Function of Reserve Bank of India (RBI)

Reserve Bank of India (RBI) is India’s Central bank. It plays a multi-facet role by executing multiple functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank of government.

RBI played a vital role in ensuring economic and financial stability.

RBI’s Previous Functions

  • Before inflation targeting was formally introduced in 2016, RBI was doing multiple roles.
  • They were responsible for growth by managing liquidity as well as interest rates.
  • They contributed in inflation management by adjusting liquidity and interest rates.
  • They borrowed money on behalf of the government to keep them functioning.
  • They also took care of the financial system’s stability by supervising banks and NBFCs.
  • Nobel laureate Joseph Stiglitz made a statement that if RBI Governor was the governor of the US Fed then the sub-prime crisis would not have occurred.

Role of Reserve Bank of India

  • The central bank issues and regulates currency notes.
  • It keeps reserves with a view to securing monetary stability and is called banker to banks.
  • The RBI plays a vital role in economic growth of the country and maintaining price stability.
  • Monetary Policy of the Country: The RBI has been tasked to have a monetary policy framework to meet the challenges of the economy and to maintain price stability while keeping in mind the objective of growth.
  • Inflation control: The RBI has targeted to keep the mid-term inflation at 4 four percent (+/- 2 percent).
  • Decides benchmark interest rate: A six-member Monetary Policy Committee, headed by RBI Governor, decides the benchmark repo rate.
  • Government’s banker: RBI acts as a banker for both the central as well as state governments. It sells and purchases government securities on their behalf.
  • Regulator of Foreign Exchange: Foreign Exchange Management Act (“FEMA”) envisages that RBI will have a key role in management of foreign exchange.
  • The central bank plays a key role in creating financial awareness among the masses.
  • It also supervises if the banks and other financial institutions are doing the job assigned to them regarding financial inclusion.