Reserve Bank of India: All About RBI

Functions of Reserve Bank of India and more.

How Does the RBI Work?

1. The Reserve Bank of India is the only central bank of India.
2. Established on April 1, 1935, the RBI then was a part of the British Empire, established under the Reserve Bank of India Act, 1934.
3. In the initial days, the RBI was a private bank with about 100 employees.
4. As the first ruling Government came into power after independence, RBI got nationalised on January 1, 1949.
5. The RBI is responsible for issuing and circulating the Indian currency and regulating the different private and public sector banks’ functions.
6. A body consisting of 21 members, called the Central Board of Directors, is responsible for overseeing its operations.

Functions of The RBI

1. The RBI has several prominent roles to play in the Indian economy.
2. For instance, apart from regulating the flow of the Indian Rupee and the economy, the bank also acts as a financial advisor to the Government.
3. Another crucial function that the RBI performs is the promotion of economic development in the country.
4. The Government of India appoints a Governor, a Deputy Governor, and other such representatives and officials from the finance ministry and ministers’ cabinet to oversee the bank's functioning.
5. Besides this, the Government also appoints other personnel from various sectors, including co-operative banks, to the Central Board of Directors.

Role and Functions of RBI

The RBI performs other functions that are of interest to the Government and India's people in general.

It Exercises Control Over Other Banks and Financial Institutions Across the Country

1. The RBI sets up and formulates the guidelines for every bank and any financial institute to follow in India.
2. The bank has set up a select committee for the purpose called the Board of Financial Supervision (BFS).
3. BFS is a committee comprising the Central Board of Directors of the bank.
4. Its roles and responsibilities include governing and regulating the banks and other financial institutions.
5. The list of banks that fall under the radar of the BFS are mostly commercial banks and other non-banking financial institutions.
6. The Governor of the RBI is the head of the committee. BFS has four other members, including the Deputy Governor.
7. Since the committee performs different functions, it comprises three departments, including those of the banking and non-banking supervision and the Division of Financial Institutions.
8. Every month, the members hold a meeting to evaluate reports and discuss various other issues.
9. During the meeting, new ways are proposed to improve the banks’ auditing quality and financial institutions.

It is Responsible for Regulating the Financial Framework of the Country

1. The RBI is also responsible for regulating the core banking functions and operations.
2. By doing so, the bank ensures that all the other banks and financial institutions function placidly.
3. RBI's regulatory policies also ensure that the money customers deposit in the respective banks is safe and get various banking services at nominal charges.
4. Furthermore, the RBI appoints special banking personnel called 'Ombudsmen,' who address all the customers' complaints and queries. RBI also has rules for the amount of capital that commercial banks should maintain to offer services.

Responsible for Issuing and Circulating The Indian Rupee

1. Only the RBI is authorized to print and circulate currency notes throughout the country.
2. The Governor's signature must be present on all the currency notes, failing which, they are invalid.
3. By circulating (distributing) the Indian Rupee, the RBI ensures there is enough cash supply in the country.
4. The issue and circulation of currency also help the bank in various other ways.
5. For instance, the bank can ensure the proper working of the credit system.
6. Another way in which the circulation of the Indian Rupee helps RBI is that it helps fuel the country's economic development while achieving price stability.
7. The RBI is also responsible for maintaining various reserves, such as the foreign currency reserve.
8. When the value of the rupee goes down, the RBI works towards its stabilisation by regulating foreign exchange.
9. One of the other significant responsibilities that the Reserve Bank of India holds is that it maintains all the other banks in the country and allows one bank to transfer money.

It Exercises Credit Control

• The RBI has a prominent role to play when it comes to controlling the credit flow.
• For this purpose, the bank has introduced various interest rates that affect inflation and, in turn, the economy.
• These interest rates include the following:

Repo Rate

1. The RBI lends money to the other banks in the country at different interest rates.
2. And the repo or repurchase rate is one such interest rate that acts as a benchmark for all the other interest rates.
3. The period for which the bank lends at the Repo Rate is 90 days at the most.
4. If the RBI decides to increase the Repo Rate, it affects all the other interest rates, and borrowing money becomes more expensive.
5. However, keeping the development of the economy and the banking sector’s progress in mind, the bank usually decreases the Repo Rate.
6. When banks borrow money from the RBI, they charge at the Repo Rate and provide various government securities for collateral purposes.
7. Additionally, the banks also agree to repurchase the securities they deposit at 5-10 % margins.
8. At times, the RBI may increase the repo rate to keep inflation at bay.
9. So, when banks borrow money from the Reserve Bank of India, they must repay the loan at higher interest rates.
10. To lessen the burden on themselves, banks charge at a higher interest rate when they lend money to their customers.
11. So, in all, when the RBI increases the repo rate, borrowing loans become more expensive.
12. And when there is a deflation at play, the RBI does the exact opposite and decreases the repo rate.
13. At such times, the bank also mandates that all the other banks follow suit by reducing their base lending rates.

Reverse Repo Rate

1. The Reverse Repo Rate is the exact opposite of the Repo Rate.
2. In this case, it is the RBI that borrows money from the other banks.
3. The central bank does this to control the excessive flow of money.
4. So, when the Reverse Repo Rate increases, banks tend to charge higher on their loans and get more money.
5. And when that happens, the banks tend to lend more to their customers.

Statutory Liquid Ratio

1. Besides cash, commercial banks across the country also keep other reserves, such as gold and various securities approved by the RBI.
2. When there is higher liquidity in the markets, banks keep most of their reserves in liquid form.
3. The higher the liquidity ratio, the lower the bank's capacity to invest in government securities.
4. In recent years, the RBI has resorted to what is known as 'open market operations.'
5. Using this tactic, the bank can use minimum margins when it lends against specific securities types.
6. The other advantage of using the 'open market operation' strategy is that the Reserve Bank can limit credit for various purposes and the interest rate for certain advances.

Cash Reserve Ratio

1. The Cash Reserve Ratio is the ratio of a bank's cash reserves to the net demand and time liabilities.
2. CRR ensures that the assets of the different banks are in liquid form.

Bank Rate

1. The RBI charges the commercial banks for borrowing money on a long-term basis by imposing the bank rate.
2. Although the RBI penalises the banks for failing to meet the minimum Statutory Liquid Ratio and Cash Reserve Ratio, it does not use the bank rate as a basis for this penalty.
3. You should also note that the bank rate doesn't affect the supply of cash.

Liquidity Adjustment Facility

1. The RBI introduced the Liquidity Adjustment Facility feature in 2000 to ensure that all the scheduled banks can get liquidity on the government securities
2. On which they provide as collateral to avail of loans.

Other Responsibilities

1. RBI performs lots of functions other than the one mentioned above.
2. For instance, the bank has introduced three qualitative measurement tools:

The loan-to-value ratio

The loan-to-value ratio is the amount that the bank lends against the assets that it purchase.

The selective credit control facility

Under the selective credit control facility, the various banks across the country cannot lend to specific traders, such as those who trade oil, sugar, spices, and other such commodities.

Moral suasion

The RBI has also introduced the moral suasion feature to counteract specific economic trends.

Final Thoughts

1. The RBI also handles various responsibilities other than the ones discussed above.
2. It has a huge role to play in the Indian economy.
3. In that, many of its policies can directly affect the country's economy.
4. So, even a small change in them is bound to affect the economic conditions for years to come.

Also Read:
What is Online Money Transfer?
Money Lending in India
Difference Between Payout Modes: Wallet vs UPI vs NEFT vs RTGS vs IMPS

FAQs

Q- Do the RBI conduct transactions on behalf of the Government of India?

Ans- Yes. According to Section 20 of the RBI Act, 1934, the bank is obliged to conduct different transactions for India’s Government and account for the same by preparing receipts.

Q- How does the RBI make payments to the Government of India?

Ans- Any payment the RBI makes to the Government goes to the account of that department it is paying.

Q- Does RBI have a prominent role to play when it comes to GST?

• The Reserve Bank of India does the accounting for all the Goods and Services Tax (GST) collected by the Government of India.
• The GST challan that the agency banks collect goes into various Government accounts that the RBI manages.

Q- Who is an NBFC Ombudsman?

• The Reserve Bank of India appoints an NBFC Ombudsman to resolve customer complaints and queries related to NBFCs.
• An NBFC Ombudsman also provides specific services that are not present in Clause 8 of the complaint scheme.