It is the central bank of India.
The Reserve Bank of India was established on
April 1, 1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934.
It was originally constituted with a capital of Rs.5 crores.
The entire share capital was contributed privately with the
exception of the nominal value of Rs 2.2 lakh subscribed
by the central bank.
After independence, the reserve bank of India was
5. Objectives Of R.B.I
To manage the monetary and credit system
of the country.
To stabilizes internal and external value of rupee.
For balanced and systematic development of banking
in the country.
For the development of organized money market in
6. For proper arrangement of agriculture finance.
For proper arrangement of industrial finance.
For proper management of public debts
To establish monetary relations with other countries of
the world and international financial institutions.
For centralization of cash reserves of commercial banks.
To maintain balance between the demand and supply
10. The RBI has the sole right or authority or monopoly of
issuing currency notes except one rupee note and coins of
These currency notes are legal tender issued by the RBI.
Currently it is in denominations of Rs.
2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers
not only to issue and withdraw but even to exchange
these currency notes for other denominations.
It issues these notes against the security of gold
bullion, foreign securities, rupee coins, exchange bills and
promissory notes and government of India bonds.
12. TheRBI being the apex monitory body has to work as an
agent of the central and state governments.
It performs various banking function such as to accept
deposits, taxes and make payments on behalf of the
It works as a representative of the government even at
the international level. It maintains government
accounts, provides financial advice to the government.
It manages government public debts and maintains
foreign exchange reserves on behalf of the government. It
provides overdraft facility to the government when it faces
14. The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in
Every commercial bank has to maintain a part of their
reserves with the RBI. The RBI controls the credit created by
commercial banks by varying the proportion of reserves.
It facilitates the clearing & rediscounting of promissory
notes, bills of exchange and cheques and also helps in inter
bank transfer of funds.
Similarly in need or in urgency these banks approach the
RBI for funds. Thus it is called as the lender of the last
16. The RBI controls the credit creation by commercial banks.
For this, the RBI uses both quantitative and qualitative
By controlling credit, the RBI achieves the following:
Maintains the desired level of circulation of money in
Maintains the stability in the price level prevailing in the
Controls the effects of trade cycles
Controls the fluctuations in the foreign exchange rate
Channelizes credit to the productive sectors of the
18. Along with the routine traditional functions, central banks especially
in the developing country like India have to perform numerous
functions. These functions are country specific functions and can
change according to the requirements of that country.
Development of the Financial System : The financial system
comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a
precondition of the rapid economic development of the nation.
The RBI has encouraged establishment of main banking and non-
banking institutions to cater to the credit requirements of diverse
sectors of the economy.
Development of Agriculture : In an agrarian economy like ours,
the RBI has to provide special attention for the credit need of
agriculture and allied activities. It has successfully rendered
service in this direction by increasing the flow of credit to this
19. Provision of Industrial Finance : In this regard the RBI has always been
instrumental in setting up special financial institutions such as ICICI Ltd.
IDBI, SIDBI and EXIM BANK etc for the adequate and timely availability
of credit to small, medium and large industry is very significant.
Collection of Data : Being the apex monetary authority of the
country, the RBI collects process and disseminates statistical data on
several topics..This data proves to be quite useful for researchers and
Publication of the Reports : This RBI collects and publishes data on
several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual Report
This information is made available to the public also at cheaper rates.
Promotion of Banking Habits : As an apex organization, the RBI always
tries to promote the banking habits in the country. It institutionalizes
savings and takes measures for an expansion of the banking network.
21. The reserve bank also performs many supervisory functions. It has
authority to regulate and administer the entire banking and financial
system. Some of its supervisory functions are given below.
Granting license to banks : The RBI grants license to banks for
carrying its business. License is also given for opening extension
counters, new branches, even to close down existing branches.
Bank Inspection : The RBI grants license to banks working as per the
directives and in a prudent manner without undue risk. In addition to
this it can ask for periodical information from banks on various
components of assets and liabilities.
Control over NBFIs : The Non-Bank Financial Institutions are not
influenced by the working of a monitory policy. However RBI has a
right to issue directives to the NBFIs from time to time regarding their
functioning. Through periodic inspection, it can control the NBFIs.
23. Monetary policy of India
Monetary policy is the process by which the central bank controls the
supply of money in the economy by exercising its control over interest
rates in order to maintain price stability and achieve high economic
growth. It is so designed as to maintain the price stability in the
Other objectives of the monetary policy of India, as stated by RBI, are:
Rapid Economic Growth
Exchange Rate Stability
Balance of Payments (BOP)Equilibrium
Neutrality of Money
Equal Income Distribution
25. I. Quantitative Tools
Bank Rate Policy – It refers to rate at which the central bank
(i.e. RBI) rediscounts bills and prepares of commercial banks or
provides advance to commercial banks against approved
Open Market Operations- It refers to the purchase and/or sale
of short term and long term securities by the RBI in the open
market. The OMO is used to wipe out shortage of money in the
Variations in Reserve Ratios- SLR & CRR -RBI increases VRR
during the inflation to reduce the purchasing power and credit
creation. But during the recession or depression it lowers the VRR
making more cash reserves available for credit expansion.
26. 2. Qualitative Tools
Prescription of margin requirements- It refers to the
"proportion of the loan amount which is not financed by the bank". Or
in other words, it is that part of a loan which a borrower has to raise in
order to get finance for his purpose.
Consumer credit regulation - RBI fixes the quota of credit for
commercial banks. It means at maximum, how much volume of money a
commercial bank can grant as loan for a particular activity. Thus
by increasing this quota RBI can increase the credit supply in an
economy and by decreasing quota RBI can restrict credit supply.
Moral suasion- It means persuasion and request. To arrest
inflationary situation RBI persuades and request the commercial banks
to refrain from giving loans for non-essential purposes. On the other
hand, to counteract deflation central bank persuades the commercial
banks to extend credit for different purposes.
27. Direct action -This method is adopted when a commercial bank
does not co-operate the central bank in achieving its desirable
objectives. Direct action may take any of the following forms:
•Central banks may charge a penal rate of interest over and above the
bank rate upon the defaulting banks;
•Central bank may refuse to rediscount the bills of those banks which
are not following its directives;
•Central bank may refuse to grant further accommodation to those
banks whose borrowings are in excess of their capital and reserves.