Functions of the RBI (Reserve Bank of India)

8 min read • Published 15 November 2022
Written by Krishna Deshmukh
Learn the various functions of the RBI in detail.

Established on 1st April 1935, the Reserve Bank of India (RBI) is the central bank of our country. It performs several crucial functions to regulate and supervise the financial system of India.

These functions of the RBI maintain synchronisation among the different financial institutions in India, which is essential for creating a secured financial system. So, keep reading to know several distinctive functions of the RBI.

What Are the Functions of the RBI?

Below are some functions that the RBI performs: 

Supervising the Financial System

The financial system includes financial intermediaries, financial markets, and financial assets. Since there are multiple institutions and assets are involved, it becomes mandatory to lay down rules and regulations to ensure the smooth operation of the system. 

Hence, one of the main functions of the RBI is to instil trust in the financial system among Indian citizens. Proper implementations of rules by different banks and financial institutions ensure the safety and security of depositors’ money. Additionally, these institutions can function efficiently under the constant supervision and guidance of the RBI.

Implementing Monetary Policy

The RBI plays a key role in framing the monetary policy with an aim to maintain price stability while keeping in mind the objective of growth. In addition to this, it stringently monitors the implementation of these policies. 

Once every six months, the Reserve Bank publishes the Monetary Policy Report containing information about the explanation of inflation dynamics in the last six months and the near-term inflation outlook and projections of inflation and growth and the balance of risks.

Issuing New Currency 

The RBI is in charge of issuing new notes and coins except for one rupee note and coins.  It follows a rule of ‘minimum reserve system.’ According to this rule, the RBI can issue any number of notes after maintaining a minimum reserve of Rs. 200 crores. 

Apart from issuing new notes, the RBI also exchanges damaged notes. This ensures the availability of good-quality notes and coins in circulation. Also, it makes sure that the damaged cash and coins are properly destroyed to prevent their circulation. 

Furthermore, with an increase in the generation of new notes, the RBI also increases its reserve proportionately to maintain the inflow of cash. It also monitors the distribution of this cash among the different financial institutions in India.

Making Payments on Government’s Behalf

One of the main functions of the RBI is that they receive and make payments on behalf of the Government of India. Reserve Bank of India maintains the Principal Accounts of Central as well as State Governments at its Central Accounts Section, Nagpur. This way they operate and maintain the accounts of the Government of India and state governments. 

Additionally, the RBI also manages public debt on behalf of the Central and State Governments. It involves the issue of new rupee loans, payment of interest and repayment of these loans and other operational matters such as debt certificates and their registration. Furthermore, the RBI has taken initiatives to make the right investment of surplus cash of the Government as a part of fund management. Apart from this, they provide financial advice to the Government when asked for the same.

Regulating Payment Systems

A crucial role and function of the RBI are to ensure that all transactions taking place in India are in accordance with the Payment and Settlement Systems Act (PSS Act, 2007). All payment systems such as NEFT, UPI, Credit Cards, RTGS, Debit Cards, ECS, and IMPS fall under this Act. According to Section 4 of the PSS Act, only the RBI has the authority to develop and operate the nation’s payment systems which are efficient, safe and secure. 

There is a sub-committee of the RBI known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). It authorises all the payment and settlement systems of the country to ensure efficient payment flows, boosting the confidence of Indians in these modern digital payment systems.

Managing Foreign Exchange

Another important function of the RBI is to verify if all foreign exchanges take place via the FEMA (Foreign Exchange Management Act) guidelines. This aids in seamless trade management across borders and simultaneously ensures transparency in the process.

The RBI plays a distinct role in managing current account transactions and capital account transactions. The current account transactions include exports, imports, gifts, personal remittances, and income, where RBI’s role is limited. Alternatively, capital account transactions include FII/FPI investments, external commercial borrowings, FDI, and NRI deposits, where RBI specifies conditions for the payments. 

Acting as a Banker

Banks must maintain minimum cash reserves with the RBI. Thus, every bank has an account with the RBI. The RBI can also give advance payments and short-term loans to the banks. The accounts with RBI can be used for setting up inter-bank transactions, clearing money market transactions, buying/selling of securities, and buying/selling of foreign currencies.

Maintaining Price Stability in the Country

The RBI functions stringently to maintain a healthy balance between “future economic growth” and “price stability” to keep a check on inflation. It does so primarily by changing the repo rate. The Repo rate is the rate at which RBI lends money to commercial banks. Increasing the repo rate restricts banks from borrowing money from the RBI, reducing the cash in circulation. 

A reduction in circulating money leads to a lowering of the prices of goods and services to a considerable extent. An increased repo rate also ensures higher returns on fixed-income assets as bond yields and deposit rates go up. This way, the RBI maintains inflation within the prescribed limit for economic growth. 

Controlling Credit Created By Banks

The RBI strictly monitors the credit given by different banks to maintain an equilibrium between demand and supply. This is beneficial as there can be sufficient availability of cash when the economy of the country is down. 

The RBI uses several quantitative measures for credit control such as Cash Reserve Ratio, Marginal Standing Facility, Statutory Liquidity Ratio, Bank Rate, etc. Additionally, there are certain qualitative measures like Credit Rationing, Moral Suasion, Consumer Credit Control, Direct Action, and Margin Requirements that the RBI has put into use for the same purpose.

Maintaining Forex Reserve of the Country

Maintaining the forex reserves of the country is a vital step in managing the exchange rate and maintaining the stability of the currency. Additionally, this ensures that the country fulfils its foreign liabilities. Hence, the Reserve Bank monitors and supervises the forex reserve to ensure a steady flow of funds. The RBI has framed several policies related to foreign exchange to which citizens must strictly adhere. 

Becoming a Lender of the Last Resort

The RBI acts as a parent for all financial institutions. Thus in case of a  monetary crisis, they can approach the central bank for funds. In addition, it provides this facility so that depositors of such banks can access their money and not face the negative impacts of financial crises.

Additionally, if a bank runs out of cash, it might end up adversely affecting the entire financial system. So, the Reserve Bank acts as the last help for these banks in crisis when no other options are available. Hence, the RBI is often referred to as the ‘lender of last resort.’

Final Word

The main goal of these functions of the RBI is to ensure the stability of the financial system of India. The RBI also maintains accounts of the Central as well as State Governments and acts as a banker of banks and the government. In addition to that, the RBI is in charge of maintaining adequate currency supply in the system and also managing foreign reserves to maintain exchange rate stability. This makes our central bank’s role very crucial in operating and managing our financial system. 

Frequently Asked Questions

What is the current inflation target of the RBI?

The current inflation target of the RBI is 4%. The RBI uses a band of +2% and -2% on the target. So, the RBI tries to keep inflation within the 2%-6% range. The RBI uses tools such as the repo rate and reverses the repo rate to maintain inflation within the prescribed limit.

Whom does the RBI allow to hold international debit and credit cards for foreign exchange?

The RBI authorises individuals dealing in foreign currency to hold International Debit Cards (IDC) for transactions from a current account. Additionally, Indian residents who deal in foreign currency with an authorised dealer can hold International Credit Cards (ICC).

Where does the RBI mint cash and coins?

The subsidiary of the RBI, Bharatiya Reserve Bank Note Mudran Private Ltd., owns two presses and the Corporation of the Government of India, Security Printing and Minting Corporation of India Ltd. own two presses where the coins and notes are minted.

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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