Roles and responsibilities of RBI

Reserve Bank of India (RBI) is constituted as the apex institution of Indian monetary system and financial system.  RBI  is responsible for implementation of monetary policy to control and ensure stability of the monetary and banking system. It has to achieve growth with price stability. The roles and responsibilities of the Reserve Bank are summarized below:

Monetary Authority: RBI is responsible for formulation, implementation and monitoring of  the monetary policy. As per the Inflation Target process to be followed by RBI under Monetary Policy frame work, RBI has to ensure that the Consumer Price Inflation  remains at 4%  with + or – 2%. Thus RBI is mandated to ensure that the Consumer Price Inflation remains within the upper band of 6% and lower band of 2%. The mandate is for five years till March 31, 2021.  

Regulator and supervisor of the financial system: RBI defines the broad parameters of banking operations within which banks and financial institutions are expected to operate.  Through this activity,  RBI ensures public confidence in banking system, protect depositor’s interest and provide cost effective banking services to the public. It carries out audits of the banks to ensure compliance of guidelines. Presently, RBI is following Risk Based Audit for banks.  

Manager of Foreign Exchange: RBI is the official reservoir of gold and foreign currencies in the country. It frames policies to ensure proper maintenance of Balance of Payment position to stabilize internal and external value of the currency. RBI intervenes in market to maintain the exchange value of Rupee in relation to other currencies. Safety and liquidity are the twin objectives of this intervention. Through its policies, it encourages international trade, FDI and FII. 

Issuer of Currency: RBI is the authority for issuance of currency notes in the country, except Rupee one and coin which are issued by Ministry of Finance. The currencies issued as such have legal tender status. In issuance of currency notes, RBI has adopted Minimum Reserve System. In this system, RBI is required to maintain Rupees 115 crore in gold and Rupees 85 crore in foreign securities. There is no upper ceiling for issue of currency notes after keeping the minimum reserve of Rupees 200 crore. Thus, RBI ensures elasticity to the monetary system, controls the supply of money and stabilizes monetary system by controlling the currency note issuance. 

Banker, Fiscal Agent and Adviser to the Government: RBI is the custodian of government’s money and wealth as it keeps the deposits of state and central governments and makes payments on their behalf. Being the fiscal agent of government,  RBI issues bonds and Treasury bills on behalf of the government. It floats loans, pays interest and repays the amount on behalf of government. It also acts as advisor to  the government on economic and money matters such as inflation, deflation, devaluation or revaluation of currency, balance of payments, deficit financing, financial crisis etc. 

Custodian of cash reserves of banks: Reserve Bank of India decides the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to be maintained by Indian commercial banks. These rates are utilized by RBI to control inflation and deflation. Currency chests are established by RBI to facilitate cash remittance by banks. 

Lender of last resort: RBI acts as the lender of last resort by granting accommodation to commercial banks and others in the form of collateral advances and re-discounts. This facility can be availed of by banks at bank rate and commercial rate. 

Bank of central clearance: RBI acts as the clearing agent for banks to facilitate clearing of cheques and settle mutual claims. Clearing houses are maintained for these purposes. RBI also acts as the regulator of various payment systems and  paymentt cards  linked to digital banking.   

The overall responsibilities of RBI can be consolidated as
a.    Protecting the interests of customers
b.    Orderly development and conduct of the banking operations
c.    Fostering the health of the banking system and
d.    Ensuring financial stability