The Reserve Bank of India And Functions

The Reserve Bank of India

The Reserve Bank of India (RBI) was established as a shareholder’s bank on April 1, 1935. It retained this character for about fourteen years. Over this period important developments took place in India. The country got freedom on August 15, 1947, and the nationalist government decided to initiate the process of planned economic development. It was felt that a State-owned central bank was better suited to the requirements of the country. Hence, the RBI was nationalised on January 1, 1949.

Check out Economic development notes in detail. 

Main Functions Of The Reserve Bank

The RBI, like any other central bank, performs almost all traditional central banking functions. But, due to the specific nature of the country’s underdeveloped economy, it has undertaken some developmental and promotional functions also.

Since the RBI was established on the model of the Bank of England, its general central banking functions are very much similar to the Bank of England. These functions are as follows :

Issue of Currency Notes

Like any other central bank, the RBI has the sole right to issue currency notes. Under the original Act, there was a provision for issuing currency notes according to the proportional reserve system. This system is relatively less elastic was not suited to the I requirements of development planning. Thus the original Act was amended and the proportional reserve system of note issue was replaced by the minimum reserve system. According to the RBI (Amendment) Act, 1956 a minimum reserve of Rs. 515 crore – Rs. 115 crore in gold coin and bullion “and Rs. 400 crore in foreign securities was to be kept. The provisions regarding the maintenance of reserves were again amended on October 31, 1957, by the Reserve bank of India (Amendment) Ordinance, 1957, subsequently substituted by the RBI (Second Amendment). The new Amendment Act reduced the amount of gold (coin and bullion) and foreign Sexchange reserve to Rs. 200 crores; of this, the value of gold was not to be at any time less than Rs. 115 crore. This provision released a large amount of foreign exchange which was earlier kept as part of the reserve. Following the policy of other central banks the RBI (Second Amendment) Act, 1957, empowered the RBI to dispense with the entire holding of foreign securities with the prior sanction of the Central Government.

Banker to the Government

The RBI renders useful service to the government in the capacity of its banker, agent and adviser. Before the establishment of the RBI, important. current financial transactions of the government were handled by the Imperial Bank of India, which was a leading commercial bank of that period. When the RBI has established in 1935 both these aspects of government finance were centralised in it. The RBI now has the obligation to transact the banking business of the Central and State governments. Thus, it accepts money on account of these governments, makes payments on their behalf and carries out other banking operations such as their exchange and remittances. The RBI has intimate knowledge of the financial markets and thus offers useful advice to the government on the quantum and terms of new loans. Since the treasury bill market is very narrow, selling treasury bills on behalf of the government is relatively a less important function of the RBI. The RBI is authorised to make ways advances to the government. These short term loans are repayable within 90 days from the date of advance. Since the discharge of this function involves receipts and payments on behalf of both Central and the State governments not only in the capital cities but also in many other towns.

Banker’s Bank

The RBI has been vested with extensive powers to control the commercial banking systems under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. According to the Banking Regulation Act, 1949, all banking companies included in the Second Schedule of the RBI are called scheduled banks. For inclusion in the Second Schedule, a bank must satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of its depositors.

All scheduled banks are under a statutory obligation to maintain a certain minimum of cash reserve (to be decided by the RBI) with the RBI against their demand and time liabilities. An amendment of 1962 to the Banking Regulation Act, has empowered the RBI to 1 determine the Cash Reserve Ratio (CRR) between 3 per cent and 15 per cent of aggregate demand – and time liabilities.

Apart from this statutory control over the commercial banks, the RBI can also direct the scheduled banks to maintain 100 per cent cash reserve against all deposits received after à specified date. Further, the scheduled banks are required to submit weekly statements of their transactions to the RBI. The Banking Regulation Act, 1949, and the various amendments made therein define the RBI’S * regulatory functions relating to banks. These functions are quite extensive and cover such areas. – as the licensing of banks, branch expansion, liquidity of the assets of commercial banks, their management and methods of working, amalgamation, reconstruction and liquidation.

Exchange Management and Control

The RBF is required to stabilise the external value of the rupee. For this purpose, it functions as the custodian of the nation’s foreign exchange reserves. It is obligatory for the RBI to buy and sell the currents of all the members of the IMF. Stability in the external value of a currency is normally achieved by employing various monetary and fiscal tools. However, these instruments were found inadequate during World War II? tackling balance of payments problems. In the abnormal conditions of the War as no other remedy was available, India (facing balance of payments problems) resorted to direct methods of exchange control, which have now become a permanent instrument of economic management. Retro Prior to February 1947, exchange controls were exercised under the Defence of India Act. In 1947, the Foreign Exchange Regulation Act (FERA) was passed and with it, foreign exchange management and control became a distinct function of the RBI. The Act empowered the RBI to exercise control over foreign securities, foreign payments and transfer of currency, bullion and securities to foreign nationals. This Act has been substituted by the Foreign Exchange Regulation Act, 1973, which came into force on January 1, 1974.

Credit Control

Credit Control is generally considered to be the principal function of a central bank. In fact, it is this function that enables a central bank to realise both exchange stability and price stability. The RBI, like any other central bank, now possesses the power to use almost all quantitative and qualitative methods of credit control. Now FERA has been replaced by Foreign Exchange Management Act (FEMA).

Agricultural Finance

Although the RBI was established on the model of the Bank of England, yet it had a unique feature in its character. The Agricultural Credit Department of the RBI clearly distinguished it from the central banks of developed countries. For enabling the RBI to fulfil this role, the RBI Act was laid down for the setting up of a special Agricultural Credit Department. With the setting up of the National Bank for Agricultural and Rural Development (NABARD) on July 12, 1982, the major functions of the Agricultural Credit Department of the RBI were taken over by the former.

Collection and Publication of Data

The RBI has been entrusted with the task of collecting and compilation of statistical information relating to banking and other financial sectors of the economy. Out of various publications of the RBI two are relatively more important. The RBI: Bulletin is a monthly publication. It presents not only statistical and other information in summary form, but also provides results of important studies and investigations conducted by the RBI. The Report on Currency and Finance is an annual publication. It provides a comprehensive review of various developments of economic and financial importance.

Developmental and Promotional Functions

Now the RBI performs many developmental and promotional functions. These functions were earlier considered outside the purview of the Central Banks. In other words, the RBI’s functions are now not confined merely to the exercise of restrictive controls over the money market. Now it attempts to mobilise savings through banks and other financial institutions.

The RBI with the objective of providing security to depositors took initiative to establish the Deposit Insurance Corporation of India in 1962. In order to mobilise savings, the RBI played an active role in the establishment of the Unit Trust of India (UTI) in 1964. To small investors, the UTI offers the advantages of reduced risk, steady income, liquidity and expert management. Development of the institutional agricultural credit has been a major function of the RBI from its very inception. It not only assisted the development of short-term cooperative credit for agriculture but also participated in the establishment of the Agricultural Refinance and Development Corporation (ARDC) in 1963. The National Bank for Agriculture and Rural Development (NABARD) was set up on July 12, 1982. Half of its share capital (Rs. 100 crores) has been provided by the RBI. The NABARD has taken over the entire undertaking of ARDC..!!! The RBI, besides being a controller of credit, is also an advisor to the government. The significance of the RBI’s advisory function has considerably increased in the context of the government’s attempts to accelerate the development process in the country. Now the Central government asks for its advice not only on financial matters but also on general economic problems. As such, it now plays a useful role in the planning process of the country.

Check out these notes for Control Of Credit By The Reserve Bank Of India.

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