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

Central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital to Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. 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.

Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with headquarters at Mumbai, Kolkata, Chennai and New Delhi.

Local Boards consist of five members each whom the Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

• To regulate the issue of bank notes
• To maintain reserves with a view to securing monetary stability.
• To operate the credit and currency system of the country to its advantage.

The Reserve Bank of India (RBI) has been playing an important role in the economy of the country both in its regulatory and promotional aspects. Since the inception of planning in 1951, the developmental activities are gaining momentum in the country. Accordingly, more and more responsibilities have been entrusted with the RBI both in the regulatory and promotional area. Now-a-days, the RBI has been performing a wide range of regulatory and promotional functions in the country.

Objectives of Reserve Bank of India (RBI)

• Monetary Stability

One of the primary objectives of the RBI is to maintain monetary stability in the country. This involves controlling inflation, regulating the supply of money, and ensuring price stability. By using tools like the repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), the RBI manages liquidity in the economy. Stable prices help foster confidence among consumers and businesses, encouraging investment and long-term growth. Monetary stability also safeguards the value of the Indian currency and supports sustainable economic development by preventing extreme inflation or deflation trends.

• Financial Stability

The RBI plays a crucial role in maintaining financial stability in the Indian economy. This means ensuring that financial institutions, such as banks and non-banking financial companies (NBFCs), operate safely and soundly. By supervising and regulating these entities, the RBI minimizes systemic risks and prevents bank failures that can disrupt the economy. Through stress tests, capital adequacy norms, and regular inspections, the RBI builds resilience in the financial system. Financial stability boosts public confidence, encourages savings, and helps create a robust foundation for economic growth and development across all sectors.

• Currency Issuance and Management

As the sole issuer of currency in India, the RBI is responsible for the design, production, and distribution of banknotes and coins. This function ensures that the public has access to adequate and secure currency at all times. The RBI works to prevent counterfeiting by introducing security features and periodically redesigning notes. It also ensures that old, damaged, or soiled notes are withdrawn efficiently. Proper currency management helps maintain public trust in the monetary system, facilitates smooth transactions, and supports the efficient functioning of the overall economy.

• Regulation of Credit

The RBI aims to regulate the volume and direction of credit in the Indian economy to meet developmental and social priorities. By controlling interest rates, setting lending norms, and issuing guidelines on priority sector lending, the RBI ensures that credit flows to productive sectors like agriculture, small businesses, and infrastructure. Effective credit regulation helps prevent speculative activities and financial bubbles. It also supports inclusive growth by channeling funds toward under-served regions and vulnerable populations. By balancing credit supply and demand, the RBI promotes economic stability and sustainable development.

• Foreign Exchange Management

The RBI is entrusted with managing India’s foreign exchange reserves and maintaining the stability of the rupee in the global market. Under the Foreign Exchange Management Act (FEMA), the RBI monitors and regulates foreign currency transactions, external borrowings, and capital flows. It intervenes in the foreign exchange market when necessary to smooth out volatility and prevent sharp fluctuations in the exchange rate. Stable foreign exchange rates enhance investor confidence, facilitate international trade, and safeguard the country’s balance of payments position, ultimately strengthening India’s economic resilience and competitiveness.

• Developmental Role

Apart from regulatory functions, the RBI also plays a developmental role by promoting financial inclusion, expanding banking services, and supporting rural development. It initiates policies to encourage the flow of credit to sectors like agriculture, micro and small enterprises, and weaker sections of society. The RBI fosters innovation in payment systems and promotes the use of digital banking channels. Additionally, it works to strengthen financial literacy and awareness among the public. Through its developmental initiatives, the RBI supports broad-based economic growth and contributes to reducing poverty and inequality.

• Consumer Protection

Protecting the interests of consumers is a key objective of the RBI. It ensures that banks and financial institutions adhere to fair practices, transparency, and responsible lending. The RBI issues guidelines on customer rights, grievance redressal mechanisms, and disclosure standards. It has established systems like the Banking Ombudsman to address complaints efficiently. By safeguarding consumer interests, the RBI builds public trust in the financial system, encourages formal savings, and promotes responsible financial behavior. Consumer protection ultimately strengthens the integrity and inclusiveness of India’s banking and financial sector.

• Promotion of Modern Payment Systems

RBI promotes the development of modern, secure, and efficient payment and settlement systems in India. This includes introducing innovations like the Unified Payments Interface (UPI), Real-Time Gross Settlement (RTGS), and the National Electronic Funds Transfer (NEFT) system. The RBI’s objective is to enhance the speed, safety, and convenience of money transfers and reduce reliance on cash transactions. By supporting digital payments and fintech innovations, the RBI helps build a cashless economy, improves transparency, reduces transaction costs, and enhances the overall efficiency of India’s financial system.

Roles of the Reserve Bank of India (RBI)

• Regulating the Volume of Currency

The 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• Advisory Functions

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

• Policy Support

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.

Functions of the Reserve Bank of India (RBI):

• 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.

• 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.

• 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.

• 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.

• 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).

• 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.