Function # 1.

Monopoly of Note Issue:

Like any other central bank, the RBI acts as a sole currency authority of the country. It issues notes of every
denomination, except one-rupee note and coins and small coins, through the Issue Department of the Bank.

One- rupee notes and coins and small coins are issued by the Government of India. In actuality, the RBI also
issues these coins on behalf of the Government of India. At present, notes of denominations of rupees two,
five, ten, twenty, fifty, one hundred and five hundred are issued by the RBI.

Prior to 1956, the principle of note issue of the RBI was based on proportional reserve system. This system
was replaced by the minimum reserve system in 1956 under which the RBI was required to hold at least Rs.
115 crores worth of gold as backing against the currency issued.

The rest (Rs. 85 crores) should be in foreign securities, so that together with gold and foreign exchange reserve
the minimum value of these assets is Rs. 200 crores.

Function # 2. Banker’s Bank:

As bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them funds for
short periods. All banks are required to maintain a certain percentage (lying between 3 per cent and 15 per
cent) of their total liabilities. The main objective of changing this cash reserve ratio by the RBI is to control
credit.

The RBI provides financial assistance to commercial banks and State cooperative banks through rediscounting
of bills of exchange. As the RBI meets the need of funds of commercial banks, the RBI functions as the Tender
of the last resort’.

The RBI has been empowered by law to supervise, regulate and control the activities of commercial and
cooperative banks. The RBI periodically inspects banks and asks them for returns and necessary information.

Function # 3. Banker to the Government:

The RBI acts as the banker to the government of India and State Governments (except Jammu and Kashmir).
As such it transacts all banking business of these Governments.

These are the following:

The RBI:

(i) Accepts and pays money on behalf of the Government.

(ii) It carries out exchange remittances and other banking operations.

As the Government’s banker, the RBI provides short-term credit to the Government of India. This short-term
credit is obtainable through the sale of treasury bills. Not only this, the RBI also provides ways and means of
advances (repayable with 90- days) to State Government. It may be noted that the Central Government is
empowered to borrow any amount it likes from the RBI.

The RBI also acts as the agent of the Government in respect of membership of the IMF and World Bank.

Furthermore, the RBI acts as the adviser of the Government not only on banking and financial matters but also
on a wide range of economic issues (like financing patterns, mobilisation of resources, institutional
arrangements with regard to banking and credit matters, arrangements with regard to banking and credit
matters, international finance) etc.

Function # 4. Controller of Credit:

The RBI controls the total supply of money and bank credit to sub serve the country’s interest. The RBI
controls credit to ensure price and exchange rate stability.

To achieve this, the RBI uses all types of credit control instruments, quantitative, qualitative and selective. The
most extensively used credit instrument of the RBI is the bank rate. The RBI also relies greatly on the selective
methods of credit control. This function is so important that it requires special treatment.

Function # 5. Exchange Management and Control:

One of the essential central banking functions performed by the Bank is that of maintaining the external value
of rupee. The external stability of the currency is closely related to its internal stability the inherent economic
strength of the country and the way it conducts its economic and monetary affairs.

Domestic, fiscal and monetary policies have, therefore, an important role in maintaining the external value of
the currency. Reserve Bank of India has a very important role to play in this area.

The RBI has the authority to enter into foreign exchange transactions both on its own account and on behalf of
the Government.

The official external reserves of the country consist of monetary gold and foreign assets of the Reserve Bank,
besides SDR holdings. The Reserve Bank, as the custodian of the country’s foreign ex- change reserves, is
vested with the duty of managing the investment and utilization of the reserves in the , most advantageous
manger.

Function # 6. Miscellaneous Functions:

The RBI collects, collates and publishes all monetary and banking data regularly in its weekly statements in the
RBI Bulletin (monthly) and in the Report on Currency and Finance (annually).

Function # 7. Promotional and Developmental Functions:

Apart from this traditional function, the RBI performs various activities of promotional and developmental
nature. It attempts to mobilize savings for productive purposes. This is done in various ways. For instance, RBI
has helped a lot in building the huge financial infrastructure that we see now.

‘This consists of such institutions as the Deposit Insurance Corporation (to safeguard the interests of depositors
against bank failure), the Agricultural Refinance and Development Corporation (to meet the needs of
agriculturists), IFCI, SFCs, IDBI, UTI (to meet the long and medium term needs of industry), etc.

As for cooperative credit movement, the RBI’s performance in really commendable. This has resulted in
curbing the activities of moneylenders in the rural economy.

Thus, it is clear that RBI is not a typical Central Bank as is traditionally understood. It is something more than
a Central Bank. It regulates not only currency and credit but aids the development of the Indian economy by
conducting various types of promotional activities. As such, in RBI we see many activities combined into one.
3. Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of
the commercial banks.

4. Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international currency, and this enables the
Reserve Bank to deal with crisis connected with adverse balance of payments position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and
the Reserve bank comes to their rescue though it might charge a higher rate of interest.

6. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal
with each other and settle the claim of each on the other through book keeping entries in the books of the
Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.

7. Controller of Credit:

Since credit money forms the most important part of supply of money, and since the supply of money has
important implications for economic stability, the importance of control of credit becomes obvious. Credit is
controlled by the Reserve Bank in accordance with the economic priorities of the government.

Chronology of Events

The Early Years - 1935 to 1949

Date Event

1 Apr 1935 Reserve Bank of India commences operations. Sir Osborne Smith the first Governor of the
Bank. The Bank was constituted as a shareholders' bank.

5 Jul 1935 Scheduled banks required to maintain the Cash Reserve Ratio, i.e., hold cash balances with
the RBI equivalent to 5% of their Demand Liabilities and 2% of their Time Liabilities.

Oct 1935 London Office of the Reserve Bank set up. This was closed on September 30, 1963.

1 Nov 1936 Resignation of the first Governor, Sir Osborne Smith, wef July 1, 1937.

15 Jan 1937 Indian Companies (Amendment) Act, 1936 devotes a separate chapter exclusively to Banks.

1 July 1937 Sir James Braid Taylor assumes office as Governor.

1937 RBI acts as banker to the Government of Burma and also responsible for note issue in
Burma.
Jan 1938 First Reserve Bank notes issued.

21 Jun 1938 The Failure of the Travancore National and Quilon Bank, the largest bank in the Travancore
region, underlined the need for comprehensive banking reform and legislation.

3 Sep 1939 Introduction of Exchange Controls in India under Defence of India Rules.

11 Mar 1940 RBI Accounting Year changed from Jan-Dec to July-June.

1940 The silver rupee replaced by the quarternary alloy rupee. One Rupee note reintroduced. This
note had the status of a rupee coin and represented the introduction of official fiat money in
India.

11 Aug 1943 Sir C. D. Deshmukh assumes office of Governor.

1944 The security thread on notes introduced for the first time in India as a security feature.

1944 Laws relating to Government securities and to the management of Public Debt by the
Reserve Bank of India consolidated on the basis of the Public Debt Act, 1944.

26 May 1945 Speculative activity in the financial and bullion markets. Defence of India Rules invoked to
authorise the Reserve Bank to collect information from banks in respect of advances. This
was to check advances against bullion for speculation.

9 Jun 1945 Reserve Bank of India entrusted with the Currency & Coinage of the British Military
Administration of Burma as well as Banker to BMA.

12 Jan 1946 High Denomination Bank Notes of Rs 500, Rs 1000 and Rs 10,000 Demonetised to curb
unaccounted money.

1946 Interim arrangements for Bank Supervision were put in place by ordinances which were later
replaced by the Banking Companies Act, 1949. These Ordinances empowered the Reserve
Bank to inspect banks, as well as authorise the licensing of bank branches.

30 Jun 1948 RBI ceased to function as the Central Bank of Pakistan. State Bank of Pakistan commenced
operations wef July 1, 1949.

1 Jan 1949 Reserve Bank of India nationalised.

16 Mar 1949 Coming into force of the Banking Companies Act, 1949. This formed the statutory basis of
bank supervision and regulation in India.
The Statutory Liquidity Ratio (SLR) requiring banks to maintain liquid assets was introduced
for the first time. The Banking Companies Act was later renamed the Banking Regulation
Act.

1 Jul 1949 Sir Benegal Rama Rau assumes office as Governor

19 Sep 1949 Rupee devalued by 30.5 % as a defensive measure consequent to the devaluation by other
'sterling area' countries.

(A) Legal Definition of Money

(B) Functional Definition of Money
(C) Definition on the Basis of Liquidity

(D) Definition on the Basis of Scope

(A) Legal Definition of Money:According to this definition, money is what the law says is money. So,
anything which the government declares as money is money.
On the basis of legal recognition, money is of two kinds:
(i) Legal Tender Money:Money which can be legally used to make payment of debts or other obligations is
termed as legal tender money. A creditor is obliged by law to receive such money in payment of debt due to
him.
Legal tender money is of two kinds:
(a) Limited Legal Tender:It refers to that form of legal tender money, which can be paid in discharge of a
debt up to a certain limit. Beyond this limit, a person may refuse to accept the payment and no legal action can
be taken against him. In India, coins are limited legal tender.

(b) Unlimited Legal Tender:It refers to that form of legal tender money, which can be paid in discharge of a
debt of any amount. Legal action can be taken against a person who refuses to accept this money. In India,
paper notes are unlimited legal tender.
(ii) Non-Legal Tender Money or Optional Money:It refers to that form of money, which is generally
accepted, but legally, one is not bound to accept it. For example, cheques, bank drafts, bills of exchange, etc.
do not have legal backing and their acceptance is totally optional.
(B) Functional Definition of Money:According to this definition, money refers to anything that performs the
four basic functions of money: (a) Medium of exchange; (b) Measure of value; (c) Standard of deferred
payments; (d) Store of value. In the words of Crowther, “Money may be defined as anything which is generally
acceptable as a medium of exchange and at the same time acts as a measure and store of value”.
(C) Definition on the Basis of Liquidity:On the basis of liquidity, money can be classified as:
(i) Money or Liquid form of Money:Money has the quality of general acceptability which makes it the most
liquid asset. By liquidity, we mean the speed and certainty with which an asset can be converted back into
money. Coins, currency notes and bank money are the most liquid form of money.
(ii) Near Money:It includes those financial assets, which are not as liquid as coins and currency notes, but can
be easily converted into money for paying debts. For example, National saving deposits, fixed deposit receipts,
bonds, etc. They are as good as money, but are non-legal tender money. Near money cannot be used directly
for purchase of goods and services. But, it can be converted into cash within a short span of time.
(D) Definition on the Basis of Scope:
According to the scope of money, it has been defined in two ways:

(i) Narrow Definition of Money:It includes only those things which function as money. It includes currency
notes, coins and demand deposits of banks as they perform the following functions of money: (a) Medium of
exchange, (b) Measure of value, (c) Standard of deferred payments, (d) Store of value.
(ii) Broad Definition of Money: In addition to narrow money, it also includes time deposits in banks and post
offices. Time deposits are included as they have high degree of moneyless and can be converted into
chequeable deposits within a short span of time. Broad Definition of Money = Money Assets + Near Money

1935–1950

Reserve Bank of India-10 Rupees (1938), first year of banknote issue.

The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after the First World
War.[12] The Reserve Bank of India was conceptualized based on the guidelines presented by the Central
Legislative Assembly which passed these guidelines as the RBI Act 1934.[13] RBI was conceptualized as per
the guidelines, working style and outlook presented by B. R. Ambedkar in his book titled “The Problem of the
Rupee – Its origin and its solution” and presented to the Hilton Young Commission. The bank was set up based
on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the
Hilton–Young Commission.[14] The original choice for the seal of RBI was The East India Company Double
Mohur, with the sketch of the Lion and Palm Tree. However, it was decided to replace the lion with the tiger,
the national animal of India. The Preamble of the RBI describes its basic functions to regulate the issue of bank
notes, keep reserves to secure monetary stability in India, and generally to operate the currency and credit
system in the best interests of the country.[15] The Central Office of the RBI was established in Calcutta (now
Kolkata) but was moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's (now Myanmar)
central bank until April 1947 (except during the years of Japanese occupation (1942–45)), even though Burma
seceded from the Indian Union in 1937. After the Partition of India in August 1947, the bank served as the
central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though set
up as a shareholders’ bank, the RBI has been fully owned by the Government of India since its nationalization
in 1949.[16] RBI has monopoly of note issue.