Reserve Bank of India

The Reserve Bank of India is the central bank of the country. It was founded in 1935. The RBI is assigned to functions like formulating, implementing and monitoring India’s monetary policy.

Formerly it was a private bank. But in 1947 the nationalization took place. Since then it is wholly possessed by the Government of India.

The headquarters of Reserve Bank of India is in Mumbai. In different state capitals of India it has 22 regional offices. It also has a greater part of stake in the State Bank of India.

Functions of the Reserve Bank of India

Since 1935, the functions of Reserve Bank of India have progressed due to the changing economic environment. Following are the major functions of RBI:

1. The main function of the Reserve Bank of India is to regulate and supervise the financial system.

2. There are many guidelines for banking and financial systems of India. These systems operate according to these guidelines. RBI outlines or defines these guidelines. It keeps watch on the working of other banks. It guards depositors’ interests and supplies cost effective banking services.

3. Issuing currency in form of different denominations of notes and coins is one of the main functions of Reserve Bank of India. Sometimes the currency gets damaged and so it does not remain suitable for circulation. Such currencies are exchanged and then destroyed by RBI. RBI also changes the design of currency from time to time. This avoids the flow of counterfeit currency.

4. According to the Foreign Exchange Management Act 1999 of Reserve Bank of India, the inflow and outflow of foreign exchange is controlled. The money can be transferred out of India for personal and business reasons. This money transfer is always according to the limits termed by RBI.

5. For the central and state governments, the Reserve Bank of India works as a merchant bank. In other words, the banker of the government of India is RBI. All banking dealings of government departments are done with RBI.

6. The Reserve Bank of India keeps the banking accounts of all scheduled banks in India. It is the banker of all main banks. As per the RBI offers the rates the interest rates of other banks also change.

7. One of the main functions of RBI is to sustain the exchange rate of Indian Rupees against to the foreign currencies like the US Dollar, Euro, Pound sterling and Japanese yen. To maintain the exchange rate, RBI sells or buys the foreign currency. On the official website of the Reserve Bank of India, one can find the trends in exchange rate value.

8. Presently in India, seventeen Indian banks are engaged in the business of gold. This business of gold is also controlled by the Reserve Bank of India. For direct import of gold, the RBI has asked for applications from other banks also. This will help to restrict the illegal business of gold. Also, this will help to boost the competition in the market.

9. For non banking finance companies (NBFC), the Reserve Bank of India has supplied some guidelines in March 2006. These guidelines are regarding the customers. According to these guidelines some customers do not require to supply all the documents. It includes those customers having deposit balance less than Rupees 50,000 or outstanding credit more than Rupees 1 Lakh. And accordingly the customers will be sorted out as low risk, medium risk or high risk.

10. The Reserve Bank of India establishes the maximum interest rate that Indian banks can provide on NRI dollar deposits. This rate depends on the liquidity in the money markets. On dollar deposits the banks can also offer an international benchmark rate. An international benchmark rate is nothing but the interest rate of the London Interbank Offered Rate (LIBOR).

11. The cash reserve ratio (CRR) should always remain with RBI. CRR is the percentage of deposits in the banks in India. The liquidity in money markets also controls CRR. The rate at which the Reserve Bank of India takes in funds from banks is called as the reverse repo rate.

12. The setting up of Automatic Teller Machines (ATMs) is controlled by the Reserve Bank of India. RBI provides the fresh currency notes to ATMs.

13. The clearing houses resolve the transactions connected with drafts, cheques and pay orders. There are nearly 1050 clearing houses. The clearing houses which are mostly in small cities and towns are handled by the State Bank of India.

14. When a cheque from metro cities like Mumbai, Delhi is cleared through the Reserve Bank of India, it costs only 50 paisa to the bank. But the private banks like ICICI take charges of nearly Rupees 100 from customer. So RBI has demanded to mention the service charges on the website.

15. The starting of new branches is also controlled by the RBI. It makes sure that these new branches follow all the regulations and guidelines.

16. Every year the Reserve Bank of India announces the yearly monetary policy in April.

The Reserve Bank of India executes these functions under the supervision and direction of the Board for Financial Supervision (BFS). The BFS was formed in November 1994.

RBI is the skeleton of India’s economical strength. Even in the global economical down time, RBI still had enough money for circulation.