Role of RBI in Indian economy.docx

7/29/2019 Role of RBI in Indian economy.docx

1/4

Role of RBI in Indian economy1. Issuer of currency -

Except for issuing one rupee notes and coins, RBI is the sole authority for the issue of

currency in India. The Indian government issues one rupee notes and coins. Major currency

is in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty,one hundred, five hundred, and one thousand. Earlier, notes of higher denominations were

also issued. But, these notes were demonetized to discourage users from indulging in black-

market operations.

RBI has two departments - the Issue department and Banking department. The issue

department is dedicated to issuing currency. All the currency issued is the monetary liability

of RBI that is backed by assets of equal value held by this department. Assets consist of gold,

coin, bullion, foreign securities, rupee coins, and the governments rupee securities. The

department acquires these assets whenever required by issuing currency. The conditions

governing the composition of these assets determine the nature of the currency standard thatprevails in India.

The Banking department of RBI looks after the banking operations. It takes care of the

currency in circulation and its withdrawal from circulation. Issuing new currency is known as

expansion of currency and withdrawal of currency is known as contraction of currency.

2. Banker to the Government -

RBI acts as banker, both to the central government and state governments. It manages all the

banking transactions of the government involving the receipt and payment of money. In

addition, RBI remits exchange and performs other banking operations.

RBI provides short-term credit to the central government. Such credit helps the government

to meet any shortfalls in its receipts over its disbursements. RBI also provides short term

credit to state governments as advances.

RBI also manages all new issues of government loans, servicing the government debt

outstanding, and nurturing the market for governments securities. RBI advises the government

on banking and financial subjects, international finance, financing of five-year plans,

mobilizing resources, and banking legislation.

3. Managing Government Securities -

Various financial institutions such as commercial banks are required by law to invest

specified minimum proportions of their total assets/liabilities in government securities. RBI

administers these investments of institutions.

The other responsibilities of RBI regarding these securities are to ensure -

o Smooth functioning of the market

o Readily available to potential buyers

o Easily available in large numbers


2/4

o Undisturbed maturity-structure of interest rates because of excess or deficit supply

o Not subject to quick and huge fluctuations

o Reasonable liquidity of investments

o Good reception of the new issues of government loans

4. Banker to Other Banks -The role of RBI as a banker to other banks is as follows:

o Holds some of the cash reserves of banks

o Lends funds for short period

o Provides centralized clearing and quick remittance facilities

RBI has the authority to statutorily ensure that the scheduled commercial banks deposit a

stipulated ratio of their total net liabilities. This ratio is known as cash reserve ratio [CRR].

However, banks can use these deposits to meet their temporary requirements for interbank

clearing as the maintenance of CRR is calculated based on the average balance over a period.5. Controller of Money Supply and Credit -

In a planned economy, the central bank plays an important role in controlling the paper

currency system and inflationary tendency. RBI has to regulate the claims of competing

banks on money supply and credit. RBI also needs to meet the credit requirements of the rest

of the banking system.

RBI needs to ensure promotion of maximum output, and maintain price stability and a high

rate of economic growth. To perform these functions effectively, RBI uses several control

instruments such as -

o Open Market Operations

o Changes in statutory reserve requirements for banks

o Lending policies towards banks

o Control over interest rate structure

o Statutory liquidity ration of banks

6. Exchange Manager and Controller -

RBI manages exchange control, and represents India as a member of the international

Monetary Fund [IMF]. Exchange control was first imposed on India in September 1939

when World War II started and continues till date. Exchange control was imposed on both

receipts and payments of foreign exchange.

According to foreign exchange regulations, all foreign exchange receipts, whether on

account of export earnings, investment earnings, or capital receipts, whether of private or

government accounts, must be sold to RBI either directly or through authorized dealers. Most

commercial banks are authorized dealers of RBI.


3/4

7. Publisher of Monetary Data and Other Data -

RBI maintains and provides all essential banking and other economic data, formulating and

critically evaluating the economic policies in India. In order to perform this function, RBI

collects, collates and publishes data regularly. Users can avail this data in the weekly

statements, the RBI monthly bulletin, annual report on currency and finance, and otherperiodic publications.

Monetary policy of India

Monetary policy is the process by which monetary authority of a country, generally a

central bank controls the supply of money in the economy by exercising its control overinterest rates in order to maintain price stability and achieve high economic growth.

[1]In

India, the central monetary authority is the Reserve Bank of India (RBI). is so designed

as to maintain the price stability in the economy. Other objectives of the monetary policy

of India, as stated by RBI, are:

Price Stability

Price Stability implies promoting economic development with considerable emphasis

on price stability. The centre of focus is to facilitate the environment which isfavorable to the architecture that enables the developmental projects to run swiftlywhile also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit andmoney supply with special attention to seasonal requirement for credit withoutaffecting the output.

Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining nonessential fixed investment.

Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock oftenresults is sickness of the unit. To avoid this problem the central monetary authority
http://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-1http://en.wikipedia.org/wiki/Monetary_policy


4/4

carries out this essential function of restricting the inventories. The main objective ofthis policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and facilitate thetrade. It is an independent objective of monetary policy.

Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of credit topriority sector and small borrowers. This policy decides over the specifiedpercentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit

The policy of Reserve Bank aims equitable distribution to all sectors of the economyand all social and economic class of people

To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It tries toincrease the efficiency in the financial system and tries to incorporate structuralchanges such as deregulating interest rates, ease operational constraints in thecredit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide aconsiderable autonomy. It encourages more competitive environment anddiversification. It maintains its control over financial system whenever and wherevernecessary to maintain the discipline and prudence in operations of the financialsystem.

Role of RBI in Indian economy.docx

Documents

Transcript of Role of RBI in Indian economy.docx