RBI Functions

Established- 1 April 1935

Nationalised-1 January 1949

Headquarter-Mumbai

Present Governor- Shaktikant Das

1. Monopoly of Note Issue:

Like any other cen-tral bank, the RBI acts as a sole currency authority of the country. It issues notes of
every denomination, except one-rupee note and coins and small coins, through the Issue Department of
the Bank. One- rupee notes and coins and small coins are issued by the Government of India. In
actuality, the RBI also issues these coins on behalf of the Government of India. At present, notes of
denominations of rupees two, five, ten, twenty, fifty, one hundred and five hundred are issued by the
RBI.
Prior to 1956, the principle of note issue of the RBI was based on proportional reserve system. This
system was replaced by the minimum reserve sys-tem in 1956 under which the RBI was required to hold
at least Rs. 115 crores worth of gold as back-ing against the currency issued.The rest (Rs. 85 crores)
should be in foreign securities, so that to-gether with gold and foreign exchange reserve the minimum
value of these assets is Rs. 200 crores.

2. Banker’s Bank:

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. The RBI provides financial assistance to com-mercial banks and State cooperative
banks through rediscounting of bills of exchange. As the RBI meets the need of funds of commercial
banks, the RBI func­tions as the Tender of the last resort’.

3. Banker to the Government:

The RBI acts as the banker to the government of India and State Governments (except Jammu and
Kashmir). As such it transacts all banking business of these Govern-ments. Just as individuals need a
bank to carry out their financial transactions effectively and efficiently, governments also need a bank to
carry out their financial transactions. The RBI serves this purpose for the Government of India (GoI). As a
banker to the GoI, the RBI maintains its accounts, receive payments into and make payments out of
these accounts. The RBI also helps the GoI to raise money from the public via issuing bonds and
government-approved securities.
4. Controller of Credit:

The RBI controls the total supply of money and bank credit to sub serve the country’s interest. The RBI
controls credit to en-sure price and exchange rate stability. To achieve this, the RBI uses all types of
credit control instru-ments, 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. This function is so important that it requires special treatment.

5. Exchange Management and Control:

One of the essential central banking functions performed by the Bank is that of maintaining the external
value of rupee. The external stability of the currency is closely related to its internal stability the
inherent economic strength of the country and the way it con-ducts its economic and monetary affairs.
Domestic, fiscal and monetary policies have, therefore, an im-portant role in maintaining the external
value of the currency. Reserve Bank of India has a very impor-tant role to play in this area.

Credit Control

Credit Control means the regulation of the creation and contraction of credit in the economy. It is an
important function of central bank of any country. The importance of credit control has increased
because of the growth of bank credit and other forms of credit.

Methods of Credit Control in India

Credit control is one of the most important functions of the Reserve Bank of India. The Reserve
Bank controls the credit in the country with the twin objectives of checking inflation and
facilitating economic development. Credit control weapons used by the Reserve Bank may be
either quantitative or qualitative.
The Reserve Bank has been employing both types of weapons to control the credit by
virtue of powers given to it by the Reserve Bank of India Act, 1934 and the Banking Regulation
Act, 1949. The Reserve Bank of India Act confers on the Reserve Bank powers to control credit
quantitatively.
There are two methods to control credit in India.

1-Quantitative

2-Qualitative

(I) Quantitative Methods

Quantitative methods aim at controlling the total volume of credit in the country. They relate to the
volume and cost of bank credit in general, without regard to the particular field of enterprise or
economic activity in which the credit is used or utilised.
The important quantitative or the general methods of credit control are as follows:

(A) Bank Rate or Discount Rate Policy

Bank rate Policy or the Discount Rate Policy has been the earliest instrument of quantitative credit
control. The bank rate is the ‘minimum rate of interest’ at which the central bank is ready to grant loans
to commercial banks or to rediscount the bills of exchange. Hence the ‘bank rate’ is also called as the
‘discount rate’. The Reserve Bank regulates credit of commercial banks and the general credit situation
of the country by manipulating the bank rate. The change in the bank rate generally has the effect on
the cost of credit available to the commercial banks from the Reserve Bank.20 If the bank rate is
increased, the cost of the lending rates to the borrowers increases, due to which the level of the
borrowings of the banks is reduced. In effect the increased bank rates results in contraction of bank
credit. Therefore, where the Central Bank of the country increases the bank rates, all other rates of
interests also increase. As of 2 January 2020, Bank rate is 5.40%.

2-Open Market Operations

Open market operations of a central bank consist of purchase and sale of government and other
securities in the open market with a view to regulate the supply of money. The Central Bank purchase
and sales the Govt. Securities, Gold, Foreign Exchange etc. for enlarging or contracting the cash basis of
the commercial banks. If the reserve Bank of India buys Govt. Securities in the market from commercial
Banks, there is a transfer of cash from the Reserve Bank of India to the commercial banks and this
increase the cash base of the commercial banks enabling them to expand credit and, conversely, if the
reserve Bank of India sales Govt, securities to the commercial banks, the commercial banks transfer cash
to the reserve Bank of India, therefore, their cash base is reduced. Thus adversely affecting the capacity
of commercial banks to expend their credit.

3- Cash Reserve Ratio (CRR)

Cash Reserve Ratio refers to the percentage of the deposits of the commercial banks to be maintained
with the central bank, being subject to variations by the central bank. Section 42 provides that every
scheduled bank shall maintained with the reserve bank an average daily balance the amount of which
shall not be less than 3% of the total demand and time liabilities in India of such bank. The reserve bank
of India has got the power to use the variable reserve requirements as an instruments of monitory
control. As of 2 January 2020 Cash Reserve Ratio ((CRR)is 4.0%

4- Statutory Liquidity Requirement (SLR)

Section 24 of the Banking Regulation Act, 1949 contains a statutory requirement regarding he
maintenance of liquid assets by banks in India. every banking company was required to maintain in India
in cash, gold or unencumbered approved securities an amount which shall not at the close of business
on any day be less than 25 per cent of the total of its demand and time liabilities in India. As of 2 January
2020 SLR is 18.50%.
5- Repo rate- Repo rate refers to the rate at which commercial banks borrow money by selling their
securities to the Central bank of our country i.e Reserve Bank of India (RBI) to maintain liquidity, in case
of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep
inflation under control. Repo rate is a powerful arm of the Indian monetary policy that can regulate the
country’s money supply, inflation levels, and liquidity. Additionally, the levels of repo have a direct
impact on the cost of borrowing for banks. Higher the repo rate, higher will be the cost of borrowing for
banks and vice-versa. As of 2 January 2020 repo rate is 5.15%.

6- Reverse repo rate - Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus
restricting the borrowing power of investors. Reverse Repo Rate is when the RBI borrows money from
banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for
their holdings with the central bank. During high levels of inflation in the economy, the RBI increases the
reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess
funds. Banks are left with lesser funds to extend loans and borrowings to consumers. As of 2 January
2020 Reverse repo rate is 4.905.

(II) Qualitative or Selective Credit Controls

The selective credit control is used to prevent speculative hoarding of commodities like Food grains so
as to prevent or control inflationary pressures in these areas.

Tools of Selective Credit Control

The main instruments of selective credit control in India are:

(a) Ceiling on Credit

The ceilings are fixed keeping in view the crop prospects, supply position and price trends. After

the fixation of ceiling of credit on a party-wise basis since November, 1972, banks are required to seek
prior permission of the Reserve Bank for (i) granting loans to new borrowers, and (ii) or increasing the
credit limits in case of existing borrowers. Thus one bank cannot take over a commodity account which
is subject to credit control from another bank without seeking prior approval of the Reserve Bank.

(b) Regulation of Minimum Margin

In case of advances against commodities subject to selective control, higher margins are prescribed in
order to restrict the borrowing capacity of the borrowers. With higher margin, a borrower can get less
credit from banks against a certain quantity of stock and thus can finance only a smaller part of it
through bank finance. Moreover, different margins may be prescribed for different types of borrowers
against the security of the same commodity. A higher margin is generally fixed for those borrowers
whose need for credit is not so urgent or larger flow of credit to whom is likely to aggravate the price
situation.
(c) Fixation of Minimum Lending Rate

Though the Reserve Bank had prescribed the interest rates on various categories of commercial bank
advances (which include the maximum rates of interest to be charged in certain cases), the minimum
lending rate was prescribed for advances for commodities subject to selective controls.

(d) Moral suasion

"Moral suasion" means persuasion of commercial banks to follow certain policies, impressing upon
them the necessity to do. There is no legal compulsion in this regard by the Reserve Bank or
Government of India and therefore the success of these measures depends upon the cooperation of the
commercial banks. Through the instrument of Moral Suasion, the approach is informal rather than
formal.

(e) Rationing of Credit

Under this method, the central bank controls credit by rationing it among its various uses. It also seeks
to control the allocation of bank credit among the various categories of borrowers. The Reserve Bank
has been authorized to secure distribution of credit in conformity with the national priorities. As
required by the Central Government, the Reserve Bank has issued directives to the commercial banks
that at least 40% of their credit must be disbursed among the priority sectors of the economy such as
agriculture, small industries, artisans, education, housing, etc. Rationing of credit can play a significant
role in a planned economy by diverting financial resources into the priority sectors. But it cannot be
denied that it curtails the freedom of the commercial banks. The commercial banks cannot follow an
independent policy because the channels of investment are determined in advance by the Reserve Bank.

(f) Direct Action

The Central Bank may take action against banks which are pursuing unsound credit policies. This may
take the form of charging a penal rate of interest or refusing to grant further rediscounting facilities to
the banks who are violating the rules and directives of the Central Bank. The element of force associated
with it is not conducive to the attainment of positive results.

(g) Publicity

Under this method, the central bank gives wide publicity regarding the probable credit Control policy it
may resort to by publishing facts and figures about the various economic and monetary condition of the
economy. The central bank brings out this publicity in its bulletin, periodicals, report etc.