, the emphasis was placed on utilizing domestic savings for domestic investment, while
continuing to preserve foreign exchange reserves.
Functions of RBI
The RBI functions within the framework of a mixed economic system. With regard to
framing various policies, it is necessary to maintain close and continuous collaboration between
the government and the RBI. In the event of a difference of opinion or conflict, the government
view or position can always be expected to prevail.
Main functions of the RBI
(i) To maintain monetary stability so that the business and economic life can deliver welfare
gains of a property functioning mixed economy.
(ii) To maintain financial stability and ensure sound financial institutions so that monetary
stability can be safely pursued and economic units can conduct their business with
confidence.
(iii) To maintain stable payments system so that financial transactions can be safely and
efficiently executed.
(iv) To promote the development of financial infrastructure of markets and systems, and to
enable it to operate efficiently i.e., to play a leading role in developing a sound financial
system so that it can discharge its regulatory function efficiently.
(v) To ensure that credit allocation by the financial system broadly reflects the national
economic priorities and social concerns.
(vi) To regulate the overall volume of money and credit in the economy with a view to ensure
a reasonable degree of price stability.

Roles of RBI
1. Note Issuing Authority
The RBI has the sole right or authority or monopoly of issuing currency notes other than
one rupee notes and coins, and coins of smaller denominations. The issue of currency notes
is one of its basic functions.
2. Government Banker
The RBI is the banker to the Central and State governments.

It provides to the

governments all banking services such as acceptance of deposits, withdrawal of funds by

cheques, making payments as well as receipts and collection of payments on behalf of the
government, transfer of funds, and management of public debt.
3. Bankers Bank
The RBI, like all central banks, can be called a bankers bank because it has a very special
relationship with commercial and co-operative banks, and the major part of its business is with
these banks.

The bank controls the volume of reserves of commercial banks and thereby

determines the deposits creating ability of the banks. The banks hold a part or all of their
reserves with the RBI. Similarly, in times of need, the banks borrow funds from the RBI. It is
therefore, called the bank of last resort.
4. Supervising Authority
The RBI has vast powers to supervise and control commercial and co-operative banks
with a view to developing an adequate and sound banking system in the country. Initially, they
used to give only orders but now it undertakes inspection of commercial banks and recommends
measures. It has the following powers:
(a)

To issue licenses for the establishment of new banks and setting up of bank branches.

(b)

To prescribe minimum requirements regarding paid-up capital and reserves, transfer to

reserve fund, and maintenance of cash reserves and others.

(c)

To inspect the working of banks in India as well as abroad in respect of their organizational
setup, branch expansion, mobilization of deposits, investments, and credit portfolio
management, credit appraisal, region-wise performance, profit planning, manpower
planning, and so on.

5.

Exchange Control
One of the essential functions of the RBI is to maintain the stability of the external value

of the rupee. It pursues this objective through its domestic policies and the regulation of the
foreign exchange market. As far as the external sector is concerned, the task of the RBI has the
following dimensions:
(a)

To administer the foreign exchange control.

(b)

To choose the exchange rate system and fix or manage the exchange rate between the

rupee and other currencies.

(c)

To manage exchange reserves.

(d)

To interact with the monetary authorities of other countries and with international

financial institutions such as IMF.

6.

Promoter of the financial system

Apart from performing the functions already mentioned, the RBI has been rendering

developmental services which have strengthened the countrys banking and financial structure.
This has helped in mobilizing savings and directing credit flows to desired channels, thereby
helping to achieve the objective of economic development with social justice.