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  • The RBI was established on April 1, 1935 under the RBI Act 1934.
  • Initially it was constituted as a private share holder’s bank with a fully paid-up share capital of Rs. 5 crores.
  • It was nationalized on January 1, 1949.

RBI as Currency Authority

  • RBI is the sole authority for the issue of currency in India other than one-rupee notes and coins and small coins which are issued by the Government of India.
  • The distribution of currency (including the coins) is solely done by RBI. The issue of notes by the RBI is kept separate from the rest of its banking operations.
  • For this, RBI is organized under two separate departments viz. the Issue Department and the Banking Department.

RBI as Banker to Government

  • RBI acts as banker to both levels of governments i.e. the Central as well as State governments.
  • It means that RBI transacts all banking business of the government which involves receipt and payment of money on behalf of the government and its other banking operations.
  • In return, the governments keep their cash balances on current account deposit with the RBI. As Government’s banker, the RBI provides shorter term credit to both Centre and State Governments.

RBI as Bankers’ Bank

  • As bankers’ bank, RBI holds a part of the cash reserves of banks, lends them funds for short periods.
  • In periods of shortfall, normally banks are supposed to find help from sources other than RBI, but in case of unavailability of funds, RBI acts as “the lender of last resort”.
  • Under RBI Act, 1934 and the Banking Regulation Act, 1949 the RBI enjoys extensive powers of supervision, regulation and control over commercial and cooperative banks. FUNCTIONS OF RBI

Controller of Money Supply and Credit

  • Excess of money supply may lead to inflationary tendency in the economy while scarce money supply may affect liquidity needs of different sectors.
  • It is the responsibility of RBI to manage the supply of money in the economy with the help of different instruments like Bank rate, CRR, SLR, etc.

Foreign Exchange Management and Control

  • The RBI as the custodian of the country’s foreign exchange reserves manages exchange control and acts as the agent of the government in respect of India’s membership of the International Monetary Fund (IMF).
  • Till 1991, India had a very rigid exchange control regime in which RBI artificially fixed the exchange rate.
  • All foreign exchange receipts, under the law, were required to be sold to the RBI and all payment in foreign exchange was also regulated by the RBI.
  • In 1991 India faced a severe depletion of the foreign exchange reserves to just Rs. 1,500 crores and there was the danger of India defaulting in its international obligations.
  • At this time RBI arranged to sell about 20 tonnes of gold for $200 million.
  • Government could tide over this crisis by arranging assistance from Asian Development Bank, Japan, Germany and World Bank.  FUNCTIONS OF RBI
  • As a part of the agreement with IMF, India had to devalue the rupee by 22%. Liberalized Exchange Rate Mechanism (LERMS) was introduced in 1992-93 allowing partial convertibility of rupee by introducing a dual exchange rate. Subsequently, full convertibility on trade account was allowed in the budget for 1993-94.
  • As a further step, full convertibility on current account was allowed with effect from August 1994 when RBI accepted the obligations under Article VIII of the IMF.
  • Under these obligations, a country was prohibited from using exchange restrictions on current account transactions as a means of managing its balance of payments. The exchange rate of rupee is now left to be decided, more or less, by market forces.
  • While India made the rupee fully convertible under current account, it was felt that the economy was not yet ready for capital account convertibility (CAC).
  • Some South East Asian Countries and Mexico which implemented CAC in the 1980s, had to face financial crisis.
  • Since capital account deals with transactions in financial assets, many economists feel that in weaker financial markets full CAC may trigger devaluation of currency leading to unpredicted capital outflow.

Provision of Agriculture Finance

  • Unlike the Central Bank of most of the developed countries, RBI is responsible for providing agricultural finance.
  • Under the RBI Act, setting up of a special Agricultural Credit Department has been specified.
  • With the setting up of NABARD in 1982, the major functions of the Agricultural Credit Department of the RBI were taken over by the former.  FUNCTIONS OF RBI

Collection and Publication of data

  • The RBI has been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy.
  • A monthly publication, the RBI Bulletin and an annual publication, the Report on Currency and Finance are its two important publications.    FUNCTIONS OF RBI


Indian Economy

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