To someone unaware of the nuances of the Indian economic and financial system, they may know that the RBI is an important entity but may be unaware of what it does. What is the role of the RBI in the Indian Economy? What purpose does it serve to warrant such a position of importance and significance?
The economy of India is a complex and Intriguing entity. It has many different elements and entities that contribute to its growth and development. This includes the consumers and sellers, corporate entities and private banks. But one of the most important aspects of the Indian economy is The RBI or The Reserve Bank of India. Many would have come across this acronym on the many currency notes in this country or often in the finance section of the newspapers they have read.
Structure of the RBI:
The Reserve Bank of India is the Central bank of India and a regulatory body for India. Established in 1935, and initially was a private entity. It was nationalised after Indian independence and since then is fully owned by the Ministry of Finance.
The main committee of the Central bank is the Central Board of Directors. These are appointed by the Government of India for a four-year term. The board comprises one Governor, and 4 Deputy Governors and 4 Directors to represent the regional boards.
What is the Role of the RBI in the Indian Economy:
The role of RBI in the Indian economy cannot be underestimated. It is the entity representing the Government of India in Domestic and International Economic Circles. The Central bank of any country has many fundamental roles. The goal of any such organisation is to secure and establish a secure, stable economy that can grow. Profit is not the primary motive of the RBI and it aims to nurture and grow the Indian economy. All its roles and functions are directed towards that effort. These roles and functions are the following:
Supervision of the Finance Sector
This can be considered the primary role of the RBI in the Indian economy. It is a body that supervises various aspects of the financial sector such as Commercial banks, financial institutes. The various non-banking Finance companies and organizations also come under this umbrella. It conducts inspections and audits organizations to keep its fingers on the pulse of the Indian economy. Supervision of the Financial Sector is important, as it allows the organization to forecast the direction of the Indian economy in the near future.
Regulation of the Financial System
One of the roles of the RBI is to regulate and supervise various financial systems. It makes very important decisions regarding the parameters of the Banking operations of all banks in the country. It directs the functioning of all banks in a very broad sense. One of its main objectives is to maintain the confidence of the public in the banking systems of India. It also aims to protect the interests of those who deposit money with banks. It also seeks to provide cost-effective banking to the public of India. The RBI controls the monetary supply and monitors economic indicators like the GDP.
Regulator of Payment Systems
Regulation of Payment systems is another one of the important roles of the RBI, as it improves the overall economic efficiency. The RBI focuses on making certain that the functioning of these payment systems is safe and efficient. These functions are the ones that allow individuals and companies to transfer funds from one bank to another, without any hassle or extensive effort.
Banker to the Government
This is one of the most important roles of RBI in the developing Indian economy. It acts as a bank to carry out various financial transactions efficiently. As a bank to the government of India, it maintains its accounts. It receives and makes payments out of these very accounts. The RBI also aids the government of India to raise money from the public in the form of Bonds and Government approved securities. It issues Taxable bonds for Investments and the interest on these bonds are payable semi-annually.
Management of Foreign Currency
The RBI is also responsible for the management of foreign currency. This role of RBI in the Indian economy is significant as it facilitates external trade and payment. This is to promote foreign investment and the stability of the foreign exchange market in India. There has been an increasing integration of the Indian economy with the global economy, hence this function of the RBI grows more and more important. RBI maintains the forex and gold and forex reserves of the nation.
Issue of Currency
The RBI is the only entity authorised to issue banknotes in India. It is also responsible for destroying banknotes when they are of low quality and no longer fit for circulation. All the banknotes issued by the central bank are their liability. This means that they are obligated to back the currency with assets of equal value. This helps in increasing the confidence of the public in paper currency. The RBI issues currency intending to maintain a steady supply of good quality banknotes in circulation and to maintain the reserves on the Indian economy. This role of the RBI in the Indian economy aids in the stabilization and maintenance of the country’s financial systems.
The Reserve Bank also functions as the central bank of India. This means all commercial banks are account holders in the RBI. It maintains accounts for commercial and scheduled banks. It allows them to create credit. It is the responsibility of the RBI to control credit, through systems of repo rate and open market operations. It facilitates the clearing of cheques between banks and helps transfer funds between different banks. One of its extremely important functions is to be the Lender of Last resort. Under the circumstance that the bank loses public trust, and the population seeks their funds from the bank. The RBI will lend emergency reserves so that the bank can make the necessary payments.
Regulator of the banking system
Supervision and regulation of the Indian economy is the primary role of the RBI, this also includes the banking systems of the country. It ensures financial stability and public confidence in the banking systems of India. It creates policies and controls the various little aspects of the Country’s economy to take the correct steps in dealing with inflation or depression. It also conducts onsite inspections and periodic meetings to supervise new bank licences. It sets up capital requirements and regulates interest’s rates.
The role of the RBI in Developing the Indian economy is very significant. It promotes various national objectives and lends support to numerous Industries. It also faces several local inflation based problems and it attempts to resolve them. Some of these problems are the direct result of the dominant part of the public sector. To fulfil this role, the RBI makes use of numerous tools. These are Public Sector lending, which is lending to agriculture, micro and small enterprises, housing and education. RBI also strengthens smaller, local banks and encourages banks to open branches in the rural areas of the country. That allows a large section of society an opportunity to be involved in the banking net.
These are some of the many roles of RBI in Indian economy. It is an organization that plays a very important role in the Indian economic sphere. Its influence and importance should not be understated. It is an organization dedicated to supporting the growth of the country and the people within it. The RBI is the backbone of the Indian economic structure, and its functions ensure the progress of the country in domestic and international economic affairs. We hope this has given some insight into what is the role of RBI in Indian Economy.