Role and Functions of RBI: Prohibited Functions, PPT Available

Content of Role and Functions of Rbi
1. RBI?
2. Functions of RBI
3. Role in Promoting Schemes
4. Restrictive Functions
5. Monetary Tools 
6. Download PPT

PPT OF FUNCTIONS OF RBI, TOOLS, ETC. CAN BE DOWNLOADED AT THE END OF THIS TOPIC

1. What is RBI?

RBI:- The Reserve Bank of India (RBI) is the apex or central bank of India. RBI manages all the banks and the country’s financial banking system in India. In other words, Rbi is the father of all banks in India. It has headquarters in Mumbai.

2. Role and Functions of RBI

1. Monopoly of Issuing Notes:
The Reserve Bank of India issues the currency notes (₹) in India. Only Rbi has the right to print Indian money except for ₹1 rupee notes that are issued by the Ministry of Finance. The Currency notes issued by the Reserve Bank are recognized as legal money throughout the country. Rbi issues money according to the need.

2. Banker to Government:
Rbi also works as a banker to governments. Reserve Bank manages the government wealth, securities and banking transactions of the government i.e operating the government’s deposit accounts, selling bonds, and securities and collecting receipts of funds, making payments on behalf of the government, etc. Rbi also advises the government on economic and money decisions.

3. Banker’s Bank: Reserve bank is the central bank of all banks. Rbi provides efficient settlements of interbank transactions. All Banks maintain their accounts with RBI for maintenance of transaction balances to get a short-term loan, re-discounting bills, and lend extra money to RBI.

4. Custodian of Foreign Currency Reserves:
The Reserve Bank maintains the foreign currency reserve in India. Rbi buys and sells foreign currency to make payments for trade, provides currency for exchanges, maintains the exchange value of Indian rupees v/s foreign currency, and deals with negative trade balances.

5. Lender of Last Resort:
Rbi acts as a lender of any bank in times of emergency over financial difficulties i.e rescue banks by giving a loan to face an emergency. Rbi is the last one who can help in a difficult situation. This facility can be availed to any bank at a high-interest rate than normal.

6. Central Clearance and Accounts Settlement:
Rbi also acts as an agent between banks. All commercial banks have their surplus cash reserves in the Reserve Bank, so Rbi can easily clear the cheques and settle mutual claims between banks. The clearing of accounts has now become an essential role of the Reserve Bank.

7. Credit Controller:
Credit money is an important part of the supply of money. The credit supply of money is controlled by the Rbi with the economic priorities of the government.

Example- If the need of the economy is to expand credit and the flow of money, the central bank lowers the interest rate loans so more people can take affordable loans. This can increase the supply of money in the economy.

8. Monetary Authority: The main role of RBI is to control monetary policy. The Monetary policy includes the instruments which decide how much money is needed to be supplied to the economy in order to stabilize the price, maintain a good balance of payment, financial stability, control inflation, etc

9. Issuer of Banking License: As per Sec 22 of the Banking Regulation Act, only Rbi can issue the banking license. A bank cannot start operating without obtaining a license from the Reserve Bank Of India.

Publishes monetary data and other data: RBI publishes all the banking and other economic data and formulates and critically evaluates the economic policies in India. RBI collects and publishes data regularly on its website.

10. Issues Codes for banking and lenders: RBI has set up the Standards Board of India for banking to measure the performance of banks against standards based on established global practices. RBI also established the fair practices code for lenders for banks to safeguard the interest of the borrowers.

11. Provision of Industrial Finance: Industrial growth is the key to the development of the economy. The RBI has an important role in setting up special financial institutions such as IDBI Ltd, ICICI, EXIM BANK, etc. This special institution Provides adequate and timely credit to the small, medium, and large industries which helps the economy and industry to grow.

Read about MNC- Advantages and Disadvantages of MNC

3. RBI’s Role in Promoting Schemes And Policies

RBI Introduces & promotes schemes and policies which benefit the public as well as the government. The sectors RBI prioritizes for economic development are mentioned below:

1. Promotion of commercial banking
2. Promotion of cooperative banking
3. RBI promotes the industrial finance and export finance
4. Promotion of credit guarantees
5. It promotes the differential rate of interest scheme
6. Promotion of credit to priority sections including rural & agricultural sector
7. Promotion of credit to weaker sections

4. Prohibitory Functions of RBI

1. Reserve bank of India cannot provide any direct financial assistance to any industry, trade, or business.
2. RBI cannot purchase its own share
3. Reserve bank cannot purchase shares of any commercial and industrial undertaking.
4. RBI cannot purchase any immovable property
5. They cannot give loans on the security of shares and property

5. Monetary Policy Tools Of RBI

Monetary policy refers to the use of regulatory tools to control the supply of money in the Market. It has two ways. The first is Quantitative methods and the Second is Qualitative methods.

1. Quantitative Methods

1. Cash Reserve Ratio (CRR): It means a certain part of cash deposits, banks are required to hold with RBI. RBI uses the Cash reserve ratio to control the money circulation in Indian markets. Excess supply/circulation of money in markets leads to high Inflation i.e. prices of goods increase and less supply brings negative inflation i.e. the price of goods decreases.

When RBI wants to control Inflation. RBI increases CRR, which means banks need to hold more cash with RBI. This decreases the supply of money in the market. For example- The current CRR is 4% which means banks can use only 96% of the deposits in the market.

2. Statutory Liquidity Ratio (SLR): SLR means the number of their deposits that commercial banks are required to maintain liquidity i.e. to meet the withdrawn amount of their customers at any time. It can be in form of cash, gold, or government-approved securities. RBI also uses this tool to control the Money supply.

Example- The current SLR is 18%. It means banks can’t give loans of 18% of their deposits to maintain liquidity. SLR increases effects to less money supply in the market.

3. Fiscal Policy: Fiscal policy is related to direct taxes and government spending. When direct taxes i.e. Income tax increase then the net income of the people and supply of money in the market reduces. When govt spends less money than the income of govt, it also reduces the supply of money.

4. Repo Rate: The interest rate at which the RBI gives money loans to commercial banks is called Repo Rate. Whenever banks need funds, they can borrow from RBI against securities, and RBI charges interest. Currently, the repo rate is 4%.

RBI increases the Repo rate to make loans expensive so this affects banks to charge a high rate of interest from customers to meet RBI interest rate and earn profits. This leads to a decrease in the supply of money in the market because less customer wants a loan at higher interest.

5. Reverse Repo Rate: The interest rate at which RBI borrows funds from commercial banks is called the reverse repo rate. When RBI increases the reverse repo rate, this means the banks are getting a good rate of Interest with less risk from RBI. 

This results in a decrease in the amount of money supply available for bank customers and leads to a higher rate of interest for loans to customers. 

For qualitative methods – Click here

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