Important Functions of RBI (Reserve Bank of India) – Explained


The Reserve bank of India is the key functionary of the Indian banking system. Functions of RBI (Reserve Bank of India) and policies have a direct impact on the economy and the banking system of the country.

It is not only the apex banking institution of the country but has many other functions to perform as well.

This article will take you through the functions pertaining to the Reserve Bank of India.

For a deeper insight into the topics, we have included the CRR and SLR ratio and the Repo rate and Reverse repo rate, and more as well.

Also Read:- Types of Insurance

What is the Reserve Bank of India (RBI)?

Headquartered in Mumbai, RBI, or Reserve Bank of India is the apex banking institution of the country.

It was established under the Reserve Bank of India Act on April 1, 1935.

It functions to attain financial stability in India by using monetary policies and is charged with regulating the country’s credit and currency system.

RBI formulates and implements and monitors the monetary policy of the country.

The RBI has the objective of managing the monetary and credit system of the country along with stabilizing the internal and external value of the Indian currency.

Moreover, it works to establish a strong and healthy monetary relation with countries and institutions across the world.

History of Reserve Bank of India (RBI)

Based on the recommendations of the Hilton Young Commission, the Reserve Bank of India was set up.

It began its operations from April 1, 1935, and the Reserve Bank of India Act 1934 furnishes the statutory basis of the functioning of the bank.

Initially, RBI was a privately-held Bank without major government ownership.

It had its original headquarters in Kolkata which was later shifted to Mumbai in 1937 on the Shahid Bhagat Singh Marg.

RBI issued the first note in January 1938. Later on, from March 11, 1940, the accounting year of The Reserve Bank was changed to July-June. It was earlier from January to December.

After the independence of India, the Reserve Bank (Transfer to Public Ownership) Act 1948 was passed by the government.

Through this act, RBI was taken over from private shareholders after paying appropriate compensation for their holdings.

Therefore, the nationalization of RBI was done in 1949 and it started working as a government-owned Bank from January 1, 1949.

Structure of RBI (Reserve Bank of India)

Following the hierarchical order, RBI has the structure as follows:-

Board of Directors

The central committee of the bank was appointed for a term of 4 years. It has 4 Deputy Governors, 4 Directors from the Finance Ministry, and 10 other Directors.


The Reserve Bank has 1 Governor and 4 Deputy Governors.

Shaktikanta Das is the current Governor of RBI (Reserve Bank of India)

Supporting Cast

There are four regional representatives and five members from the representation. The regional representations are New Delhi (North), Chennai (South), Kolkata (East), and Mumbai (West).

Branches and offices of RBI

Reserve Bank of India has four zonal offices and around 19 offices across various states and cities in the country.

Some of which are located in the capital cities of the states like Bhopal, Delhi, Mumbai, Ahmedabad, Chandigarh, Nagpur, Jammu, Kolkata, Srinagar, Lucknow, and Shimla.

What are the main functions of the Reserve bank of India (RBI)?

Reserve Bank of India has several major functions to perform to ensure the financial stability of the country.

It regulates the economy by functions which are as follows:-

Issue of currency notes

One of the primary functions of RBI (Reserve Bank of India) is printing and issuing currency notes in the country. RBI holds the sole right to issue currency notes of various denominations.

The currencies issued by the Reserve Bank are declared as unlimited legal tender throughout India.

However, the Reserve Bank does not print and issue 1 Rupee notes. They are issued by the Ministry of Finance.

Having the currency note issued by the apex banking institution of the country brings uniformity in note issue and develop possible effective state supervision.

Moreover, as the Reserve Bank regulates the monetary policy of the country, it is easier for them to control and regulate the credit in the economy in accordance with the requirements.

Above all, it keeps the faith of the public in the currency being issued by the central banking institution of the country.

Banker to the Government

The Reserve Bank of India acts as the banker to the government by managing all the banking needs of the government.

It functions as a banker to both the central and the state governments.

The Reserve Bank advises the government on the monetary, banking and financial subjects and policies along with providing short-term credit.

Moreover, it manages the issues of government loans, services the government outstanding debt, and nurturing the market for government securities.

In other words, it is the banker, agent and the advisor of the government at the central and the state levels.

Also, the Reserve Bank of India is the representative of the Indian government as a member of the World Bank and the IMF.

Banker’s bank

Being the Central Banking Institution of India the Reserve Bank of India acts as a Bankers Bank.

It takes deposits of all the commercial bank and lends to these banks in case of liquidity or any type of insolvency.

Moreover, it enables a smooth and swift clearing and settlement of the inter-bank transactions alongside providing efficient means of funds transfer for all the banks in the country.

Also, the Reserve Bank maintains the current account of all the banks and provides them with the facility of maintaining cash reserves.

Also, the RBI furnishes Real Time Gross Settlement (RTGS) facility to the banks for easier inter-bank transactions.

Custodian of foreign currency reserves

Another vital function of RBI is being the custodian of the foreign currency exchange and reserves in the country.

RBI is the custodian of the stock of gold and international currencies available in India.

Also, it manages the stability of the exchange rates and brings the external value of currencies at par with the internal values in regards to the sale and purchase of the foreign currencies.

This helps the bank in maintaining international liquidity and corrects the adverseness in the balance of payments.

Moreover, it needs to manage the exchange control international operations alongside holding the responsibility of maintaining the exchange value of Rupee as well.

At present, India holds a Foreign Exchange Reserve of approximately US $ 487 billion. RBI protects the country’s foreign exchange funds as well.

Lender of last resort

Alongside being the banker to the banks, the Reserve Bank of India also functions as the ‘Lender of the Last Resort’.

This function of RBI means that RBI can come to the rescue of any bank in the country which is solvent and facing temporary liquidity problems.

It assists them by supplying needed liquidity while no one else is extending credit to the bank. Alongside, the Reserve Bank can extend this facility to protect the interest of the depositors of the bank and prevent its possible failure.

This is because the failure or insolvency of a bank may affect other institutions and banks having an adverse impact on the financial stability following the economic instability.

However, the Reserve Bank can help commercial banks in financial difficulties while charging a higher rate of interest.

To borrow from the Reserve Bank, the commercial and other banks are required to keep eligible securities as collateral with the Reserve Bank.

Credit controller

Another prominent function of RBI is credit controlling in the country. The institution has the responsibility of formulating and implementing the monetary policy of India to keep the economy on a growing path.

It controls the availability and cost of currency alongside keeping the inflationary and deflationary trends at a low and stable level.

The RBI performs this function by adopting various measures which are categorized as quantitative and qualitative tools.

The qualitative tools are applicable to the entire money and banking system without any discrimination.

They are the cash reserve ratio, statutory liquidity ratio, bank rate, repo rate, the reverse repo rate, marginal standing facility and open market operations.

Qualitative tools of credit control include loan-to-value or marginal requirements, moral suasion and selective credit control.

Custodian of Cash Reserves of commercial banks

The central bank or The Reserve Bank of India is the custodian of the cash reserves of the commercial banks in India.

All the commercial banks in India have to maintain a portion of the total cash deposit as reserves in with the bank.

It is a part of a legal requirement and the percentage of cash reserves to be kept with the Reserve Bank is decided by the Reserve bank itself.

What are the quantitative and qualitative tools used by RBI to control credit?

Qualitative and quantitative tools are the measures used by the Reserve Bank in order to control the credit in the country.

The quantitative measures include tools that pertain to monetary policies and functions.

The qualitative measures have tools that do not have any monetary aspects or policies.

Quantitative Tools used by RBI (Reserve Bank of India) to control credit

What is CRR (Cash Reserve Ratio)?

CRR or the cash reserve ratio refers to the ratio of total deposits of the customers with the commercial bank to the ratio of deposits that the commercial banks have to keep with the central bank.

In simple term, CRR is the ratio of total deposits of the customer with the commercial banks to the cash deposits kept with the central bank.

The central bank of the country issues guidelines that regulate the cash reserve ratio which can vary from 3% to 15%.

At present, the cash reserve ratio as announced by RBI is 3%. (As of 1st May 2020)

What is SLR (Statutory Liquidity Ratio)?

As per the guidelines issued by the Reserve Bank of India, every commercial bank in India has to keep a specific proportion of deposits in the form of liquid assets.

This excludes the funds kept in the cash reserve ratio.

The statutory liquidity ratio can be in the form of cash, gold, or other liquid assets. The Reserve Bank of India holds the authority to increase this ratio by up to 40%.

This is done to restrict the ability of the bank to supply or inject money into the economy.

The current Statutory Liquidity ratio is 18%. (As of 1st May 2020)

What is the Bank rate?

Another quantitative tool used by the Reserve Bank of India to control credit is the bank rate.

It is the official interest rate at which RBI provides loans to the banks in the country.

These loans can be given out either by lending directly or rediscounting or buying back the bills of commercial banks and treasury bills.

When the Reserve Bank wants to reduce the credit flow in the economy it increases the bank rate and vice versa.

The bank rate acts as the reflector of the tightening monetary policy and also the interest rates offered by the commercial bank.

The current bank rate in the country is 4.65%. (As of 1st May 2020)

What are Open Market Operations by the RBI?

Open market operation refers to the activity of buying and selling government securities in an open market.

It is done to control the supply of money in the banking system.

When there is an excess supply of money, the Reserve Bank sells government securities.

Commercial banks buy these securities which take away their liquidity. In this manner, they cannot lend credit or provide loans in excess.

Similarly, when there is less supply of money or the economy demand more liquidity, the Reserve Bank buys the government securities.

This makes more liquidity available with the commercial bank which infuses more money supply into the economy as the commercial banks obtain the capacity to lend more.

What is Repo rate and Reverse repo rate?

Repo Rate

Repo rate is the rate at which every bank in the country can borrow money from the Central Bank of India by selling their securities.

It can be done to maintain liquidity or due to some other statutory measures.

It is a powerful tool of RBI to keep the inflation rate under control.

When RBI wants to curb inflation, it increases the repo rate which makes borrowing costlier for the banks and vice versa.

When the Repo rates are increased, the banks pass this increased cost to their customers, in turn, making borrowing costlier in the whole economy.

At present, the Reserve bank announced the repo rate as 4.40%. (As of 1st May 2020)

Reverse Repo rate

The reverse repo rate is just the opposite of the repo rate. It is the interest rate at which the Reserve Bank borrows money from the banks in the country for a short-term.

This is done to restrict or reduce the flow of funds or credit in the economy.

When the reverse repo rate is increased, there is a decrease in money supply in the economy and vice versa while the other things remain constant.

An increased reverse repo rate refers to more incentives with the commercial banks to voluntarily park their funds with the Reserve Bank which decreases the supply of money in the market.

At the time of writing, the reverse repo rate which RBI announced is 3.75%. (As of 1st May 2020)

Qualitative Tools used by RBI (Reserve Bank of India) to control credit

What is Loan to Value or Marginal Requirements?

Loan to value or margin requirements refers to the ratio of the loan amount to the actual value of the asset purchase.

In simple terms, it is the difference between the current value of the security against the loan and the value of the loan.

Let’s understand this with the help of an example.

Suppose you want to buy a house with borrowed money. The value of the house is Rs 50 Lakhs. The marginal requirement or the loan to value set by RBI is 70%.

In this situation, you can only avail of a loan of Rs 35 Lakhs.

Loan to value can be decreased or increased by the Reserve Bank to regulate inflation or deflation respectively.

What is selective credit control?

By using the selective credit control tool, the Reserve Bank can restrict the banks from giving loans and credits to the traders of certain commodities.

In other words, it is the control over a bank’s finance against the security of sensitive commodities.

The Reserve Bank can issue directives to the commercial banks from time to time stipulating specific restrictions on the bank advances against specified certain commodities.

Section 21 and 35A of the Banking Regulation Act 1949 confers the Reserve Bank of India to exercise this power.

What is moral suasion?

Through moral suasion, the Reserve Bank requests and persuades the commercial banks to perform specific things under certain economic trends and policies.

This can be performed through meetings, media statements conferences, etc. An example of moral suasion can be asking the commercial banks to reduce their non-performing asset.

Must Read:-

Rate this post

Leave a Comment