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What does RBI do: 10 things to know

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Note: ,WhatdoesRBIdo:10thingstoknowEverycountryhasanorganisationthatworksasthecentralbank.Themainfunctionofthecentralbankistoc
 ,What does RBI do: 10 things to know 

 

Every country has an organisation that works as the central bank. The main function of the central bank is to control and monitor the banking and finance system of a country. In India, The Reserve Bank of India (RBI) serves as the Central Bank.

 

There are many things for which the RBI is responsible such as controlling inflation, regulating banking system, issuing bank notes, acting as lender to banks, controlling credit, and monetary policy and so on and so forth.

 

Here are things to know about the functioning of RBI:

 

1. Control of inflation: Inflation is the supply of excess money relative to the goods and services produced resulting in increased prices. It occurs when the demand increases and there is shortage of supply. RBI controls inflation using monetary policy. It controls borrowing rates for banks by setting the repo rate. When RBI wants to control inflation it increases these rates. As a result, banks and other lenders are required to pay a higher interest rate to the Central Bank in order to obtain money. They pass this on to their customers by charging a higher rate of interest for lending money. This reduces the availability of money in the economy as well as demand and helps in controlling inflation.       

 

 2. Issuer of Bank Notes: The RBI has the sole right to issue currency notes. At present, notes of Rs 10; Rs 100; Rs 500; and Rs 1,000 are only printed. The printing of Re 1, Rs 2 and Rs 5 has been stopped. However, the RBI has powers to print currency notes of up to Rs 10,000 denomination. But, an amendment to the Reserve Bank of India Act, 1934 will be needed if any note of higher denomination has to be printed.

 

3. Banker to Government: As banker to the government the RBI 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.

 

4. Payment system: The RBI takes part in the payment system as a user of the system, a service provider and is also the regulator of the systems. As a user it deals with the cheque based clearing operations. It also participates as a user in the Electronic Clearing Service (ECS) and (Electronic Funds Transfer) EFT systems for making its own internal payments to its employees, vendor payments etc. Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market Operations, would also be settled through the respective components of payment systems. As a provider it manages the Centralised Funds Management Systems (CFMS), Negotiated Dealing System (NDS) and Real Time Gross Settlement (RTGS) systems have been fully developed, operationalised and maintained by RBI. Besides the above, RBI (through IDRBT) has also provided the communication backbone to the financial system in the country in the form of Indian Financial Network (INFINET).

 

5. Regulates banks: RBI regulates banks in the country. All those aspiring to start a bank or acquire an existing one, have to seek RBI approval. RBI also monitors financial stability of banks and keeps a check on lending in the system. Banks have to maintain a portion of their deposits for cash reserve ratio or CRR and at all times maintain minimum capital adequacy. RBI monitors risks to the financial system by keeping a check on banks.

 

6. Exchange rate stability: RBI may intervene in the market to influence the exchange rate or to reduce volatility. The basic intention in such actions is to maintain the demand-supply equilibrium. The Central Bank may transact in the market on its own for this purpose or on behalf of the government. Under the Flexible Exchange Rate System currently in operation, the RBI is under no obligation to defend any particular exchange rate but still can intervene to influence the market sentiment.

 

7. 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.

 

8. Custodian of Country’s Foreign Currency Reserves: The Reserve Bank has the custody of the country’s reserves of international currency, and this enables it to deal with crisis connected with adverse balance of payments position.

 

9. Lender to banks: 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.

 

10. 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.
 
 
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