Roles & Functions of RBI

Contents
• Roles & Functions of RBI – Introduction
• Preamble Of The RBI
• Organizational Structure of RBI:
• Functions of RBI in Indian Banking System
• The RBI’s Role In Current Scenario
• RBI’s Role in Economic Development
• RBI’s Role in Promoting Schemes And Policies
• Supervisory Functions of RBI
• Prohibitory Functions of RBI
• RBI Functions – General Terms
Introduction
• India is one of the fastest growing economies in the world, with a
population over 1.3 Billion, has become the hub for global investment.
• There are various factors that influence and control Indian economy, one
such being,
• The RBI, one of the oldest institution behind the success of our economy.
• The RBI is the guardian of Indian economy and because of it, growth in
Exports, FOREX, Capital Markets and other sectors of the economy are all
taking place at a healthy rate. It plays a pivotal role in strengthening,
developing and diversifying the country’s economic and financial structure.
• It is the apex bank in the Indian Banking System.
Structure Of The Indian Banking System
1. Reserve banks of India.
2. Indian Scheduled Commercial Banks.
• State Bank of India and its associate banks.
• Twenty nationalized banks.
• Regional rural banks.
• Other scheduled commercial banks.
3. Foreign Banks
4. Non-scheduled banks.
5. Co-operative banks.
• The Reserve Bank of India (RBI) is India’s Central banking institution, which
controls the monetary policy of the Indian rupee.
• The Reserve Bank of India was established on April 1, 1935, in accordance with
the provisions of the Reserve Bank of India Act, 1934.
• It was initially privately owned and managed but since nationalisation in 1949,
the Reserve Bank is fully owned by the Government of India.
Preamble Of The RBI
• The Preamble of the Reserve Bank of India describes the basic Functions of
Reserve Bank of India as:
“to regulate the issue of Bank notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency
and credit system of the country to its advantage; to have a modern
monetary policy framework to meet the challenge of an increasingly
complex economy, to maintain price stability while keeping in mind the
objective of growth.”
• The Preamble of the Reserve Bank of India describes the basic functions of
the Reserve Bank as:
1. Regulating the issue of Banknotes
2. Securing monetary stability in India
3. Modernising the monetary policy framework to meet economic challenges
RBI as an Organization
• The RBI has four zonal offices at:
1. Chennai
2. Delhi
3. Kolkata
4. Mumbai
• It has 22 regional offices and 11 Sub-offices
Organizational Structure of RBI
• The Reserve Bank’s affairs are governed by a central board of
directors. The board is appointed by the Government of India for a
period of four years.
• Full-time officials: Governor and not more than four Deputy
Governors. The current Governor of RBI is Mr. Shaktikanta Das.
• There are 4 Deputy Governors, Mr B.P. Kanungo, N. S. Vishwanathan,
M. K. Jain.
• Nominated by Government: ten Directors from various fields and two
government officials
• Others: four Directors – one each from four local boards.
RBI
Organizational
Hierarchy
Legal Framework
• The Reserve Bank of India comes under the purview of the following
Acts:
1. Reserve Bank of India Act, 1934
2. Public Debt Act, 1944
3. Government Securities Regulations, 2007
4. Banking Regulation Act, 1949
5. Foreign Exchange Management Act, 1999
6. Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
7. Credit Information Companies(Regulation) Act, 2005
8. Payment and Settlement Systems Act, 2007
Functions of RBI in Indian Banking System
1. Monetary Authority: It decides how much money is needed to be supplied to
the economy in order to stabilize the exchange rate, maintaining good balance
of payment, attain Finanancial stability, control inflation, strengthening the
core banking system.
2. The issuer of currency: It has the sole authority in India to issue currency. It
also takes action to control the circulation of fake currency.
3. The issuer of Banking License: As per Sec 22 of Banking Regulation Act, a bank
cannot start functioning without obtaining license from the Reserve Bank Of
India.
4. Banker’s to the Government: It acts as banker both to the central and the state
governments. It provides short term credit. It manages all new issues of
government loans, servicing the government debt outstanding and nurturing
the market for government’s securities. It advises the government on banking
and financial subjects.
Functions of RBI in Indian Banking System
5. Banker’s Bank: RBI is the bank of all banks in India as it provides the loan
to banks/bankers, rediscount the bills of banks and accept the deposit of
banks.
6. Lender of last resort: The banks can borrow from the RBI by keeping
eligible securities as collateral at the time of need or crisis.
7. Banker and debt manager of government: RBI keeps deposits of
Governments without charging any interest, receives and makes the
payment, carry exchange remittances, and help to float new loans and
manage public debt, it also acts as an advisor to Government.
8. Money supply and Controller of Credit: To control demand and supply of
money in Economy by Open Market Operations, Credit Ceiling, etc. RBI
has to match the credit requirements of the rest of the banking system. It
needs to maintain price stability and a high rate of economic growth.
Functions of RBI in Indian Banking System
9. Act as clearinghouse: For the settlement of banking transactions, RBI
manages 14 clearing houses. It facilitates the exchange of instruments
and processing of payment instructions.
10. Manager of foreign exchange: It acts as a custodian of FOREX. It
administers and enforces the provision of Foreign Exchange
Management Act (FEMA), 1999. RBI buys and sells foreign currency to
maintain the exchange rate of Indian rupee v/s foreign currencies.
11. Regulator of Economy: It controls the money supply in the system,
monitors different key indicators like GDP, Inflation, etc.
12. Managing Government securities: RBI administers investments in
institutions when they invest specified minimum proportions of their
total assets/liabilities in government securities.
Functions of RBI in Indian Banking System
13. Regulator and Supervisor of Payment and Settlement systems: The
Payment and Settlement systems Act of 2007 (PSS Act) gives RBI
oversight authority for the payment and settlement systems in the
country. RBI focuses on the development and functioning of safe, secure
and efficient payment and settlement mechanisms.
14. Developmental Role: This role includes the development of the quality
of banking system in India and ensuring that credit is available to the
productive sectors of the economy. It provides a wide range of
promotional functions to support national objectives. It also includes
establishing institutions designed to build the country’s financial
infrastructure. It also helps in expanding access to affordable financial
services and promoting financial education and literacy
Functions of RBI in Indian Banking System
15. Publisher of monetary data and other data: RBI maintains and provides all
essential banking and other economic data, formulating and critically
evaluating the economic policies in India. RBI collects, collates and publishes
data regularly.
16. Exchange manager and controller: RBI represents India as a member of the
International Monetary Fund [IMF]. Most commercial banks are authorized
dealers of RBI
17. Banking Ombudsman Scheme: RBI introduced the Banking Ombudsman
Scheme in 1995. Under this scheme, the complainants can file their complaints
in any form, including online and can also appeal to the RBI against the awards
and the other decisions of the Banking Ombudsman
18. Banking Codes and Standards Board of India: To measure the performance of
banks against Codes and standards based on established global practices, the
RBI set up the Banking Codes and Standards Board of India (BCSBI).
Functions of RBI in Indian Banking System
19. Fair Practices Codes For Lenders:- RBI formulated the Fair Practices Code for Lenders
which was communicated to banks to safeguard the interest of the borrowers. All the
banks are supposed to follow the codes formulated by RBI.
20. Miscellaneous Functions: The RBI collects, collates and publishes all monetary and
banking data regularly in its weekly statements in the RBI Bulletin (monthly) and in the
Report on Currency and Finance.
21. Provision of Industrial Finance: Rapid industrial growth is the key to the development
of the economy. Providing adequate and timely credit to small, medium and large
industry is very important. The RBI has played a pivotal role in setting up special
financial institutions such as IDBI Ltd, ICICI and EXIM BANK etc.
22. Provisions of Training: The RBI has always tried to provide essential training to the
staff of the banking industry. The RBI has set up the bankers’ training colleges at
several places. National Institute of Bank Management i.e NIBM, Bankers Staff College
i.e BSC and College of Agriculture Banking i.e CAB are few to mention
The RBI’s Role In Current Scenario
• The role of RBI in Indian economy has changed according to the scenario in
the country.
• In April 2019 the RBI took the monetary policy decision to lower its
borrowing rate to 6%.
• This was the second rate cut for 2019 and is expected to have a positive
impact on the borrowing rate across the credit market more substantially.
• Prior to April, credit rates in the country have remained relatively high,
despite the central bank’s positioning, which has been limiting borrowing
across the economy.
• The central bank must also grapple with a slightly volatile inflation rate that
is projected at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5%
to 3.8% in the latter half of 2020.
RBI’s Role in Economic Development
• RBI’s role in the economy is pivotal as it makes or breaks the
economy. Below mentioned are the areas where RBI plays an
important role
1. Development of banking system
2. Development of financial institutions
3. Development of backward areas
4. Bringing Economic stability
5. Facilitating Economic growth
6. Preparing Proper interest rate structure
RBI’s Role in Promoting Schemes And Policies
• Introducing schemes and policies which benefit the public as well as
the government is one of the important function of RBI. Below
mentioned are the sector RBI prioritizes for economic development
1. Promotion of commercial banking
2. Promotion of cooperative banking
3. Promotion of industrial finance
4. Promotion of export finance
5. Promotion of credit guarantees
6. Promotion of differential rate of interest scheme
7. Promotion of credit to priority sections including rural & agricultural sector
8. Promotion of credit to weaker sections
Supervisory Functions of RBI
1. Providing license to banks & keeping a control on the number of
new branches
2. Doing periodical inspection of banks
3. Controlling Non-Bank Financial Institutions: The Non- Bank Financial
Institutions are not influenced by the working of a monitory policy.
RBI has a right to issue directives to the NBFIs regarding their
functioning.
4. Implementation of the Deposit Insurance Scheme: In order to
protect the deposits of small depositors, RBI work to implement the
Deposit Insurance Scheme in case of a bank failure. (For bank
deposits below 2 Lakh.)
Prohibitory Functions of RBI
1. It cannot provide any direct financial assistance to any industry,
trade or business
2. It cannot purchase its own share
3. It cannot purchase shares of any commercial and industrial
undertaking
4. It cannot purchase any immovable property
5. It cannot give loans on the security of shares and property
RBI Functions – General Terms
• Monetary policy: refers to the use of regulatory tools under the
control of the RBI in order to regulate the availability, cost and use of
money and credit.
• Cash Reserve Ratio (CRR): Banks are required to hold a certain
proportion of their deposits in the form of cash with RBI. RBI uses
CRR either to drain excess liquidity from the economy or to release
additional funds needed for the growth of the economy.
• Statutory Liquidity Ratio (SLR): SLR is the amount that commercial
banks are required to maintain in the form of gold or government
approved securities before providing credit to the customers.
RBI Functions – General Terms
• Repo Rate: The rate at which the RBI loans out money to commercial banks is called
Repo Rate. Whenever banks face limitation of funds they can borrow from the RBI,
against securities. If the RBI increases the Repo Rate, borrowing becomes quite
expensive for banks and vice versa. As a tool to control inflation, RBI increases the Repo
Rate, making it more expensive for the banks to borrow from the RBI with a view to
restricting the availability of money. Similarly, the RBI will do the exact opposite in a
deflationary environment.
• Reverse Repo Rate: The rate at which the RBI is willing to borrow from the commercial
banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that
the RBI is willing to offer good interest rate to banks to deposit their money with the RBI.
This results in a decrease in the amount of money available for banks customers as banks
prefer to deposit their money with the RBI as it guarantees higher security. This naturally
leads to a higher rate of interest which the banks will demand from their customers for
lending money to them.
• The Repo Rate and the Reverse Repo Rate are important tools with which the RBI can
control the availability and the supply of money in the economy.
RBI Functions – General Terms
• Fiscal Policy: It is related to direct taxes and government spending. When direct
taxes increases and spending of government increases than the disposable
Income of the people reduces and hence the demand reduces.
• On the basis of an assessment of the current and evolving macroeconomic
situation at its meeting today, the Monetary Policy Committee (MPC) decided to
keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged
at 5.15 percent.
• Consequently, the reverse repo rate under the LAF remains at 4.90 percent, and
the marginal standing facility (MSF) rate and the Bank Rate at 5.40 percent.
• The decision of the MPC is consistent with a neutral stance of monetary policy in
consonance with the objective of achieving the medium-term target for
consumer price index (CPI) ination of 4 percent within a band of +/- 2 percent
while supporting growth.
 Current RBI Rates

Marginal Term
Policy Reverse Standing Savings Deposit
Repo Repo Facility Bank Base Deposit Rates >
Rate Rate Rate Rate CRR SLR Rate MCLR Rate 1 year

8.95%- 7.70%- 3.50%– 6.00%-