Detailed RBI Notes for Exams

Introduction to RBI

The Reserve Bank of India (RBI) is the central bank of India established under the Reserve Bank of India Act, 1934. It
started functioning on 1 April 1935. RBI controls the banking and monetary system of India. It regulates money supply,
maintains price stability, supervises banks, and ensures financial stability in the country. The RBI plays a very
important role in the economic development of India. It acts as: • Banker to the Government
• Banker to Banks
• Lender of Last Resort
• Controller of Credit
• Custodian of Foreign Exchange Reserves

Broad Functions of RBI

The important functions of RBI are: • Issue and management of currency

• Banker to the Government
• Banker to the Banks
• Lender of Last Resort
• Loans and Advances
• Monetary Policy Functions
• Foreign Exchange Management
• Regulation and Supervision of Banks and NBFCs
• Public Debt Management
• Payment and Settlement Functions
• Financial Inclusion and Consumer Protection

1. Issue and Management of Currency

One of the primary functions of RBI is to issue and manage currency notes. Under Section 22 of the RBI Act, 1934,
RBI has the sole right to issue bank notes in India. However: • ■1 notes and coins are issued by the Government of
India.
• All other bank notes are issued by RBI. Currency notes are issued through the Issue Department of RBI, which is
separate from the Banking Department. Functions of RBI in currency management: • Printing and circulation of
currency notes.
• Maintaining adequate supply of currency in the economy.
• Removing torn, damaged, and fake notes from circulation.
• Supplying fresh and genuine notes.
• Managing currency chests and distribution channels. Every RBI note is legal tender and must be accepted as money
throughout India. RBI also maintains reserves such as gold and foreign securities to support the issue of currency
notes.

2. Banker to the Government

Under Section 20 of the RBI Act, RBI acts as banker, agent, and financial advisor to the Central Government. RBI
also performs banking functions for State Governments. Functions: • Accepts deposits and government money.
• Makes payments on behalf of the Government.
• Manages public debt and government borrowings.
• Handles treasury bills and government securities.
• Advises the Government on banking and economic matters.
• Maintains Consolidated Fund of India, Contingency Fund, and Public Accounts. RBI receives commission for
managing public debt functions.

3. Banker to the Banks

RBI is known as the “banker’s bank” because commercial banks maintain accounts with RBI. Scheduled banks are
required to maintain reserves with RBI under Section 42 of the RBI Act. Functions: • Maintenance of cash reserves of
banks.
• Transfer and settlement of inter-bank transactions.
• Providing loans and financial assistance to banks.
• Acting as clearing house for banks.
• Operating systems such as RTGS, e-Kuber, and CFMS. This function helps maintain stability and confidence in the
banking system.

4. Lender of Last Resort

When banks face shortage of funds and cannot obtain money from other sources, they approach RBI. Therefore, RBI
is called the “Lender of Last Resort.” RBI provides: • Emergency loans and advances.
• Rediscounting of eligible bills.
• Financial accommodation during crises. Bills rediscounted by RBI include: • Commercial bills
• Agricultural bills
• Bills related to small-scale industries
• Bills connected with Government securities
• Foreign bills This function prevents bank failures and protects the banking system.

5. Loans and Advances

RBI grants short-term loans and advances to: • Scheduled Banks

• State Co-operative Banks
• State Financial Corporations These loans are generally repayable within 90 days. Loans are granted against: • Gold
and silver
• Government securities
• Bills of exchange
• Promissory notes
• Agricultural and trade documents These loans help banks maintain liquidity and continue lending activities.

6. Emergency Advances

Under Section 18 of the RBI Act, RBI grants emergency advances during special situations or financial crises.
Features: • Loans are provided to maintain credit stability.
• RBI may provide loans against securities not normally accepted.
• Emergency loans help protect trade, commerce, agriculture, and industries.
• Such advances are usually repayable within 90 days. Emergency advances help maintain financial stability in the
country.

Credit Control Function of RBI

Credit control means controlling the supply of money and loans in the economy. RBI supervises the credit granted by
commercial banks and controls money supply according to economic conditions. Objectives of Credit Control: •
Maintain proper liquidity in the economy.
• Control inflation and deflation.
• Maintain stability in currency and money market.
• Meet financial needs during economic downturns.
• Control business cycles and economic fluctuations.

Cash Reserve Ratio (CRR)

CRR is the percentage of deposits that commercial banks must keep with RBI as reserve. Banks cannot use this
money for lending. During inflation: • RBI increases CRR.
• Banks have less money to lend.
• Money supply decreases. During recession or deflation: • RBI decreases CRR.
• Banks can lend more money.
• Money supply increases. CRR helps RBI control liquidity and inflation.

Statutory Liquidity Ratio (SLR)

SLR is the percentage of deposits banks must maintain in the form of liquid assets such as: • Cash
• Gold
• Government securities Purpose of SLR: • Ensure liquidity and solvency of banks.
• Control excessive credit creation. During inflation: • RBI increases SLR to reduce lending. During recession: • RBI
decreases SLR to increase lending and economic activity.

Foreign Exchange Management

Under the Foreign Exchange Management Act, 1999 (FEMA), RBI manages foreign exchange reserves and external
payments. Functions: • Custodian of foreign exchange reserves.
• Regulation of foreign exchange market.
• Management of external trade payments.
• Maintaining stability in foreign exchange market.

Banking Functions of RBI

RBI performs various banking activities such as: • Accepting deposits from Central and State Governments.
• Purchase, sale, and rediscount of bills of exchange.
• Granting short-term loans and advances to banks.
• Purchase and sale of Government securities.
• Dealing in derivatives.
• Issue of bank notes. RBI also acts as: • Banker to Government
• Banker to Banks
• Lender of Last Resort

Business Which RBI Cannot Do

RBI cannot: • Purchase shares of banking companies or other companies.

• Grant loans against immovable property.
• Engage directly in trade or commercial business.
• Pay interest on current accounts or deposits.
• Draw or accept bills payable otherwise than on demand.

Regulation and Supervision of NBFCs

Regulation of Non-Banking Financial Companies (NBFCs) is an important function of RBI. Every NBFC must register
with RBI under Section 45-IA of RBI Act, 1934. RBI has powers to: • Regulate deposits accepted by NBFCs.
• Prohibit misleading advertisements.
• Inspect NBFCs.
• Issue directions and policies.
• Call for information from NBFCs.

Right to Issue Bank Notes

The Paper Currency Act, 1861 gave the Government of India monopoly power to issue currency notes. From 1861 to
1935, the Government managed paper currency. When RBI started functioning in 1935, it took over the function of
note issue. Today, RBI and Government together manage: • Design of notes
• Printing of notes
• Security features
• Prevention of counterfeiting

Monetary Policy

Monetary policy means the policy adopted by RBI to control money supply and credit in the economy. The RBI is
responsible for implementing monetary policy under the RBI Act, 1934. Objectives of Monetary Policy: • Maintain price
stability.
• Control inflation.
• Promote economic growth.
• Ensure financial stability. Price stability is essential for sustainable economic growth.
Conclusion

The Reserve Bank of India is the backbone of India’s financial and banking system. RBI controls money supply,
regulates banks, maintains price stability, manages foreign exchange, and supports economic growth. Through its
various functions, RBI ensures financial stability, public confidence, and smooth functioning of the economy.