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RBI and Functions of Central Bank

The document summarizes the key roles and functions of central banks, using the Reserve Bank of India as an example. It discusses how central banks act as a lender of last resort, regulate commercial banks, control money supply and credit, issue currency, manage government finances, and more. The RBI was established in 1935 and nationalized in 1949. It aims to maintain monetary stability and ensure adequate credit flow in India through tools like repo rates, bank interest rates, open market operations, and by fulfilling roles like sole note issuer, government banker, and commercial bank regulator.

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0% found this document useful (0 votes)
277 views21 pages

RBI and Functions of Central Bank

The document summarizes the key roles and functions of central banks, using the Reserve Bank of India as an example. It discusses how central banks act as a lender of last resort, regulate commercial banks, control money supply and credit, issue currency, manage government finances, and more. The RBI was established in 1935 and nationalized in 1949. It aims to maintain monetary stability and ensure adequate credit flow in India through tools like repo rates, bank interest rates, open market operations, and by fulfilling roles like sole note issuer, government banker, and commercial bank regulator.

Uploaded by

tushar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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R B I AND FU NCT IONS

OF CENTRA L B A NK

B Y- T U S H A R D H I M A N
OF CLASS XII-D
INTRODUCTION
• A central bank is an institution that manages a country’s currency and monetary policy. They also oversee
the commercial banking system of their country. Central banks originated in 1694 when the Bank of
England was founded to manage the national debt of Great Britain. The US Federal Reserve System is
considered to be one of the most influential central banks, along with the European Central Bank. A
central bank is a financial institution that controls a country’s monetary policy and usually issues the
national currency, which serves as the State’s legal tender. Central banks are known as “lender of last
resort,” as they can provide liquidity to commercial banks during times of crisis or economic recession.
• A central bank is a bank that acts as a bridge between the government and the public. It has a variety of
responsibilities, such as controlling the money supply by setting interest rates, regulating banks to prevent
financial crises from happening, and acting as lender of last resort to banks in times of financial crisis. A
central bank is usually responsible for setting the interest rate that banks charge each other for loans, also
referred to as the discount rate. The higher this rate is set, the more expensive it becomes for commercial
banks to borrow money from one another.
BRIEF HISTORY
• It was set up on the recommendation of the HILTON YOUNG COMMISSION.
• It was started as a Share-holders Bank with a paid-up capital of Rs.5 Crores.
• It was established on April 1, 1935.
• Initially, it was located in Kolkata.
• It moved to Mumbai in the year 1937.
• Initially, it was privately owned.
• It was the first bank to be nationalized in 1949.
• It has 22 Regional offices, most of these in-state Capitals.
• Since its nationalization in 1949, Reserve Bank is fully owned by the Government of India.
PREAMBLE
• The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
“To regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in
India and generally to operate the currency and credit systems of the country to its advantage; to have a
modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain
price stability while keeping in mind the objective of growth.”
OBJECTIVES OF RBI

The Objectives of the Central Bank of India are 

• To help ensure the monetary, stability of the country.


• To assist in regulating the financial system of the country.
• To formulate, implement and monitor the monetary policy.
• To maintain liquidity in the country.
• To ensure an adequate flow of credits.
• Prescribes parameters for baking in the country.
• Maintain public confidence in the system.
• To manage the foreign management Act.
• To facilitate external trade.
• Issue and exchange currency.
• Maintain the supply of currency.
• Own and operate the depository and exchange for government bonds.
• Banker to the government.
• To stabilize the internal and external value of the rupee.
• To centralize the cash reserves of commercial banks.
• To establish monetary relations with other countries of the world and international financial institutions .
MEANING AND DEFINITION
• “Central Bank is an ‘apex’ body that controls, operates, regulates, and direct the entire banking and
monetary structure of the country.”
• The Reserve Bank of India (RBI) is the apex (supreme) body in the monetary and banking system of the
country. It occupies the topmost position in the country’s financial system. All financially developed
countries have their central bank, which plays an important role in financial stability, monetary policy
transmission, bank regulation and supervision, etc. The RBI was
FUNCTIONS OF CENTRAL BANK
As the country’s central bank, the Reserve Bank of India performs several functions:
• Issue of currency
• Banker to the Government
• Bankers bank and supervisor
• Money supply and credit control
• Custodian of foreign reserve
CURRENCY ISSUE
The central bank has the sole right to issue currency notes in a country. In India, this power belongs to the
RBI. The only exception is one rupee notes and coins, which are issued by the Ministry of Finance.
All the currency issued by the Central Bank is its monetary liability. To ensure public confidence in paper
currency, assets of equal value must be held to back up the money supply. These assets usually consist of
gold coins and bullion, foreign securities, and government-issued local currency securities.
ADVANTAGES OF SOLE AUTHORITY OF
NOTE ISSUE WITH RBI
• It leads to uniformity in note circulation.
• It gives the Central Bank power to influence the money supply because currency with the public is a part
of the money supply.
• It enables the Government to have supervision and control over the Central Bank concerning the issue of
notes.
• It ensures public faith in the currency system.
• It helps in the stabilization of the internal and external value of the currency.
The government is authorized to borrow money from the Central Bank. When the government has an
additional expense, it will borrow money from the Central Bank by selling treasury bills. When the Central
Bank buys these securities, they issue new currency. This process is known as “monetizing the debt” or
“deficit financing”.
BANKER TO THE GOVERNMENT
The Reserve Bank of India acts as a banker, agent, and financial advisor to the Central Government and all
State Governments except that of Jammu and Kashmir.
To carry out its responsibilities as an agent, the RBI manages the issue of various government securities such
as Treasury Bills, State Development Loans (SDLs), National Development Loans (NDLs).
• It maintains a current account for keeping its cash balances.
• It accepts receipts and makes payments for the government and carries out the exchange, remittance, and
other banking operations.
• It also gives loans and advances to the government for temporary periods. The government borrows
money by selling treasury bills to the Central Bank.
The Central Bank is a government agency that deals with public debt. It also advises the Government on
economic, financial, and monetary matters from time to time.
BANKERS BANK AND SUPERVISOR
As the banker to banks, the Central Bank functions in three capacities:
1. Custodian of Cash Reserves: Commercial Banks are required to keep a certain proportion of their
deposits (known as Cash Reserve Ratio or CRR) with the Central Bank. In this way, Central Bank acts as
a custodian of cash reserves of commercial banks.
2. Lender of Last Resort When Commercial Banks fails to meet their financial requirements from other
sources, they approach the Central bank to give loans and advances as lender of the last resort. Central
Bank assists these banks through discounting of approves securities and bills of exchange.
3. Clearing House All Commercial Banks have their account with the Central Bank. Therefore, The Central
Bank can easily settle claims of various economical banks against each other, by making debit and credit
entries in their accounts.
As a supervisor, Central Bank regulates and controls the Commercial Banks. The regulation of Banks may
be related to their licensing, branch expansion, the liquidity of assets, management, merging, winding up,
etc. The control is exercised by periodic inspection of banks and the return filed by them.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT
Due to economic fluctuations, the Central Bank controls the money supply and credit in the best interest of
the economy. It has the sole monopoly in currency issues; it can control credit and supply of money. For
this, RBI makes use of following methods:
1. Repo rate: "Repo rate is the rate at which a central bank in a country lends funds to a commercial bank
to meet short-term needs." The central bank lends a loan with approved securities or eligible exchange
bills. Offers. Increasing repo rates increase the cost of borrowing from central banks. This forces
commercial banks to raise interest rates and lenders discourage borrowing. This reduces the credit-
granting capacity of commercial banks. Lower repurchase rates have the opposite effect.
2. Bank interest rate (or discount rate) "Bank interest rate is the rate at which the central bank of a country
lends money to commercial banks to meet long-term needs." RBI actively uses bank interest rates for
credit. Is managed. Bank interest rates have the same effect as repo interest rates. In other words, rising
bank interest rates increase central bank lending costs, leading to higher commercial bank lending rates.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT (CONTINUATION)

This discourages lenders from borrowing and reduces the ability of commercial banks to generate credit.
Reverse repo rate is the exact opposite of repo rate. This is the rate at which RBI borrows from commercial
banks. RBI uses this tool when it feels that the banking system has an excess money supply. The rise in
reverse repo rates is causing banks to send more money to RBI due to attractive interest rates.
3. Open market operations: "Open market operations (OMOs) are the buying and selling of government
bonds by central banks to public and commercial banks." In the end, the amount is deposited or remitted
by the bank, so the securities It doesn't matter if it is bought or sold by the general public or sold to a
bank.
• • The sale of securities by the central bank reduces the reserves of commercial banks. This affects a
bank's ability to create credit and thus reduces the money supply in the economy.
• • Purchasing securities by a central bank increases reserves and enhances a bank's ability to provide
credit.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT (CONTINUATION)

4. Legal reserve requirements (variable reserve requirement method): Commercial banks must keep
reserves in two accounts.
a) Cash Reserve Ratio (CRR) The minimum percentage of net demand and time commitment that a
commercial bank must maintain at a central bank. Increasing CRR reduces the excess reserves of
commercial banks and limits their ability to create credit.
b) Statutory Liquidity Ratio (SLR) 'The minimum percentage of net demand and one-time debt that a
commercial bank must maintain. SLRs are held in the form of designated current assets, such as excess
reserves and other securities, or current account balances with other banks. As the SLR increases, the
bank's ability to grant credits diminishes and vice versa.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT (CONTINUATION)

5. Margin requirements: "Margin is the difference between the amount of a loan and the market value of
the securities the borrower provides for the loan." Increasing the margin reduces the borrowing capacity
and money supply. Lower margins encourage people to borrow more. The RBI can provide differentiated
margins for different types of lenders compared to other credit management measures such as moral
crime and selective credit management. RBI uses the above methods to manage credit in the economy.
Safety of the same product. If a bank takes out a loan equivalent to the full amount of the security, the
bank will suffer a loss if the price of the security drops, so a margin is required.
CUSTODIAN OF FOREIGN EXCHANGE
RESERVES
The central bank also acts as a manager of national gold stocks and foreign exchange reserves. This feature
allows central banks to manage their currencies reasonably. According to Forex regulations, all Forex
transactions must be submitted by RBI. Centralizing foreign exchange transactions with RBI has two
purposes.
i. Help banks stabilize the external value of their currency.
ii. Support the pursuit of coordinated policies on the country's balance of payments situation.
PROMOTIONAL FUNCTIONS OF RBI
The Reserve Bank of India performs various promotional functions as shown below.
1. Promote banking habits: RBI helps mobilize people's savings for investment. We have expanded our
banking system through institutions such as UTI, IDBI, IRCI and NABARD. In this way, he promotes
banking habits among people.
2. Provide export refinancing: RBI provides refinancing for export promotion. The Export Guarantee
Credit Corporation [ECGC] and the Export-Import Bank were initially established by RBI to fund
India's foreign trade.
3. Give credit to agriculture: RBI makes institutional arrangements for local or agricultural financing.
Example: A bank has created a special cell for agricultural credit. It promoted local regional banks with
the help of commercial banks. He also promoted NABARD.
4. Loans to Small Industry Units: Commercial banks will lend to Small Industry Units according to the
instructions issued by RBI from time to time. The RBI encourages commercial banks to provide
warranty services to the small industry sector as well. The RBI has instructed commercial banks to open
specialized branches to provide adequate financial and technical assistance to the small industrial sector.
PROMOTIONAL FUNCTIONS OF RBI (CONTINUATION)

5. Providing Indirect Financing to the Co-operative Sector: The RBI orders NABARD to lend to the state
co-operative banks, which the state co-operative banks lend to the co-operative sector. Therefore, the
Reserve Bank of India provides indirect financing to the Indian co-operative sector.
6. Management of the national financial and banking system: RBI has enormous and broad authority over
the supervision and management of commercial banks, co-operative banks, and non-bank institutions
that receive deposits. Banking regulations set out a wide range of requirements for reserves, cash
reserves and current assets. Each upcoming bank must submit a weekly financial statement to the
Reserve Bank stating the most important items of debt and assets in India.
ACHIEVEMENTS OF RBI
1. Flexible monetary policy: RBI adopts flexible monetary policy. This has changed the financial regulation
of India's money markets. The pressure of seasonal demand is well achieved.
2. Stable interest rate structure: _ RBI's interest rate policy has resulted in a relatively stable interest rate
structure in the economy. Bank interest rates remained low at 3% until 1951.
3. Modern Banks and Credit Structures: Reserve banks have succeeded in building modern and sound
banks and credit structures. We had broad oversight that allowed us to guide the development of banks in
a fixed order. Training of bank staff has improved their efficiency. Bank geographic and basic coverage
has also increased significantly.
4. Cheap payment facilities: Reserve Bank has introduced very cheap payment facilities. Widely used in
commercial banks, government agencies and co-operative banks.
FAILURES OF RBI
1. Lack of Coordination in Money Markets: The RBI has virtually no control over or control over the
activities of money lenders and other indigenous bankers. These bankers are not simply included in the
reserve banking territory.
2. Lack of interest rate uniformity: Due to lack of control in different sectors of money markets, different
interest rates are still prevalent outside the organized sectors of money markets, with ROI higher than
bank rates. Is also overly high.
3. Lack of building market: RBI created a development plan for the building market in 1952. But so far,
India does not have an independent, organized and extensive billing market.
4. Inadequate availability of agricultural credit: The RBI has taken many steps to provide adequate
agricultural credit, but it is still dominated by local money lenders and other indigenous bankers.
5. Inadequate banking facilities: Most banking activities are concentrated in urban areas. People in small
towns and suburbs are still deprived of banking services.
CONCLUSION
The banking system has been with us since people spent money. Banks and financial institutions
provide security to individuals, businesses and governments. In general, it's pretty easy to
understand what a bank is doing. For the average person, a bank accepts deposits, lends, provides
a safe place for money and valuables, and acts as a payment agent between the merchant and the
bank. History has made power banks vulnerable to many risks, including credit, liquidity,
markets, corporate interest rates and legal risks, and many global crises are the result of such
vulnerabilities, a country. And led to strict regulation by national banks. .. However, the central
bank is the backbone of the entire banking sector, without which the banking sector would not be
involved at all. Central banks are an integral part of the economy and help increase the resources
of the economy.

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