▶ Monetary Authority :
The RBI is the sole authority to formulate monetary authority. Monetary policy refers to the use of instruments under the control of central bank to regulate the availability, cost and use of money and credit. The goal of monetary policy is achieving specific economic objectives such as low and stable inflation and promoting high economic growth.
The RBI Governor announces annual Monetary Policy Report in April every year for the financial year ending in the following March. This is followed by six bi-monthly Monetary Policy Report in April, June, August, October, December and February every year.
The objectives of the monetary policy of India, as stated by RBI, are:
◉ Maintaining Price Stability
Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.
◉ Controlling Expansion Of Bank Credit
One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without
affecting the output.
◉ Promotion of Fixed Investment
The aim here is to increase the productivity of investment by restraining non essential fixed investment.
◉ Restriction of Inventories and stocks
Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness of the unit. To avoid this problem the central monetary authority carries out this essential function.
◉ Promoting Efficiency
It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.
◉ Reducing the Rigidity
RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.
◉ Instruments uses by RBI
The Reserve Bank of India traditionally relied on direct instruments of monetary control like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR).
In the late 1990s, the Reserve Bank of India restructured its operating framework for monetary policy to rely more on indirect instruments like Open Market Operations (OMOs). In the early 2000s, the Reserve Bank instituted Liquidity Adjustment Facility (LAF) to manage day-to-day liquidity in the banking system.
The repo rate (at which liquidity is injected) and reverse repo rate (at which liquidity is absorbed) have emerged as the main instruments for the Reserve Bank of India’s interest rate control in Indian Economy. The Reserve Bank of India’s instruments to manage liquidity was strengthened in April 2004 with the introduction of Market Stabilization Scheme (MSS). MSS securities are issued with the objective of providing the RBI with a stock of securities with which it can intervene in the market for managing liquidity.
The recent legislative amendments to the Reserve Bank of India Act, 1934 enable a flexible use of CRR for monetary management, without being constrained by a ceiling on the level of CRR. The amendments to the Banking Regulation Act, 1949 also provide further flexibility in liquidity management by enabling the Reserve Bank of India to lower the SLR to levels below the pre-amendment statutory minimum of 25% of net demand and time liabilities (NDTL) of banks.
▶ Issuer of currency :
The bank issues and exchanges currency notes and coins and destroys the same when they are not fit for circulation. The Reserve Bank of India’s responsibilities are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves.
RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.
For printing of notes, the Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the Government of India, has set up printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of the Reserve Bank of India, also has set up printing presses at Mysuru in Karnataka and Salboni in West Bengal.
In all, there are four printing presses. And for minting of coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata and Hyderabad for coin production.
▶ Banker to the Government :
Like individuals, businesses and banks, governments need a banker to execute their financial transactions in an effective manner. As a banker to the central government, the Reserve Bank of India maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds.
The Reserve Bank of India also acts as the banker to those state governments that have entered into an agreement with RBI. At present, the Reserve Bank acts as banker to all the State Governments in India, except Jammu and Kashmir.
In 2011, the Reserve Bank of India entered into an agreement with the Jammu & Kashmir government to undertake its general banking business and act as the sole agent for investment.
As a banker to the Government, the Reserve Bank of India receives and pays money on behalf of the various Government Departments. The Reserve Bank of India has offices in 27 locations. In addition to these offices, the Reserve Bank of India appoints other banks to act as its agents for undertaking the banking business on behalf of the governments.
The Central Government and State Governments may make rules for the receipt, custody and disbursement ot money from the consolidated fund, contingency fund and public account. These rules are legally binding on RBI.
The Central Government is empowered to borrow through treasury bills any amount it likes from the RBI.
The RBI provides short-term advances to state governments called Ways and Means advanves. But the state government are not empowered to borrow any amount they like from the RBI. Besides Ways and Means advances, the RBI also gives loans to state governments from its ‘national funds’ for the development of agriculture.
The Reserve Bank of India also acts as adviser to the government, whenever called upon to do so, on monetary and banking related matters.
▶ Banker of Banks :
RBI also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks.
Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations.
As banker’s bank, the RBI facilitates the clearing of cheques between the commercial banks and helps inter-bank transfer of funds.
It can grant financial accommodation to schedule banks.
It acts as the lender of the last resort by providing emergency advances to the banks.
It supervises the functioning of the commercial banks and take action against it if need arises.
▶ Foreign Exchange Manager :
The Reserve Bank of India acts as the custodian of the country’s foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India’s membership of the IMF. Exchange control was first imposed in India in September 1939 at the outbreak of World War II and has been continued since.
The basic parameters of the Reserve Bank of India’s policy for foreign exchange management are safety, liquidity and returns.
The Reserve Bank of India oversees the foreign exchange market in India. It supervises and regulates it through the provisions of the Foreign Exchange Management Act (FEMA), 1999. The statutory power for exchange control was provided by the Foreign Exchange Regulation Act (FERA), 1947. This act was subsequently replaced by a more comprehensive Foreign Exchange Regulation Act (FERA), 1973.
FERA, 1973 empowered the Reserve Bank of India to control and regulate dealings in foreign exchange payments outside India, export and import of currency notes and bullion, transfer of securities between residents and non-residents, acquisition of foreign securities and acquisition of immovable property in and outside India.
▶ Controller of Credit :
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It does so through changing the bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank of India.
The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get licence from the RBI to do banking business within India. The licence can be cancelled by the RBI if certain stipulated conditions are not fulfilled.
As supreme authority in the country, the RBI has the following powers :
● It holds the cash reserves of all the scheduled commercial banks.
● It controls credit operations of banks.
● It controls the banking system through the system of licencing , inspection and calling for information.
● It acts as the lender of last resort by providing rediscount facilities to scheduled banks.
▶ Supervisory Fonctions :
In addition to its traditional central banking functions, the Reserve Bank of India has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks. The RBI achieves this through on-site inspection, off-site surveillance and periodic meetings with top management of the banks.
◉ On-site Inspection :
The Reserve Bank of India undertakes annual on-site inspection of banks to assess their financial health and their performance in terms of quality of management, capital adequacy, asset quality, earning, amalgamation, branch expansion, liquidity position as well as internal control systems.
◉ Off-site Surveillance :
Under RBI’s Off-site Surveillance and Monitoring System, Banks are required to submit detailed and structured information to RBI in a periodic manner. The RBI makes through analysis of this information to assess the health of individual banks.