The Reserve Bank of India is the Central Bank of India, which means it is at the apex of the banking structure of the economy. It is one of the main governing body and regulatory body in India and helps the government in its role as a business facilitator. Let us learn a bit more about the RBI.
The Reserve Bank of India
The RBI was first established on the 1st of April 1935 and nationalized in 1949. The governing of the RBI is done in accord to the RBI Act by the government. Its day to day affairs are take care of the Board of Directors who are chosen by the government.
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Functions of the RBI
- The issuer of Currency: The RBI is the only authorized body that can issue currency in the country. So they print, distribute and regulate the flow of currency in the economy.
- Banker to the Government: Even the Central and State government need basic banking functions. The RBI provides them with these facilities like depositing monies, remittances etc. It can also make advances and provide loans to the government whenever necessary.
- Banker to other Banks: The Reserve Bank of India also supervises all other commercial banks in the country. It provides financial assistance to these banks like short-term loans and advances. The RBI also will dictate interest rates and the CRR limits to the commercial banks.
- Regulator of Foreign Exchange: It is the function of the RBI to maintain the value of the rupee in the global economy. It does so by acting as the custodian of foreign exchange reserves in the country. It maintains enough reserves to battle against fluctuations.
- Controls Credit in the Economy: This can be said to be the primary function of the Reserve Bank of India, the control of credit and money in the market. It uses qualitative and quantitative methods to either expand or contract the available credit in the economy according to circumstances.
RBI’s Role in Business Facilitation
As we know the government plays a huge role in facilitating and promoting business and trade in the economy. It does so through its various business organizations. The RBI plays a major role in this function. Let us see how the RBI helps facilitate business and growth in the economy.
If you remember from the recent demonetization event, the RBI played a major role in that. This is because the RBI is responsible for the monetization of the economy, i.e. the currency policy.
The entire economy depends on the availability of money in the market. So the money supply is also critical to the functioning and success of businesses. And businesses also require foreign currency for international trade.
The RBI is also responsible for the foreign exchange mechanism of the economy. So the RBI plays a very direct role in the government’s facilitation of business in the economy.
Funding and loans are a very important aspect of businesses. The RBI does not provide any financing to the businesses directly. However, it does control the credit available in the market through the banks and any other lending institutions.
By using quantitative methods like the SLR and the CRR ratios it can increase or decrease the funds available with the banks. This will, in turn, decide how much loans the banks can provide to its customers. The most direct measure is the bank rates, or what we call the basis points scheme.
The RBI can also use qualitative measures to increase or decrease credit availability in the economy. Say, for example, it feels the steel industry needs more loans to advance. Then it can relax the norms for such an industry and instruct the banks to make such loans available. There is also the Priority Lending Sector as decided by the RBI.
Solved Question on Reserve Bank of India
Q: _____ basis points is one percent.
Ans: The correct option is C. One percent change in the rate of interest corresponds to 100 basis points.