The important central banking functions of reserve bank of India are:
1. Issue of Paper Currency:
Reserve Bank of India has the monopoly right of Note-Issue. It issues notes of the denomination of Rs. 2, 5,10, 20, 50,100 and 500. The bank has its separate department for note issuing. This is known as Issue Department. In accordance with the Reserve Bank of India Act, this bank is required to maintain Reserve Fund for note-issuing.
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This is to maintain confidence of the people in the country’s currency. Since 1956, note- issuing is based on Minimum Reserve System. Presently, a Minimum Reserve of Rs. 200 crores is to be maintained for issuing-notes upto any limit. This comprises of Gold worth Rs. 115 crores and foreign securities worth Rs. 85 crores.
2. Regulation of Credit:
Regulation of credit implies control over the credit policy of the commercial banks. Being the Central Bank, the Reserve Bank controls the creation of credit by the Commercial Banks. According to the Reserve Bank of India Act, this bank can adopt several measures to control credit creation, viz, changing the Bank Rate, Open market operations, change in the Reserve Requirement of the Commercial Banks etc. Reserve Bank also controls the loan policy, interest policy and investment policy of the Commercial banks.
3. Bank of Banks:
Being the Central Bank, Reserve Bank of India is the bank of all the Banks in the country. In this context the Reserve Bank acts as a guide of the Commercial Banks, besides controlling and regulating their affairs. During times of emergency, it is lender of the last resort for the Commercial Banks.
That is, it gives loans to the Commercial Banks during times of emergency. Banking Companies Act, (1949), has conferred various rights on the Reserve Bank, such as to issue Licenses to the banks regulate the number and branches of commercial banks, examine the plans and accord sanctions for the merger of banks, obtain reports from the banks, examine the credit policy of the banks and give advice and suggestions.
4. Banker of the Government:
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Reserve Bank is the banker of the Central and State Government. All banking functions of the Government are handled by the Reserve Bank of India.
Thus,
(i) The Reserve Bank keeps cash balances of the Central and State Governments and makes payment out of these balances on the advice of the Government. No interest is paid to the Government on these balances.
(ii) The bank arranges public loans for the Governments.
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(iii) It sells and purchases 5 Government securities.
(iv) It also sells Treasury Bills on behalf of the Government by issuing Tenders.
(v) The bank also gives loans to the Government. It is called Ways and Means Advances. These loans are returned within 90 days.
(vi) On the basis of experience of the monetary system, the bank advices the Government on the monetary and economic policies.
(vii)Reserve Bank also has the right to function on behalf of foreign Governments.
(viii) The Bank functions for the success of monetary and economic policies of the Government.
5. Regulation of Foreign Exchange:
Being the Central Bank of the Country, Reserve Bank of India also regulates exchange rate of rupee in terms of foreign currencies. It tries to maintain stability of exchange rate. For this, the Reserve Bank deals in foreign exchange only at fixed rates right from the beginning.
Earlier, entire business of foreign exchange was done through the medium of sterling. But after India became member of the International Monetary Fund in 1947, Sterling System was given up in favour of the IMF system of exchange. Reserve Bank deals in the currencies of those countries only which are members of IMF.
6. Other Functions:
Besides the above stated specific functions, the Reserve Bank of India performs the following other functions:
(i) Export Assistance:
Reserve Bank gives loans to the Export industries. These loans are given directly as well as indirectly by refinancing the loans given by other banks.
(ii) Clearing House Functions:
Being Central Bank of the country, the Reserve Bank also functions as Clearing House. Inter-banking obligations are conveniently settled through this house.
(iii) Change of Currency:
The bank changes big notes into small ones and small notes into coins.
(iv) Transfer of Currency:
The bank also facilitates the transfer of currency. It also issues Demand Hundies on its branches.
(v) Publication of Statistics and Other Information:
Reserve Bank publishes data on various parameters, such as money, credit, finance, agricultural and industrial output. Reports on these data are also periodically published.
(vi) Training in Banking:
The Reserve Bank has opened various Training Centres to produce talented bankers:
(a) Bankers Training College
(b) College of Agricultural Banking, Pune
(c) Reserve Bank Staff College, Chennai
(d) National Institute of Bank Management
(e) Zonal Training Centres.
7. Supervisory Functions:
The Reserve Bank performs certain non- monetary functions of the nature of supervision of banks and promotion of efficient banking in India. The Reserve Bank has been given wide powers of supervision and control over commercial, co-operative and regional banks. The various aspects of supervisory functions are as follows:
(i) No bank can be established in India without obtaining a licence from Reserve Bank.
(ii) The Reserve bank supervises branch expansion, liquidity of the assets, management, amalgamation and liquidation of the banking institutions in India.
(iii) An inspection directorate has been established in 1995 to make vigorous inspection of the working of the banking institutions.
(iv) The nationalised banks and regional rural banks are directly controlled and supervised by the Reserve Bank.