The Reserve Bank is the central banking institution of India which regulates and formulates policies for the banking system in India. It controls the issue and supply of Indian rupees. Reserve bank of India (RBI) was formulated through the Reserve Bank of India Act, 1934.RBI regulates non-banking finance companies in and commercial banks in India. In the development strategy of the government of India, RBI plays a major role. Reserve bank of India commenced its operations on 1st April 1935. However, it was nationalized after independence on 1st January 1949. Headquarter of RBI is situated in the city of Mumbai.
Functions of RBI
Issue of Bank Notes: One of the major functions of RBI is to issue notes and currency of the country. RBI has the sole rights except it can’t issue one rupee notes as they are issued by the Ministry of Finance. Whichever notes are issued by the RBI are termed as “Unlimited Legal Tender” throughout the country. There are several advantages when notes are issued by the RBI. They are:
It brings uniformity when notes are issued through a single bank.
It restores the faith of the public in the paper currency.
Adequate supervision is done.
Changes can be made, as per the requirements of the economy.
Controller of Credit: Credit plays a significant role, especially at the times when economic stability is not well. RBI controls the credit, thus impacting the supply of money, which is again of vital importance. Credit is controlled by the Reserve Bank in as per the economic priorities of the government.
Lander of last resort: Reserve bank of India is the leader of all the other banks. At the time of crisis, it lends money to all the other commercial banks may be at a higher rate of interest. It’s the last resort for the commercial banks to borrow money in the hard times. Moreover, it also lends money to the government according to its requirements.
Banker to Government: RBI fulfils all the responsibilities of a bank for the Government. It lends money to the government and as well as keep track of all the receipt payments and make payments on behalf of the bank. Further, the Reserve bank also represents the government in the World Bank and International Monetary Fund.
Accounts settlement and Central Clearance: The surplus cash reserves of commercial banks are deposited in the Reserve Bank, and therefore, it becomes easy to deal with each other and settle all the claims through book entries in the books of the Reserve Bank. Hence, clearing of accounts and settling of claims has become an essential function of the Reserve Bank.
Custodian of Cash Reserves of Commercial Banks: Cash reserves which are known as the extra money with commercial banks are deposited in the RBI, and therefore RBI is called as the Custodian of Cash Reserves.
Custodian of Country’s Foreign Currency Reserves: When there is a cash crisis in the economy, the RBI holds the country’s reserves of international currency, and this enables the Reserve Bank to deal with a crisis connected with adverse balance of payment position.
Recent Developments of Reserve Bank of India
Being the bank of all the other commercial banks, RBI has gone through several amendments in the past. They are:
After demonetization took place, the Reserve bank of India decided to amend its liquidity management tool. The government decided to amend the Reserve Bank of India Act to allow the central bank to get the excess liquidity from the money market without offering any securities as collateral. This amendment provided RBI with a new tool in liquidity management, especially in times when the money market liquidity is in excess. Such a liquidity tool was much demanded by RBI as during the period of demonetization, as RBI had to increase its cash reserve ratios as the bank ran out of securities to offer as collateral.
Government of India amended the RBI act for setting up a monetary policy committee (MCP) to set the benchmark interest rate of the central bank and also to fix the inflation targets. It was further noted that the Financial Stability Development Council (FSDC) was set up to facilitate integrated data aggregation and analysis in the financial sector. Moreover, Asset Reconstruction Companies (ARCs) were given an important role.
Amendments are being made by the Finance Ministry of India to give more powers to RBI over the multi-state co-operative banks in lines with the powers that it has overscheduled banks. These changes in the banking system are taking place due to the continuous complaints of RBI as the dual nature of control over these banks means it has less authority over such banks and often blindsides it. For this amendment, the multi-state co-operatives act may be reworked too.
Long-term operations would be conducted by the RBI to inject money into the banking system at the policy repurchase rate for one and three years. It is an opportunity given to the financial institutions to use the arbitrage between the repo rate and sovereign papers of similar maturities. This would also help the companies to borrow short-term money in the local debt market to save the funding cost.
Reserve Bank of India deals with the Banking system and formulates policies to regulate the excess and shortage of money in the market. Developments and amendments are taking place in the bank with the help of the government to impose those policies which are beneficial both for the public and the government. These policies help to regulate smooth money supply in the market and in increasing the purchasing power of the people.