Reserve Bank of India (RBI), Role, Importance, Functions

Reserve Bank of India (RBI), established in 1935, is India’s central bank and the primary authority responsible for regulating the country’s monetary and financial system. Its key functions include formulating monetary policy, issuing currency, managing foreign exchange, and regulating financial institutions such as banks and non-banking financial companies (NBFCs). The RBI ensures economic stability, controls inflation, and promotes financial inclusion by providing banking access to all sectors of society. It serves as the banker to the government and other commercial banks, overseeing their operations to maintain the integrity of the financial system and national economy.

Roles of the Reserve Bank of India (RBI)

1. Regulating the Volume of Currency

RBI is performing the regulatory role in issuing and controlling the entire volume of currency in the country through its Issue Department. While regulating the volume of currency the RBI is giving priority on the demand for currency and the stability of the economy equally.

2. Regulating Credit

RBI is also performing the role to control the credit money created by the commercial banks through its qualitative and quantitative methods of credit control and thereby maintains a balance in the money supply of the country.

3. Control over Commercial Banks

Another regulatory role performed by the RBI is to have control over the functioning of the commercial banks. It also enforces certain prudential norms and rational banking principles to be followed by the commercial banks.

4. Determining the Monetary and Credit Policy

RBI has been formulating the monetary and credit policy of the country every year and thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate, interest rate, credit to priority sectors etc.

5. Mobilizing Savings

RBI is playing a vital promotional role to mobilize savings through its member commercial banks and other financial institutions. RBI is also guiding the commercial banks to extend their banking network in the unbanked rural and semi-urban areas and also to develop banking habits among the people. All these have led to the attainment of greater degree of monetization of the economy and has been able to reduce the activities of indigenous bankers and private money­lenders.

6. Institutional Credit to Agriculture

RBI has been trying to increase the flow of institutional credit to agriculture from the very beginning. Keeping this objective in mind, the RBI set up ARDC in 1963 for meeting the long term credit requirement of rural areas. Later on in July 1982, the RBI set up NABARD and merged ARDC with it to look after its agricultural credit functions.

7. Specialized Financial Institutions

RBI has also been playing an important promotional role for setting specialized financial institutions for meeting the long term credit needs of large and small scale industries and other sectors. Accordingly, the RBI has promoted the development of various financial institutions like, WCI, 1DBI, ICICI, SIDBI, SFCs, Exim Bank etc. which are making a significant contribution to industry and trade of the country.

8. Security to Depositors

In order to remove the major hindrance to the deposit mobilization arising out of frequent bank failures, the RBI took major initiative to set up the Deposit Insurance Corporation of India in 1962. The most important objective of this corporation is to provide security to the depositors against such failures.

9. Advisory Functions

The RBI is also providing advisory functions to both the Central and State Governments on both financial matters and also on general economic problems.

10. Policy Support

The RBI is also providing active policy support to the government through its investigation research on serious economic problems and issues of the country and thereby helps the Government to formulate its economic policies in a most rational manner. Thus, it is observed that the RBI has been playing a dynamic role in the economic development process of the country through its regulatory and promotional framework.

Importance of RBI:

1. Monetary Policy Formulation

RBI is responsible for formulating and implementing India’s monetary policy. Through its monetary policy tools—such as the repo rate, reverse repo rate, and cash reserve ratio (CRR)—the RBI controls inflation, ensures price stability, and supports economic growth. The central bank manages the money supply in the economy by either increasing or decreasing the amount of money circulating, depending on the economic conditions. Its role is critical in balancing inflation and growth, which is essential for maintaining a stable economy.

2. Issuer of Currency

RBI has the exclusive authority to issue and manage India’s currency. It designs, manufactures, and circulates currency notes, except for the one-rupee note and coins, which are issued by the Ministry of Finance. By controlling the supply of currency, the RBI plays a crucial role in maintaining the value of the Indian rupee, preventing counterfeit currency, and ensuring the integrity of the monetary system.

3. Banker’s Bank

As the banker to the government and all commercial banks in India, the RBI performs several functions that are essential to the functioning of the financial system. It facilitates transactions between banks, acts as a clearinghouse, and manages inter-bank payments. The RBI ensures that the commercial banking system is stable by regulating financial operations, offering emergency liquidity support, and overseeing the solvency of banks.

4. Regulation of Financial Institutions

RBI is responsible for regulating and supervising commercial banks, cooperative banks, and other financial institutions to ensure they operate within the framework of the law and maintain sound financial practices. It issues licenses, sets regulatory standards for capital adequacy, and ensures that financial institutions follow prudent risk management practices. Through its regulatory role, the RBI safeguards the interests of depositors and maintains the trust in the banking system.

5. Management of Foreign Exchange

RBI plays a pivotal role in managing India’s foreign exchange reserves. It intervenes in the foreign exchange market to stabilize the rupee’s value against foreign currencies, maintaining external sector stability. The RBI also monitors foreign exchange flows, manages India’s external debt, and ensures that the country meets its international financial obligations. Its interventions are critical in protecting India from excessive volatility in foreign exchange markets.

6. Financial Inclusion and Development

The RBI has taken several initiatives to promote financial inclusion and ensure that banking services are accessible to all sections of society. By encouraging the establishment of rural and regional rural banks, setting up policies for microfinance institutions, and promoting digital banking, the RBI has played a significant role in broadening the reach of banking. Its efforts have focused on ensuring that underserved and low-income populations have access to affordable financial products, helping in the economic upliftment of rural India and ensuring balanced growth.

Functions of the Reserve Bank of India (RBI):

1. Note Issue

Being the Central Bank of the country, the RBI is entrusted with the sole authority to issue currency notes after keeping certain minimum reserve consisting of gold reserve worth Rs. 115 crore and foreign exchange worth Rs. 85 crore. This provision was later amended and simplified.

2. Banker to the Government

RBI is working as banker of the government and therefore all funds of both Central and State Governments are kept with it. It acts as an agent of the government and manages its public debt. RBI also offering “ways and means advance” to the government for short periods.

3. Banker’s Bank

RBI is also working as the banker of other banks working in the country. It regulates the whole banking system of the country, keep certain percentage of their deposits as minimum reserve, works as the lender of the last resort to its scheduled banks and operates clearing houses for all other banks.

4. Credit Control

RBI is entrusted with the sole authority to control credit created by the commercial banks by applying both quantitative and qualitative credit control measures like variation in bank rate, open market operation, selective credit controls etc.

5. Custodian of Foreign Exchange Reserves

RBI is entrusted with sole authority to determine the exchange rate between rupee and other foreign currencies and also to maintain the reserve of foreign exchange earned by the Government. The RBI also maintains its relation with International Monetary Fund (IMF).

6. Developmental Functions

RBI is also working as a development agency by developing various sister organizations like Agricultural Refinance Development Corporation. Industrial Development Bank of India etc. for rendering agricultural credit and industrial credit in the country.

On July 12, 1986, NABARD was established and has taken over the entire responsibility of ARDC. Half of the share capital of NABARD (Rs. 100 crore) has been provided by the Reserve Bank of India. Thus, the Reserve Bank is performing a useful function for controlling and managing the entire banking, monetary and financial system of the country.