Reserve Bank of India

The central bank plays an important role in the monetary and banking structure of nation. It supervises controls and regulates the activities of the banking sector. It has been assigned to handle and control the currency and credit of a country. In older days, the central banks were empowered to issue the currency notes and bankers to the Union governments. The first central bank in the world was Riks Banks of Sweden which was established in 1656. The Reserve Bank of India, the central bank of our country, was established in 1935 under the aegis of Reserve Bank of India Act, 1934. It was a private shareholders institution till January 1949, after which it became a state-owned institution under the Reserve Bank of India Act, 1948. It is the oldest central bank among the developing countries. As the apex bank, it has been guiding, monitoring, regulating and promoting the destiny of the Indian financial system.

Objectives of RBI

It plays a more positive and dynamic role in the development of a country. The financial muscle of a nation depends upon the soundness of the policies of the central banking. The objectives of the central banking system are presented below:

1.      The central bank should work for the national interest of the country.

2.      The central bank must aim for the stabilization of the mixed economy.

3.      It aims at the stabilization of the price level at average prices.

4.      Stabilization of the exchange rate is also essential.

5.      It should aim for the promotion of economic activities.

Constitution and Management

Reserve Bank of India has been constituted as a corporate body having perpetual succession and a common seal. Its capital is Rs. 5 crore wholly owned by the Government of India. The general superintendence and direction of the affairs and business of the Bank has been vested in the Central Board of Directors. The Central Government, however, is empowered to give such directions to the Bank as it may, after consultation with its Governor, consider necessary in the public interest.

The Central Board of Directors consists of the following:

a) A Governor and not more than four Deputy Governor to be appointed by the Central Government.

b) Four directors to be nominated by the Central Government, one from each of the four local boards.

c) Ten directors to be nominated by the Central Government.

d)  One Government official to be nominated by the Central Government.

Besides the Central Board of Directors, four Local Boards have also been constituted for each of the four areas specified in the first schedule to the Act. A Local Board has five members appointed by the Central Government to represent as far as possible, territorial and economic interests and the interests of cooperative and indigenous banks. A Local Board advises the Central Board on matters referred to it by the Central Board and performs such duties as are delegated to it by the Central Board.

Functions of RBI

The RBI functions are based on the mixed economy. The RBI should maintain a close and continuous relationship with the Union Government while implementing the policies. If any differences arise, the government’s decision will be final. The main functions of the RBI are presented below:

1.  Welfare of the public

2. To maintain the financial stability of the country.

3.  To execute the financial transactions safely and effectively.

4. To develop the financial infrastructure of the country.

5.  To allocate the funds effectively without any partiality.

6.   To regulate the overall credit volume for price stability.

Authorities

The RBI has the full authority in the following aspects:

1.   Currency issuing authority

2. Monitoring authority

3.  Banker to the Union Government

4. Foreign exchange control authority

5.  Promoting authority.

1. Currency Issuing Authority- The RBI has the sole authority to issue the currency notes and coins. It is the fundamental    right of the RBI. The coins and one rupee notes are issued by the Government of India and they are circulated through the RBI. The notes issued by the RBI issues by the RBI will have legal identity everywhere in India. The RBI issues the notes of the denomination of RS. 1000, 500, 100, 50, 20 and 10. The RBI has the authority to circulate and withdraw the currency from circulation. It has also the authority to exchange notes and coins from one denomination to other denominations as per the requirement of the public. The currency notes may be distributed throughout the country through its 15 full pledged offices, 2 branch offices, and more than 4000 currency chests. The currency chests are maintained by different banks in various locations. The RBI issues currency notes, based on the availability of balances of gold, bullion, foreign securities, rupees, coins and permitted bills.

2. Monitoring Authority- The RBI has the full authority to control all the aspects of the banking system in India. The RBI is known as the Banker’s Bank. The banking system in India works according to the guidelines issued by the RBI. The RBI is the premier banking institute among the commercial banks. All the commercial banks, foreign banks and cooperative urban banks in India should obey the rules and regulations which are issued by the RBI from time to time. The RBI controls the deposits of the commercial banks through the CRR and the SLRs. Every bank should deposit a certain amount in the RBI. The commercial banks have the power to borrow the money from the RBI when they are in need of finance. Hence it is known as the lender of the last resort. The RBI has the authority to control the credit supply in the economy or monetary systems of the nation.

3. Banker to the Union Government- Generally in any country all over the world the Central bank dominates the banking sector. It advises the government on monetary policies. The RBI is the bankers to the Union Government and also to the state governments in the country. It provides a wide range of banking services to the government. It also transfers the funds, collects the receipts and makes the payment on behalf of the Government. It also manages the public debts. The Government will not pay any remuneration or brokerage to the RBI for rendering the financial services. Any deficit or surplus in the Central Government account with the RBI will be adjusted by creation or cancellation of the treasury bills. The treasury bills are known as the Adhoc Treasury bills.

4. Foreign Exchange Regulation Authority- The RBI’s another major function is to control the foreign exchange reserves position from time to time. It maintains the stability of the external value of the rupee through its domestic policies and forex market. The RBI has the full authority to regulate the market as discussed below:

1) To monitor the foreign exchange control.

2) To prescribe the exchange rate system.

3) To maintain a better relation between rupee and other currencies.

4) To interact with the foreign counterparts.

5)To manage the foreign exchange reserves.

It administers the FERA, 1973. It is replaced by the FEMA which would be consistent with full capital account convertibility with policies of the Central Government.

The RBI administers the control through the authorized forex dealers. The RBI is the custodian of the country’s foreign exchange reserves. The foreign exchange is precious and it takes the responsibility of the better utilization.

5.Promoting Authority:

The RBI’s function is to look after the welfare of the financial system. It renders the promotion services to strengthen the country’s banking and financial structure. It helps in mobilizing the savings and diverting them towards the productive channel. Thus the economic development can be achieved. After the nationalization of the commercial banks, the RBI has taken a number of series of actions in various sectors such as agriculture sector, industrial sector, lead bank scheme and cooperative sector.