FUNCTIONS OF RBI AND MONETARY POLICY| CUET ECONOMICS| L-2

Functions of RBI (Reserve Bank of India) | Finance & Management

The central bank of India, RBI is also regarded as a bank of banks owing to the functions of RBI. It was established on April 1, 1935, under the Reserve Bank of India Act, 1934. In the beginning, the headquarters of RBI was established in Calcutta. However, soon after, in 1937, it was permanently shifted to Mumbai. 

As of October 2021, the Governor of the Reserve Bank of India is Mr Shaktikanta Das. He is the 25th RBI Governor and all the RBI functions are supervised by him.

Interesting Facts About Reserve Bank of India (RBI)

The first Governor of RBI was Osborne Smith, 

The first Indian governor of RBI was C D Deshmukh.

Originally, the Reserve Bank of India was privately owned; and was established as a private bank with two extra functions: the regulation and control of all banks in India, and to be the banker to the then government. 

Since its nationalization in 1949, RBI has been wholly owned by the Government of India and thus, some new roles were added to the list of functions of RBI!

Now, let us look at some of the important functions of RBI.

Important Functions of RBI (Reserve Bank of India)

Being a central bank of India, RBI serves a critical role in regulating the financial transactions in the country. Some of the important functions of RBI are listed below:

Issue of Bank Notes

Banker to the Government

Custodian of the Cash Reserves of Commercial Banks

Custodian of country’s forex reserves

Lender of last resort

Controller of credit

Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often as an attempt to reduce inflation or the interest rate, to ensure price stability and general trust of the value and stability of the nation’s currency.[1][2][3]

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Detail from the mural “Government” by Elihu Vedder in the Library of Congress

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Monetary policy is a modification of the supply of money, i.e. “printing” more money, or decreasing the money supply by changing interest rates or removing excess reserves. This is in contrast to fiscal policy, which relies on taxation, government spending, and government borrowing[4] as methods for a government to manage business cycle phenomena such as recessions.

Further purposes of a monetary policy are usually to contribute to the stability of gross domestic product, to achieve and maintain low unemployment, and to maintain predictable exchange rates with other currencies.