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Role of Reserve Bank of India

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The Reserve Bank of India was established on April

1, 1935 in accordance with the provisions of theReserve Bank of India Act, 1934. Though originally

owned privately, it was nationalised in 1949 and now

the Reserve Bank is fully owned by the Government

of India.

Preamble:According to the Preamble of the RBI Act,

the basic functions of the Reserve Bank are - to

regulate the issue of Bank Notes and keeping ofreserves with a view to secure monetary stability in

India and generally to operate the currency and

credit system of the country to its advantage.

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Role of Reserve Bank of India contd.

It was established with the objective of ensuring

monetary stability and operating the currency andcredit system of the country to its advantage. Its

functions comprise monetary management, foreign

exchange and reserves management, government

debt management, financial regulation andsupervision, apart from currency management and

acting as banker to the banks and to the

Government. In addition, from the beginning, the

Reserve Bank has played an active developmentalrole, particularly for the agriculture and rural sectors.

Over the years, these functions have evolved in

tandem with national and global developments.

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Functions of the Reserve Bank

Monetary policy

Regulation and supervision of the banking and non-banking financial institutions, including credit

information companies

Regulation of money, forex and government

securities markets as also certain financial

derivatives

Debt and cash management for Central and State

Governments Management of foreign exchange reserves

Foreign exchange managementcurrent and capital

account management

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Other Functions of RBI

Banker to banks

Banker to the Central and State Governments Oversight of the payment and settlement systems

Currency management

Developmental role

Research and statistics

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Monetary Policy

An important factor that determines the effectiveness

of monetary policy is its transmissiona processthrough which changes in the policy achieve the

objectives of controlling inflation and achieving

growth. In the implementation of monetary policy, a

number of transmission channels have beenidentified for influencing real sector activity.

These are (a) the quantum channel relating to money

supply and credit;

(b) the interest rate channel;

(c) the exchange rate channel; and

(d) the asset price channel.

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Monetary Policy

How these channels function in an economy

depends on its stage of development and itsunderlying financial structure. For example, in an

open economy one would expect the exchange rate

channel to be important; similarly, in an economy

where banks are the major source of finance asagainst the capital market, credit channel could be a

major conduit for monetary transmission.

Of course, these channels are not mutually

exclusive, and there could be considerable feedback

and interaction among them.

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Over time, the objectives of monetary policy in India

have evolved to include maintaining price stability,

ensuring adequate flow of credit to productivesectors of the economy for supporting economic

growth, and achieving financial stability.

Based on its assessment of macroeconomic and

financial conditions, the Reserve Bank takes the callon the stance of monetary policy and monetary

measures. Its monetary policy statements reflect the

changing circumstances and priorities of the Reserve

Bank and the thrust of policy measures for the future.

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Monetary Policy Framework

The monetary policy framework in India, as it is today, has

evolved over the years. The success of monetary policy depends

on many factors.

Operating Target : There was a time when the Reserve Bank

used broad money (M3) as the policy target. However, with

the weakened relationship between money, output and prices,

it replaced M3 as a policy target with a multiple indicatorsapproach. Interest rates or rates of return in different

segments of the financial markets along with data on

currency, credit, trade, capital flows, fiscal position, inflation,

exchange rate, and such other indicators, are juxtaposed withthe output data to assess the underlying trends in different

sectors. provides considerable flexibility to the Reserve Bank

to respond more effectively to changes in domestic and

international economic environment and financial market

conditions

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Monetary Policy Instruments

The Reserve Bank traditionally relied on direct

instruments of monetary control such as Cash Reserve Ratio (CRR) and

Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio indicates the quantum of cash

that banks are required to keep with the Reserve

Bank as a proportion of their net demand and time

liabilities.

SLR prescribes the amount of money that banksmust invest in securities issued by the government.

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Monetary Policy Instruments

The armour of instruments with the Reserve Bank to

manage liquidity was strengthened in April 2004 withthe Market Stabilisation Scheme (MSS).

The MSS was specifically introduced to manage

excess liquidity arising out of huge capital flows

coming to India from abroad.Prudential tools to modulate the flow of credit to certain

sectors so as to ensure financial stability. The availability

of multiple instruments and their flexible use in the

implementation of monetary policy have enabled the

Reserve Bank to successfully influence the liquidity and

interest rate conditions in the economy.

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Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operationswithin which the country's banking and financial

system functions. The Reserve Bank of India

performs its function of financial supervision under

the guidance of the Board for Financial Supervision(BFS). The BFS was constituted in November 1994

as a committee of the Central Board of Directors of

the Reserve Bank of India.

Objective:maintain public confidence in the system,

protect depositors' interest and provide cost-effective

banking services to the public.

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Issuer of currency:Issues and exchanges ordestroys currency and coins not fit for circulation.

Objective:to give the public adequate quantity ofsupplies of currency notes and coins and of goodquality.

Developmental role :Performs a wide range ofpromotional functions to support national objectives.

Related Functions:

Banker to the Government: performs merchant

banking function for the central and the stategovernments; also acts as their banker.

Banker to banks:maintains banking accounts of allscheduled banks.

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Offices and Training Establishments

Reserve Bank of India has 22 regional offices, mostof them in state capitals.

It has six training establishments:Three, namely,

College of Agricultural Banking, Bankers Training

College and Reserve Bank of India Staff College arepart of the Reserve Bank. Others are autonomous,

such as, National Institute for Bank Management

(NIBM, Pune), Indira Gandhi Institute for

Development Research (IGIDR, Goregaon), Institute

for Development and Research in Banking

Technology (IDRBT, Hyderabad)

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5 role of rbi

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