Functioning of RBI

All the central activities about the money in India is controlled by the RBI. They are responsible for the changing exchange rates as well as the interest rates. But there are many other functions as well which RBI performs. The functioning of RBI is fully done the central board of directors.

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Functioning of RBI

There are several functioning of RBI. Below are some of the important functions done by the RBI.

Issue of Money/Currency

RBI in India controls the flow of money in the market. The main objective is to check on the credit system and based on it maintain the money in the system.

This is done so that the reserves are maintained. Also, RBI is the sole authority when it comes to the printing of money. This function of issuing notes by RBI has many advantages. They are:

• It is easy to supervise.
• This helps in the uniformity of the notes that are issued.
• It becomes easy to control and regulate the credit that is within the system.

Learn more about Departments of RBI here in detail.

Issuer of Banking License

Any bank that has to obtain the license for various banking activities has to obtain the license from the RBI. They can only conduct the banking business if they have the license. This is as per section 22.

Banker’s to government

RBI acts as a bank to both the central as well as the state government. It provides them the short-term loan whenever necessary. The government deposit accounts are also maintained by the RBI.

On behalf of the government, it collects the receipts of the funds and makes the payment. It is also responsible for advising the government on financial and banking subjects.

Custodian for the Foreign Currency in the Country

Every country has some reserve of foreign exchange. The RBI in India has the custody to reserve this currency. This helps the RBI fight any crisis related to the bad balance of payments situation.

Lender to Commercial Banks

In the time of emergency and financial difficulties, the commercial banks approach the RBI. The RBI helps these banks by charging them a bit higher interest rate.

Debt Manager for Government

The government of India stores their money in the RBI. They keep these deposits of government free of interest. Besides, it all makes and receives the payment and help floating the new loans.

It carries the exchange remittances for the government. It acts as an advisor to government and manages the public debt.

Accounts Settlement and Central Clearance

All the commercial banks in India, stores their surplus cash in the Reserve Bank of India. Thus, it becomes easier for them to deal with each other and settle any claims that are entered in the books. This has also made the clearing account a very important function for the RBI.

Credit Controller

The credit money is a very important part of the supply of money. And there are implications for the supply of money on the economic stability of the country.

Thus, it becomes important to control credit. This credit is controlled by the RBI on the basis of the economic priorities of the government.

Government Securities

Besides other government deposits, RBI also manages government securities. They administer the investment for the institutions that invest a portion of their total liabilities or assets in the government securities.

Practice Questions

Q. If the RBI conducts the sale of their securities than would happen to the cash reserves of the commercial banks?

A. Remains constant                   B. Increase                   C. Decreases                D. Either B or C

Answer: C. Decrease

Q. RBI can lend to the commercial banks.

A. True       B. False

Answer: A. True