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Reserve Bank of India RBI: Functions, Role, Composition, RBI UPSC

So, here we will read in detail about these three types of functions. To achieve this, the RBI uses all types of credit control instru­ments, quantitative, qualitative and selective. The most extensively used credit instrument of the RBI is the bank rate. The RBI also relies greatly on the selective methods of credit control.

The RBI also acted as Burma’s (now Myanmar) central bank until April 1947 (except during the years of Japanese occupation (1942–45)), even though Burma seceded from the Indian Union in 1937. After the Partition of India in August 1947, the bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI has been fully owned by the Government of India since its nationalisation in 1949.[19] RBI has a monopoly of note issue. The Reserve Bank of India, abbreviated as RBI, is India’s central bank and regulatory body responsible for regulation of the Indian banking system.

The Reserve Bank of India is an important segment of the UPSC syllabus. It is of prime importance for the candidates to be conversant of the important topics pertaining to the RBI, then they will be able to comprehend numerous other concepts. The functions, objectives, history, composition, and powers are some of the essential topics for the upcoming IAS exam. The Reserve Bank of India (RBI) was established as the central bank of India based on the recommendations of the Hilton Young Commission. As per RBI, priority sectors are those sectors of the economy that may not get timely and sufficient credit in the absence of these special schemes. RBI also provides loans to the central/State/UT Government as a banker to the government.

  1. The RBI has set CRR at 4.5%[111] A 1% change in CRR affects the economy by ₹1.37 trillion.[111] An increase draw this amount from the economy, while a decrease injects this amount into the economy.
  2. RBI makes short-term loans and advances to banks for specific uses or in need.
  3. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions.
  4. Reserve Bank Staff College Chennai, Reserve Bank of India Academy Mumbai, and Reserve Bank of India College of Agricultural Banking Pune.

As bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them funds for short periods. All banks are required to maintain a certain percentage (lying between 3 per cent and 15 per cent) of their total liabilities. The main objective of changing this cash reserve ratio by the RBI is to control credit. It is also responsible for operating the currency and credit system of India and having a modern monetary framework to meet the challenges of a developing economy.

Reserve Bank Innovation Hub

The Central and State Governments’ Consolidated Funds, Contingency Funds, and Public Accounts are all maintained by the RBI. As a lender to the government, RBI also extends loans to the federal, state, and territorial governments. The government of India sets an inflation target for every five years.

What is RBI?

It is under the ownership of Ministry of Finance, Government of India. It is responsible for the control, issue and maintaining supply of the Indian rupee. It also manages the country’s main payment systems and works to promote its economic development. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialized division for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.

Monetary Management/Authority

The main functions of RBI are to manage foreign exchange, issue currency, control inflation, encourage growth, and achieve financial stability. We have already seen that monetary policy refers to the actions undertaken by a nation’s central bank to control the money supply. A central board of directors headed by a governor oversees the bank. In addition, four local boards, headquartered in Mumbai, Kolkata, Chennai, and New Delhi, advise the central board on regional issues and represent the interests of regional banks.

Role And Function Of RBI In Indian Economy PDF: Complete Details

An expansionary monetary policy is focused on expanding (increasing) the money supply in an economy. An expansionary monetary policy is implemented by lowering key interest rates thus increasing market liquidity. Monetary policy refers to the policy of the central bank – ie Reserve Bank of India – in matters of interest rates, money supply and availability of credit.

The Department of Supervision assists and provides secretarial support to BFS. The primary objective for the RBI would be to regulate the various banking functions for India in the money market. It was established that under the reserve bank of India act of 1934.

Not only this, the RBI also provides ways and means of advances (repayable with 90- days) to State Government. It may be noted that the Central Government is empowered to borrow any amount it likes from the RBI. The rest (Rs. 85 crores) should be in foreign securities, so that to­gether with gold and foreign exchange reserve the minimum value of these assets is Rs. 200 crores. After the partition of the country into two separate countries, the Reserve Bank acted as Pakistan’s central bank (upto June 1948).

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 (annually). The RBI has https://1investing.in/ been empowered by law to super­vise, regulate and control the activities of commer­cial and cooperative banks. The RBI periodically in­spects banks and asks them for returns and neces­sary information.

Such research undertaken by RBI focuses on issues and problems arising at the national and international levels, having a critical impact on the Indian economy. Priority sector guidelines don’t provide a preferential interest rate for loans to the sector. These small-value loans typically run to those features of rbi sections of the population that are weaker sections of society and needed special attention and to the section intensively employed in agriculture and small enterprises. That means RBI comes to rescue the banks that are solvent (facing temporary liquid problems) but have not gone bankrupt.

If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the commercial banks for a short-term (a maximum of 90 days). When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks can’t carry out their business at a profit whereas the very opposite happens when the repo rate is cut down. Generally, repo rates are cut down whenever the country needs to progress in banking and economy.

Thus, they are entirely responsible for the management of the RBI. Furthermore, a fascinating feature of the RBI was that at its very origin, the Bank was viewed as assuming a unique function with regards to advancement, particularly Agriculture. Apart from these traditional function, the RBI performs various activities of promotional and developmental nature. For instance, RBI has helped a lot in building the huge financial infrastructure that we see now.

If the RBI increases SLR to 50% and CRR to 20% then bank will be left only with ₹600 million (US$7.5 million) for operations. Now it will be very difficult for the bank to maintain profitability with such a small amount of capital. The bank will be left with no choice but to raise its interest rate which will make borrowing by its customers more costly. This will in turn reduce the overall demand and hence prices will eventually come down. CRR refers to the ratio of bank’s cash reserve balances with RBI with reference to the bank’s net demand and time liabilities to ensure the liquidity and solvency of the scheduled banks. The share of net demand and time liabilities that banks must maintain as cash with the RBI.

S. Tarapore to “lay the road map” to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999–2000. In order to maintain their SLR and CRR, banks open current accounts with the RBI. The RBI serves as a central banker for all of the individual banks and facilitates the settlement of money transfers between banks.

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