STRUCTURE AND FUNCTIONS

OF RESERVE BANK OF INDIA

 RBI
A central bank is an apex institution, which operate, control,
directs and regulates the monetary and banking structure of a
country.
A central bank is so called because it occupies a central or
highest position in monetary and banking structure of the
country.
In India RESERVE BANK OF INDIA is the central bank of
the country.
RBI is the Central Bank of India, it commenced its
INTRODUCTION

operations on 1 April 1935 during the British Rule in

accordance with the provisions of the Reserve Bank of
India Act, 1934
Reserve Bank of India was set up based on the
recommendation of Hilton Young commission of 1926.

Its head quarter is in Mumbai (Maharashtra). Its present

governor is “Shri Shaktikanta Das

It has “22 Regional Offices”, most of them in State

capitals.
 BRIEF HISTORY
 It was started as Share-Holders Bank with a paid up capital of 5
crores.
 Initially it was located in Kolkata.
It moved to Mumbai in 1937.
Initially it was Privately Owned.
The RBI was nationalised on 1 January 1949.Since then Reserve
Bank is fully owned by the Government of India.
The RBI is entrusted with the
21-member Central Board of Directors
The Governor,
4 Deputy Governors,
2 Finance Ministry representatives,
10 government nominated directors to represent important elements of
India's economy, and
4 directors to represent local boards headquartered at Mumbai,
Kolkata, Chennai and New Delhi.
Governor

Shri Shaktikanta Das, IAS Retd., former Secretary,

Department of Revenue and Department of Economic
Affairs, Ministry of Finance, Government of India
assumed charge as the 25th Governor of the Reserve Bank
of India effective December 12, 2018.
 PREAMBLE

The Preamble of the Reserve Bank of India describes

the basic functions of the Reserve Bank as :-

“…To regulate the issue of Bank Notes and 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."
 FUNCTIONS OF RBI
Issue of Currency/Notes
Development role
Banker to Government
Banker to Banks
Role of RBI in Inflation control
Formulate Monetary Policy
Manager of Foreign Reserve
Clearing House Functions
Regulations of Banking system
Lender of the Last Resort
 Issue of Currency
 To ensure adequate quantity of supplies of currency notes and coins
of good quality.
Issues new currency and destroys currency and coins not fit for
circulation.
It has to keep in forms of gold and foreign securities as per statutory
rules against notes & coins issued.
RBI in our country has been given sole right of issue of currency
notes except one rupees note.
This function gets such importance that central bank has come to
be known as bank of issue.
RBI tries to keep money growth within a target range and keeps
inflationary pressure at a low level.
 Developmental Role
 To develop the quality of banking system in India.
Performs a wide range of promotional functions to
support national objectives.
To establish financial institutions of national importance,
for e.g: NABARD, IDBI etc.
 Banker, agent and advisor to the Govt.
Performs all banking function for the central and the state
governments and also acts as their banker. It makes loans and
advances to the States and local authorities. It acts as adviser
to the Government on all monetary and banking matters.

It helps the Government with short-term loans and advance in

times of difficulty .

GOI borrows money from RBI to finance its budget deficit.

As government agent, the central bank conduct sell and purchase
of government securities also manage national debt and foreign
debt.
 Banker to banks:
Maintains banking accounts of all scheduled banks.
RBI also regulates the opening /installation of  ATM.
Fresh currency notes for  ATMs are supplied by RBI.
RBI regulates the opening of branches by banks.
It ensures that all the N.B.F.S follow the Know Your
Customer guidelines.
The Reserve Bank of India also regulates the trade of gold.
RBI has invited applications from more banks for direct import
of gold to curb illegal trade in gold and increase competition in
the market.

Collection and publication of data.

It issues guidelines and directives for the commercial banks.

 Role of RBI in inflation control
Inflation arises when the demand increases and there is a shortage
of supply.
There are two policies in the hands of the RBI.

Monetary Policy: It includes the interest rates. When the bank

increases the interest rates than there is reduction in the borrowers
and people try to save more as the rate of interest has increased.

Fiscal Policy: It is related to direct taxes and government

spending. When direct taxes increased and government spending
increased than the disposable Income of the people reduces and
hence the demand reduces.
 Formulate monetary policy

 Maintain price stability and ensuring adequate flow of credit

in the economy.

It formulates implements and monitors the monetary policy.

Instruments: qualitative & quantitative.

 Quantitative Measures

Quantitative Measures “BANK RATE” also called “Discount

Rate”.
It also includes “Repo Rate”.
“Open Market Operations” buying and selling of government
securities.
“Variable Reserve Ratio” it includes C.R.R (Cash reserve
ratio) and S.L.R (Statutory Liquidity ratio)

Qualitative Measures
1. Direct Action
2. Moral persuasion
3. Legislation
4. Publicity
 BANK RATE
The bank rate is the official interest rate at which RBI rediscounts the
approved bills held by commercial banks. For controlling the credit,
inflation and money supply, RBI will increase or decrease the Bank
Rate.
It’s the interest rate that is charged by a country’s central bank on
loans and advances to control money supply in the economy and the
banking sector.

This is typically done on a quarterly basis to control inflation and

stabilize the country’s exchange rates.

A fluctuation in bank rates Triggers a Ripple-Effect as it impacts

every sector of a country’s economy.
A change in bank rates affects customers as it influences Prime
Interest Rates for personal loans.
The present bank rate is 4.25%
 REPO RATE
Whenever the banks have any shortage of funds they can borrow it
from the central bank. Repo rate is the rate at which banks borrow
currency from the central bank.

Repo rate is the rate at which the central bank of a country (Reserve
Bank of India in case of India) lends money to commercial banks in
the event of any shortfall of funds.
Repo rate is used by monetary authorities to control inflation.
A reduction in the repo rate will help banks to get Money at a
cheaper rate.

When the repo rate increases borrowing from the central bank
becomes more expensive.
In order to increase the liquidity in the market, the central bank
does it.
 REVERSE REPO RATE
It’s the rate at which the banks park surplus funds with reserve bank.

While the Repo rate is the rate at which the banks borrow from the
central bank.

Reverse repo rate is the rate at which the central bank of a country
(Reserve Bank of India in case of India) borrows money from
commercial banks within the country. It is a monetary policy
instrument which can be used to control the money supply in the
country.

It is mostly done , when there is surplus liquidity in the market by

the central bank.
 CRR (Cash Reserve Ratio)

• Cash Reserve Ratio (CRR) is the amount of Cash(liquid cash

like gold)that the banks have to keep with RBI.

•This Ratio is basically to secure solvency of the bank and to

drain out the excessive money from the banks.

•CRR refers to that portion of total deposits in commercial Bank

which it has to keep with RBI as cash reserves. an increase in
CRR will decrease the capacity of banks to lend money thereby
decrease the money supply and vice versa .
 SLR ( Statutory Liquidity Ratio)

•It is the amount a commercial bank needs to maintain in the

form of cash, or gold or govt. approved securities (Bonds)
before providing credit to its customers.

•SLR rate is determined and maintained by the RBI (Reserve

Bank of India) in order to control the expansion of bank credit.

•Refers to that portion of deposits with the banks which it has to

keep with itself as liquid assets(Gold, approved govt. securities
etc.) If RBI wishes to control credit and discourage credit it
would increase CRR & SLR.
 QUALITATIVE MEASURES
1. Direct Action: The central bank may take direct action against
commercial banks that violate the rules, orders or advice of the
central bank. This punishment is very severe of a commercial bank.

2. Moral persuasion: It is another method by which central bank

may get credit supply expanded or contracted. By moral pressure it
may prohibit or dissuade commercial banks to deal in speculative
business.
3. Legislation:
The central bank may also adopt necessary legislation for
expanding or contracting credit money in the market.

4. Publicity:
The central bank may resort to massive advertising campaign
in the news papers, magazines and journals depicting the poor
economic conditions of the country suggesting commercial
banks and other financial institutions to control credit either by
expansion or by contraction.
Controller of credit
The most important function of the central bank is to control the credit creation
power of commercial banks in order to control inflationary and deflationary
pressures within the economy. Controlling credit in the economy is amongst the
most important functions of the Reserve Bank of India. The basic and important
needs of credit control in the economy are-
To encourage the overall growth of the"priority sector" i.e. those sectors of the
economy which is recognized by the government as "prioritized" depending upon
their economic condition or government interest. These sectors broadly totals to
around 15 in number.
To keep a check over the channelization of credit so that credit is not delivered for
undesirable purposes.
To achieve the objective of controlling inflation as well as deflation.
To boost the economy by facilitating the flow of adequate volume of bank credit to
different sectors.
To develop the economy.
For this purpose, the central bank adopts
1. Quantitative methods
2. Qualitative (selective) methods.
These help the quantity of credit created and the money in
circulation the following method are used :
The quantitative measures of credit control are as follows:
1. Bank Rate Policy
The bank rate is the official interest rate at which RBI rediscounts
the approved bills held by commercial banks. For controlling the
credit, inflation and money supply, RBI will increase the Bank
Rate.
2. Open Market Operations
These refer to direct sales and purchase of securities and bills in
the open market by Reserve bank of India. The aim is to control
volume of credit.
3. Varying Interest Rates:
Commercial banks vary interest rates depending on the credit
requirements of the society and as per directions of RBI
4.Varying Reserve Requirements:
The central bank changes the rate of cash reserve and it has direct effect on money
supply .
Cash Reserve Ratio
CRR refers to that portion of total deposits in commercial Bank which it has to keep
with RBI as cash reserves. an increase in CRR will decrease the capacity of banks to
lend money thereby decrease the money supply and vice versa .
Statutory Liquidity Ratio
refers to that portion of deposits with the banks which it has to keep with itself as
liquid assets(Gold, approved govt. securities etc.) If RBI wishes to control credit and
discourage credit it would increase CRR & SLR.
5. Varying Repo Rate and Reverse -Repo rate:
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in
case of India) lends money to commercial banks in the event of any shortfall of funds.
Repo rate is used by monetary authorities to control inflation.
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of
India in case of India) borrows money from commercial banks within the country. It is
a monetary policy instrument which can be used to control the money supply in the
country.
Repo Rate and Reverse Repo Rate:
Repo rate:
Repo rate is the rate at which the Reserve Bank of India
lends the banks for a very short period.
The central bank can make necessary changes in the repo rate
according to the present economic situation.
It can also be used as a tool of credit control by RBI.
Reverse Repo Rate:
It is the rate at which Reserve Bank of India borrows from
the banks.
Generally there is 1% gap between the Repo rate and
Reverse Repo rate.(Reverse repo rate is always lower than
repo rate)
Qualitative or Selective Method of Credit Control:
The qualitative or the selective methods are directed towards the
diversion of credit into particular uses or channels in the economy.
Their objective is mainly to control and regulate the flow of credit
into particular industries or businesses.
The following are the important methods of credit control under
selective method:
1. Rationing of Credit.
2. Direct Action.
3. Moral Suasion.
4. Method of Publicity.
5. Regulation of Consumer’s Credit.
6. Regulating the Marginal Requirements on Security Loans.
Objectives of credit control :
Credit control policy is just an arm of economic policy which
comes under the purview of Reserve Bank of India, hence, its
main objective being the attainment of high growth rate while
maintaining the reasonable stability of the internal purchasing
power of money.
The broad objectives of credit control policy in India have been-
Ensure an adequate level of liquidity enough to attain high
economic growth rate along with maximum utilisation of
resource but without generating high inflationary pressure.
Attain stability in the exchange rate and money market of the
country.
Meeting the financial requirement during a slump in the
economy and in the normal times as well.
Control business cycle and meet business needs.
 Manager of Foreign Exchange

To facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in
India.

It acts as a custodian and Manages the Foreign Exchange

 RBI buys and sells foreign currency to maintain the exchange

rate of Indian Rupee v/s  foreign currencies like the US Dollar,
Euro, Pound and Japanese yen.