Function of RBI

Function of RBI is defined as structured and organized expression, guide lines, rules, or laws that define a relationship between one independent variable and many dependent variables.

RBI that is central bank of India is an apex body of country enjoys supreme power along with sense of very important responsibilities.

Reserve Bank of India plays an important role in development strategy of Government of India.

Over the last 86 years RBI is continuously evolving the roles and functions. Evolution of Banking in India is the main function of RBI.

RBI has many important functions to perform. But evolution and invention of new tools for economy development is major and most important function.

RBI’s central office is located at Mumbai and it has twenty-seven departments.

These departments frame policies in their respective work areas. They are headed by senior officers in the rank of Chief General Manager.

List of Central Office Departments:

(1) Markets

  • Department of External Investments and Operations
  • Financial Markets Department
  • Financial Stability Unit
  • Internal Debt Management Department
  • Monetary Policy Department

(2) Regulation and Supervision

  • Department of Banking Operations and Development
  • Department of Banking Supervision
  • Department of Non-Banking Supervision
  • Foreign Exchange Department
  • Rural Planning and Credit Department
  • Urban Banks Department

(3) Research

  • Department of Economic Analysis and Policy
  • Department of Statistics and Information Management

(4) Services

  • Customer Service Department
  • Department of Currency Management
  • Department of Government and Bank Accounts
  • Department of Payment and Settlement Systems

(5) Support

  • Department of Administration and Personnel Management
  • Department of Communication
  • Department of Expenditure and Budgetary Control
  • Department of Information Technology
  • Human Resources Development Department
  • Inspection Department
  • Legal Department
  • Premises Department
  • Rajbhasha Department
  • Secretary’s Department

The Central Board has primary authority for the oversight of RBI. It delegates specific functions through it’s committees, boards and sub-committees.

Functions of the Reserve Bank of India

  • Monetary Management
  • Financial Regulation and Supervision
  • Foreign exchange management
  • Banker to banks
  • Currency management
  • Developmental role
  • Market Operations
  • Banker and Debt Manager to Government
  • Payment and Settlement Systems

(1) Financial Regulation and Supervision

The Reserve Bank of India regulates and supervises not only the Indian banking system but also domestic financial institutions (DFIs), non-banking financial companies (NBFCs), primary dealers, credit information companies of the financial markets.

India’s financial system includes commercial banks, regional rural banks, local area banks, cooperative banks, financial institutions and non-banking financial companies.

In respect of all types of banks in India the Reserve Bank derives its power from the provisions of the Banking Regulation Act, 1949.

While the other entities and markets are regulated and supervised under the provisions of the Reserve Bank of India Act, 1934.

The credit information companies are regulated under the provisions of Credit Information Companies (Regulation) Act, 2005.

(1.1) Licensing

Prime function of RBI is to provide banking licence to the Financial Institutions.

For commencing banking operations in India, opening of new branches, change in the location of existing branches whether by an Indian or a foreign bank, a licence from the Reserve Bank is required.

Banking companies get licence under Banking Regulation Act 1949; Section 22 Subsection (1)

No company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank as per BR Act 1949.

(1.2) Corporate Governance

Objective function of Reserve Bank of India is to ensure high quality rich corporate governance in banks. RBI defines the terms, guide lines and criteria for directors such as have special knowledge or practical experience in various relevant areas.

The Reserve Bank also has power to appoint additional directors on the board of a banking company.

Reserve Bank derives its power to appoint the directors from the provisions of the Banking Regulation Act 1949, Section 10 (B) (B)

(1.3) Maintaining the Reserve Ratios

Reserve Banks has responsibility to supervise, monitor and getting maintained the below mentioned Ratios for the protection of interest of depositors.

All scheduled banks have to maintain a certain portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, government securities with the Reserve Bank. That is called Cash Reserve Ratio (CRR).

In the same manner, banks have to keep the defined percentage of their Net Demand and Time Liabilities (NDTL) in liquid form, such as government securities, cash, and gold along with bank itself. That is called Statutory Liquidity Ratio (SLR).

Banks are always guided and monitored by Reserve Bank for maintaining the adequate capital on continuous basis. The adequacy of capital is measured in terms of Capital to Risk-Weighted Assets Ratio (CRAR).  Banks are required to maintain adequate capital for credit risk, market risk, operational risk and other risks.

The Reserve Bank also monitors compliance with these requirements by banks in their day-to-day operations.

(1.4) Protection of Small Depositors

The Reserve Bank has set up Deposit Insurance and Credit Guarantee Corporation (DICGC) to protect the interest of small depositors, in case of bank failure.

(2) Monetary Management

Main objectives of monetary policy are maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for supporting economic growth, and achieving financial stability.

As per RBI Act 1934, Section – 45 monetary management is: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”  Thus, the Reserve Bank’s mandate for monetary policy flows from its monetary stability objective.

The Reserve Bank traditionally relied on direct instruments of monetary control such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).

(3) Currency management

After Government of India, the Reserve Bank of India is the sole authorized body to issue banknotes in India.

RBI Act, 1934, Section 22 carries the core function of RBI i.e. Responsible for the design, production and management of the currency, with the goal of ensuring an adequate supply of clean and genuine notes.

RBI always invents and introduces security features in currency notes to reduce the risk of counterfeiting or forgery of currency notes.

For printing of the currency RBI has to follow the norms of IMF (International Monetary Fund). As per IMF, there must be minimum reserve of Rs.200 Crore along with central bank in form of gold of value Rs.115 Crore and foreign currency assets and government securities of Rs. 85 Crore.

Foreign currency assets have combination of below mentioned global currency.

Currency NameCountry
US dollarUnited States
EuroEuropean Union
Yuan/ RenminbiChina

This Foreign currency asset is also known as the RBI currency Chest along with IMF.

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) is a wholly owned subsidiary of Reserve Bank of India. It was established on February 3, 1995, headquarter is Bangalore.

BRBNMPL is registered as a private limited company under company Act 1956.

BRBNMPL has two printing presses in Mysore, Karnataka and salboni, West Bengal. The RBI is authorised to issue notes with face values of up to Rs.10,000.

At present below mentioned currency notes are in circulation as a legal tender i.e. note of Rs. 1 (Printed by Government of India only),2,5,10,20,50,100,200,500,2000.

New Rs. 500 and Rs. 2000 notes were issued on 8 November 2016. The old series of Rs. 1000 and Rs. 500 notes were banned on 8 November 2016.

Denomination of Rs.1,000 notes have been discarded by the RBI now Rs. 1000 note is no longer in use.

The Security Printing & Minting Corporation of India Ltd. (SPMCIL) is a wholly owned company of the Government of India, has printing presses at Nashik Maharashtra and Dewas, Madhya Pradesh.

SPMCIL was founded on 10 February 2006, Headquarter is New Delhi. SPMCIL is under jurisdiction of Ministry of Finance, Government of India.

For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin production.

Coins are minted as per Coinage Act 1996. All coins and 1 Re. notes are printed by SPMCIL, Government of India. RBI works as an agent of GoI for the distribution and handling of coins.

At present below mentioned currency coins are in circulation as a legal tender i.e. 50 Paisa, 1 Re., 2 Re., 5 Re., 10 Re. coins.

Function of RBI is to destroy banknotes when they are not fit for circulation.

RBI also works to prevent counterfeiting of currency by regularly upgrading security features of currency.

Dimensions and Features of new Indian Currency Notes

Currency NoteNew SeriesDimensionsBase ColourMotif ( Image on Note)
10 Rupee NoteMahatma Gandhi63 mm × 123 mmChocolate BrownSun Temple
20 Rupee NoteMahatma Gandhi63 mm × 129 mmGreenish yellowEllora Caves
50 Rupee NoteMahatma Gandhi66 mm × 135 mmFluorescent blueHampi with Chariot
100 Rupee NoteMahatma Gandhi66 mm × 142 mmLavenderRani Ki Vav
200 Rupee NoteMahatma Gandhi66 mm × 146 mmBright yellowSanchi Stupa
500 Rupee NoteMahatma Gandhi66 mm × 150 mmStone greyRed Fort
2000 Rupee NoteMahatma Gandhi66 mm × 166 mmMagentaMangalyaan

(4) Banker and Debt Manager to Government

As an individual needs an efficient banker for their financial transactions, Government also required a banker for doing financial transactions on behalf of Government.

One of the most important core functions of RBI is to maintain the accounts, receive payments into and make payments out of these accounts.

As per RBI Act 1934, Section – 21 and 21(A), by agreement, The Reserve Bank acts as the banker to the Central and State Government respectively.

Currently, the Reserve Bank acts as banker to all the State Governments in India, except Jammu & Kashmir and Sikkim. It has limited agreements for the management of the public debt of these two State Governments.

The Reserve Bank manages public debt on behalf of the Central and the State Governments.

The Reserve Bank also gives loans and manages them on behalf of the Governments. RBI provides Ways and Means Advances – a short-term interest bearing advance – to the Governments (Central and State both), to meet the temporary mismatches in their receipts and payments.

Only for State Government Ways and Means Advances are of two types, one is normal WMA and second is Special Drawing Facility (SDF). SDF is being given against the collateral of the government securities held by the State Government.

In case of financial contingency State Government can avail funds from RBI in three ways.

First option is providing Special Drawing Facility against the collateral of the government securities held by the State Government. After the SDF limit is exhausted, the State Government is provided a normal WMA.

Second option is normal WMA limit, which is based on three-year average of actual revenue and capital expenditure of the state. After the WMA limit is exhausted, the State Government is provided an overdraft facility.

Third option is overdraft facility. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter.

The rate of interest on Ways and Means Advances are linked to the Repo Rate.

Being a Banker to Government, RBI fulfills both purpose via issuing bonds and government approved securities, one is sucking surplus money from the market to control the money flow and second is to fundraising from the public for the government.

Under the administrative arrangements, the Central Government has to maintain a minimum cash balance with the Reserve Bank. The amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays, as also at the annual account closing day of the Centre and the Reserve Bank (end of March now as per new fiscal year and earlier it was June).

Just like Central Government, State Governments also have to maintain a minimum balance with the Reserve Bank, which varies from state to state depending on the relative size of the state budget and economic activity.

Reference: RBI Documents

(5) Banker to Banks

Being a Banker to Banks, functions of RBI are

  • Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations.
  • Providing an efficient means of funds transfer for banks.
  • Enabling banks to maintain their accounts with the Reserve Bank for cash reserve requirements and maintenance of account with transaction balances.
  • Acting as a lender of last resort

Central Bank is banker for scheduled banks. All scheduled banks have to maintain the current account with Reserve Bank. These current accounts are used by commercial banks to maintain the cash reserves as well as to carry out interbank transactions through these accounts. Inter bank accounts can also be settled by transfer of money through electronic fund transfer system, such as, the Real Time Gross Settlement System (RTGS).

Lender of Last Resort:

As RBI does lending to commercial banks as per their fund requirement, but this is most important function of RBI to become a “Lender of Last Resort”.

RBI uses the power of this function for rescue of any Bank that is solvent but facing the temporary liquidity problem. When no one else is willing to support by providing credit facility to the bank.

RBI comes forward as “Lender of Last Resort” and provides this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank.

Failure of any financial institution may affect other banks and institutions and can have an adverse impact on financial stability and economy of the nation.

(6) Foreign Exchange Management

Foreign Exchange Management is the function of RBI.

The Reserve Bank supervises and regulates the foreign exchange market in India, through the provisions of the Foreign Exchange Management Act, 1999.

RBI supervises and regulates current and capital account management, Foreign Investment, Indian Investment Abroad, External Commercial Borrowings, Liberalised Remittance Scheme, Currency Swap, Indian Depository Receipts (IDRs) etc.

(7) Market Operations

Market Operation is a function of RBI which helps RBI into monetary management.

Open Market Operation

RBI uses the open market operation as a tool for monetary management. Open Market Operation is a process of purchasing and selling of government securities in the secondary market on the electronic Negotiated Dealing System – Order Matching (NDS-OM) platform by placing bids for securities.

All the secondary market transactions of government securities are settled through Clearing Corporation of India Limited (CCIL).The funds settlement is carried out through members Current Account maintained with the Reserve Bank.

Liquidity Adjustment Facility

Liquidity adjustment facility auction is an activity in which banks can avail liquidity in case of their need and park excess fund with RBI on an overnight basis against the government securities as a collateral. LAF was introduced in year 2000 by RBI.

(8) Payment and Settlement Systems

RBI regulates and supervises the payment systems in India under provision of Payment and Settlement Systems Act, 2007.

Payment and settlement system is one of function of RBI. RBI is a sole authority for all type of payment and settlement system. Transaction type may be of individual, corporate, interbank, open market etc. RBI has many ways and tools to process and settle the transactions.

RBI regulates payments and settlements system through National Payments Corporation of India (NPCI)

There are many ways of payment and settlement systems namely are:

  • Clearing Corporation of India Limited (CCIL)
  • Negotiated Dealing System (NDS)
  • High-Value Clearing (HVC)
  • Cheque Truncation System (CTS)
  • Electronic Clearing Service (ECS)
  • National Electronic Clearing Service (NECS)
  • Electronic Funds Transfer
  • Real Time Gross Settlement (RTGS)
  • National Automated Clearing House (NACH)
  • National Electronic Funds Transfer (NEFT)

Reference: RBI Document for Payment system

(9) Developmental role

RBI has many important functions to perform. But evolution and invention of new tools for economy development is major and most important function.

The central bank has to perform a wide range of promotional functions to support national objectives and industries.

There are many evolutionary tools invented and implemented by RBI for countries economic growth.

  • Priority Sector Lending
  • Lead Bank Scheme
  • Special Agricultural Credit Plan
  • Kisan Credit Cards
  • Natural Calamities – Relief Measures
  • Micro, Small and Medium Enterprises Development
  • Credit Guarantee Scheme for Small Industries by SIDBI
  • Specialised MSE Branch in every District
  • Formulation of “Banking Code for MSE Customers”
  • Working Group on Rehabilitation/Nursing of Potentially Viable Sick SME Units
  • Banking Codes and Standards Board of India (BCSBI)