Functions of RBI (Reserve Bank of India) | Finance & Management for RBI Grade-B Main

The Reserve Bank of India (RBI) is the central bank of India and is also regarded as a bank of banks owing to the functions of RBI. It was established on April 1, 1935, under the Reserve Bank of India Act, 1934. In the beginning, the headquarters of RBI was established in Calcutta, but soon after, in 1937, it was permanently shifted to Mumbai. The Governor sits at the RBI headquarters; and it is also here that important policies are formulated.

As of July 2020, the Governor of Reserve Bank of India is Mr. Shaktikanta Das. He is the 25th RBI Governor. The first Governor was Osborne Smith, while the first Indian governor of RBI was C D Deshmukh.

It is also interesting to note that, originally, the Reserve Bank of India was privately owned; and was established as a private bank with two extra functions: the regulation and control of all banks in India, and to be the banker to the then government. But since its nationalization in 1949, RBI has been wholly owned by the Government of India and thus, some new roles were added to the list of functions of RBI!

Now, let us look at some of the important functions of RBI.

Important Functions of RBI (Reserve Bank of India)

Being a central bank of India, RBI serves a critical role in regulating the financial transactions in the country. Some of the important functions of RBI are listed below:

The Issuer of Bank Notes

The most important function of RBI is of the issuance of currency notes and coins, except the one rupee note and coin which are issued by the Ministry of Finance. All other notes bear the signature of the RBI Governor. However, the agency of distribution of all notes and coins issued by the Government of India is Reserve Bank of India.

Banker to the Government

Another chief function of RBI is that it takes care of the banking needs of the government, which includes maintaining & operating the deposit accounts of the government, collecting the receipts of funds, and making payments on behalf of the Government of India. It also represents the Indian Government, as a member of the International Monetary Fund and the World Bank.

Custodian of Cash Reserves of Commercial Banks

The commercial banks are required to maintain the cash reserves at a rate decided by the RBI in its monetary policy.

Custodian of Foreign Exchange Reserve

Another of the important functions of RBI is maintaining a reserve of foreign currencies that enables the RBI to deal with any crisis situation.

Lender of the Last Resort

Often regarded as the banker of banks, the RBI acts as a parent to all commercial banks in India. Thus, it becomes the lender of the last resort for all banks when they are in a crisis situation. RBI helps them by lending money, although at higher RoI, to sail through the tide of financial difficulties.

Controller of Credit

RBI controls the credit created by the commercial banks in India, in accordance with the economic priorities of the government of India. RBI uses quantitative and qualitative methods to control and regulate the flow of money in the market. These are implemented by announcing monetary policies at regular intervals. The monetary policy involves the management of interest rates and money supply. The central bank of India tweaks the money supply to achieve objectives such as liquidity, inflation, and consumption.

This is an extremely topic to prepare because not only is it the exam conducting body for RBI Grade B Exam but also your potential employer. Hence, a thorough knowledge of the structure and functions of RBI will help you in understanding it better. Further, over the years, questions from the functions, structure, or the latest announcements/ notifications/guidelines that RBI announces are asked in the exam.

According to the current trends, as many as 16% of the total questions from the Finance section are asked from RBI and monetary policy. Hence, do not skip the topic. Read it at length, as it is important for both Prelims and Main exam.

If you’ve any difficulty in preparing for these topics, you can consider joining our detailed course on RBI Grade B Mains. We’re providing online classes, mock tests and doubt solving sessions to help you achieve your dreams. Check out our range of courses for the preparation of RBI Grade B here. Should you have any queries, you can get in touch with our course counselors to seek assistance.