Functions of the Reserve Bank of India (RBI)

1. Monopoly of Note Issue: 

          Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to 
issue bank notes of all denomination. The distribution of one rupee notes and 
coins and small coins all over the country is undertaken by the Reserve Bank 
as agent of the Government. The Reserve Bank has a separate Issue Department 
which is entrusted with the issue of currency notes. The Reserve Bank of India is 
required to maintain gold and foreign exchange reserves of Rs. 200 crores, of 
which at least Rs. 115 crores should be in gold. The system as it exists today 
is known as the Minimum Reserve System.

 2. Banker to the Government: 

          The Reserve Bank of India serves as a banker to the Central Government 
and the State Governments. It is its obligatory function as a central bank. It 
provides a full range of banking services to these Governments, such as:

       (a) Maintaining and operating of deposit accounts of the Central and State 
Government.

       (b) Receipts and collection of payments to the Central and State Government.

       (c) Making payments on behalf of the Central and State Government.

       (d) Transfer of funds and remittance facilities of the Central and State 
Governments.

       (e) Managing the public debt and issue of new loans and Treasury Bills of 
the Central Government.

       (f) Providing ways and means advances to the Central and State governments 
to bridge the interval between expenditure and flow of receipts of revenue.

       (g) Advising the Central/State governments on financial matters, such as the 
quantum, timing and terms of issue of new loans. For ensuring the success of 
government loan operations, the RBI plays an active role in the gilt-edged market. 

       (h) The bank also tenders advice to the government on policies concerning 
banking and financial issues, planning as resource mobilisation. The Government 
of India consults the Reserve Bank on certain aspects of formulation of the 
country’s Five Year Plans.

             (i) The Reserve Bank represents the Government of India as member of the 
International Monetary Fund and World Bank.

 3. Banker’s Bank: 

          The Reserve Bank has the right of controlling the activities of the banks in 
the country. All the commercial banks, co-operative banks and foreign banks in 
the country have to open accounts with the bank and are required to keep a certain 
portion of their deposits as reserves with the Reserve Bank.

 4. Lender of the Last Resort: 

          The scheduled banks can borrow from the Reserve Bank on the basis of 
eligible securities. They can also get the bills of exchange rediscounted. The 
Reserve Bank acts as the clearing house of all the banks. It adjusts the debits and 
credits of various banks by merely passing the book entries.

5. Credit Control: 

          the Reserve Bank of India is the controller of credit, i.e., it has the power 
to influence the volume of credit created by bank in India. It can do so through 
changing the bank rate or through open market operation. The Reserve Bank of 
India is armed with many more powers to control the Indian money market.

          Every bank has to get a licence from the Reserve Bank of India to do 
banking business within India. The licence can be cancelled by the Reserve Bank
 if certain stipulated conditions are not fulfilled. Every bank will have to get the 
permission of the Reserve Bank before it can open a new branch. Each scheduled 
bank must send a weekly return to the Reserve Bank showing, in detail, its 
assets and liabilities. This power of the bank to call for information is also intended
 to give it effective control of the credit system. The Reserve Bank has also the 
power to inspect the accounts of any commercial bank.

          As supreme banking authority in the country, the Reserve Bank of India, 
therefore, has the following powers:

 (a) It holds the cash reserves of all the scheduled bank.

(b) It controls the credit operation of banks through quantitative and qualitative 
controls. 

(c) It controls the banking system through the system of licensing, inspection 
and calling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities to 
scheduled banks.

6. Custodian of  Foreign Exchange Reserves: 

          The Reserve Bank has the responsibility of maintaining the external value 
of the rupee. There is centralisation of the entire foreign exchange reserves of the 
country with the Reserve Bank to avoid fluctuations in the exchange rate.The RBI 
has the authority to enter into foreign exchange transactions both on its own 
account and on behalf of government. The bank is also empowered to buy and sell 
foreign exchange from and to scheduled banks in amounts of not less than the
 equivalent of Rs. 1 lakh.