Reserve Bank of India

The Reserve Bank of India (RBI) is India's central bank and regulatory body and is responsible for the issue and supply of the Indian rupee and the regulation of the Indian banking system. It also manages the country's main payment systems and works to promote its economic development. Bharatiya Reserve Bank Note Mudran is one of the specialized divisions of RBI through which it mints Indian banknotes and coins. RBI established the National Payments Corporation of India as one of its specialized divisions to regulate the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialized divisions to provide insurance of deposits and guarantee credit facilities to all Indian banks.

Until the Monetary Policy Committee was established in 2016,[6] it also had full control over monetary policy in the country. It commenced its operations on 1 April 1935 by the Reserve Bank of India Act, 1934. The original share capital was divided into shares of 100 each fully paid. Following India's independence on 15 August 1947, the RBI was nationalized on 1 January 1949.

KEY TAKEAWAYS

• The Reserve Bank of India (RBI) is the central bank of India,

• The RBI was originally set up as a private entity in 1935, but it was nationalized in 1949.

• The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions, and non-banking finance firms.

The RBI acts as a regulator and supervisor of the overall financial system. This injects public confidence into the national financial system, protects interest rates, and provides positive banking alternatives to the public. Finally, the RBI acts as the issuer of national currency. For India, this means that currency is either issued or destroyed depending on its fit for current circulation. This provides the Indian public with a supply of currency in the form of dependable notes and coins, a lingering issue in India. In 2018 the RBI banned the use of virtual currencies by the financial agencies and banks that it regulates.

Functions of RBI

Reserve Bank of India being an apex court of the center enjoys enormous power and functions under the banking system in India. It has a monopoly over the issue of bank-notes and the monetary system of the country. These power and functions as to the issue of banknotes and currency system are governed by the Reserve Bank of India Act, 1934. Besides it the Banking Regulation Act, 1949 also empowers certain power and Function of the Reserve Bank.

Main Functions of RBI

Main functions are those functions that every central bank of each nation performs all over the world These functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks.

1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of a smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes, and government of India bonds.

2. Banker to other Banks: The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks' reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of its reserves with its parent's viz. the RBI. Similarly, in need or urgency, these banks approach the RBI for funds. Thus, it is called the lender of the last resort.

3. Banker to the Government: The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking functions such as accepting deposits, taxes and making payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides an overdraft facility to the government when it faces a financial crunch.

4. Exchange Rate Management: It is an essential function of the RBI. To maintain stability in the external value of the rupee, it has to prepare domestic policies in that direction. Also, it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. To maintain the exchange rate stability, it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other.

5. Credit-Control, Function: Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus, it regulates the credit creation capacity of commercial banks by using various credit control tools.

6. Supervisory Function: The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue licenses for setting up new banks, to open new branches, to decide minimum reserves, to inspect the functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections and audits of the commercial banks in India.

Supervisory Functions of RBI

The reserve bank also performs many supervisory functions. It has the authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below.

1. Granting licenses to banks: The RBI grants licenses to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches.

2. Bank Inspection: The RBI grants licenses, to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities.

3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However, RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs.

4. Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh is insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.