Role and Function of the Reserve Bank of India (RBI)

In every country there is one organization which works as the central bank. The function of the central bank of a country is to control and monitor the banking and financial system of the country. In India, the Reserve Bank of India (RBI) is the Central Bank.

The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of regulator of the banking system in India. The Banking Regulation Act 1949 and the RBI Act 1953 has given the RBI the power to regulate the banking system.

The RBI has different functions in different roles. Below, we share and discuss some of the functions of the RBI.

RBI is the Regulator of Financial System

The RBI regulates the Indian banking and financial system by issuing broad guidelines and instructions. The objectives of these regulations include:-

1.      Controlling money supply in the system,

2.      Monitoring different key indicators like GDP and inflation,

3.      Maintaining people’s confidence in the banking and financial system, and

4.      Providing different tools for customers’ help, such as acting as the “Banking Ombudsman.”

RBI is the Issuer of Monetary Policy

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well. The main objectives of monitoring monetary policy are:-

1.      Inflation control

2.      Control on bank credit

3.      Interest rate control

The tools used for implementation of the objectives of monetary policy are:-

1.      Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),

2.      Open market operations,

3.      Different Rates such as repo rate, reverse repo rate, and bank rate.

RBI is the Issuer of Currency

Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also takes action to control circulation of fake currency.

RBI is the Controller and Supervisor of Banking Systems

The RBI has been assigned the role of controlling and supervising the bank system in India. The RBI is responsible for controlling the overall operations of all banks in India. These banks may be:-

1.      Public sector banks

2.      Private sector banks

3.      Foreign banks

4.      Co-operative banks, or

5.      Regional rural banks

The control and supervisory roles of the Reserve Bank of India is done through the following:-

1.      Issue Of Licence: Under the Banking Regulation Act 1949, the RBI has been given powers to grant licenses to commence new banking operations. The RBI also grants licenses to open new branches for existing banks. Under the licensing policy, the RBI provides banking services in areas that do not have this facility.

2.      Prudential Norms: The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such, they are responsible for implementation of international standards of capital adequacy norms and asset classification.

3.      Corporate Governance: The RBI has power to control the appointment of the chairman and directors of banks in India. The RBI has powers to appoint additional directors in banks as well.

4.      KYC Norms: To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Customer“ guidelines. Every bank has to ensure KYC norms are applied before allowing someone to open an account.

5.      Transparency Norms: This means that every bank has to disclose their charges for providing services and customers have the right to know these charges.

6.      Risk Management: The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in basel norms.

7.      Audit and Inspection: The procedure of audit and inspection is controlled by the RBI through off-site and on-site monitoring system. On-site inspection is done by the RBI on the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control.

8.      Foreign Exchange Control: The RBI plays a crucial role in foreign exchange transactions. It does due diligence on every foreign transaction, including the inflow and outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee. The RBI also takes necessary steps to control the current account deficit. They also give support to promote export and the RBI provides a variety of options for NRIs.

9.      Development: Being the banker of the Government of India, the RBI is responsible for implementation of the government’s policies related to agriculture and rural development. The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI gives stress on giving specialized support for rural development. Priority sector lending is also in key focus area of the RBI.

Apart from the above, the RBI publishes periodical review and data related to banking. The role and functions of the RBI cannot be described in a brief write up. The RBI plays a very important role in every aspect related to banking and finance. Finally the control of NBFCs and others in the financial world is also assigned with RBI.