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MAIN FUNCTIONS OF THE RESERVE BANK OF INDIA The RBI, like any other central bank, performs almost all traditional central banking functions. But, due ti the specific nature of the country’s underdeveloped economy it has undertaken some development and promotional functions also. First we shall explain its general central banking functions. General Central Banking Functions Since the RBI was established on the model of the Bank of England, its general banking functions are very much similar to those of Bank of England. These functions are as follows: 1. Issues of currency notes. Like any other central bank the RBI has sole right to issue currency notes. Under the original Act, there was provision for issuing currency notes according to the proportional reserve system. This system being relatively less elastic, was not suited to the requirements of development planning. Thus the original Act was amended and the proportional reserve system of note issue was replaced by the minimum reserve system. According to the RBI (Amendment) Act, 1957 a minimum gold and foreign exchange reserve was to be of Rs.200 crore. Valve of gold was not to be at any time less than Rs115 crore. This provision released a large amount of foreign exchange which was earlier kept as part of reserve. Following the policy of other central banks the RBI ( Amendment) Act, 1957, empowered the RBI to dispense with the entire holding of foreign securities with the prior sanction of the central government. There is a division of work between the issue and the Banking Departments of the RBI in respect of note issue. Currency notes are being issue by the Issue Department on the basis of demand made by the Banking Department while making demand for currency notes has to transfer government or other approved securities to the Issue Department. 2. Banker to the government. The RBI renders useful service to the government in the capacity of its banker,agent and adviser. The RBI has the obligation to transact the banking business of the central and the state government. Thus it accepts money on account of these governments makes payment on their behalf and carries out other banking operations such as their exchange and remittances. It also undertakes the management of public debt and is responsible for the issue of new loans. For ensuring the success of the loan operations it actively operates in the gilt-edged market. The RBI has intimate knowledge of the financial market and thus offers useful advice to the government on the quantum and terms of new loans. Since the Treasury bill market is very narrow, selling of Treasury bill on behalf of the government is relatively a less important function of the RBI, the RBI is authorized to make ways and means advances to the government. These short term loans are repayable within 90 days from the state of advance. Since the discharge of this function involves receipts and payments on behalf of both Central and the State government and not only in the capital cities, but also in many other towns, it has appointed the State Bank Of India as its sole agent for transacting government business.

The need for coordination between the monetary and fiscal policies is now geing universal recogned. As such, central bank’s function as the adviser to the government has assumed new significance.prior to the beginning of economic planning in india the RBI’s role as the adviser to the government was rather limited. The position has, hawever, changed over the last decades. The range of the advisory function of the RBI is now quite extensive. “ like all Central banks, the Bank(RBI) act as adviser to the government not only on policies concerning banking and financial matters but also on a wide range of economic issues including those in the field of planning and resource mobilization. It has of course a special responsibility in respect of financial policies and measures concerning new loans, agricultural finances and legislation affecting banking and credit. The Bank’s (RBI’S) advice is sought on certain aspects of formulation of the country’s Five Year Plans such as the financial pattern, mobilization of resources and institutional arrangements with regard to banking and credit matter.’’ 3. Banker’s bank. The RBI has been vested with extensive powers to control commercial banking system under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. According to the Banking Regulation Act, 1949, all banking companies included in the second scheduled banks. For inclusion in the Second Schedule a bank must satisfy the RBI that the affairs are not conducted in a manner detrimental to the interests of its depositors. All scheduled banks are under a statutory obligation to maintain a certain minimum of cash reserve ( to be decided by the RBI) with the RBI against their demand and time liabilities. An amendment of 1962 to the Banking Regulation Act has empowered the RBI to determine the Cash Reserve Ratio (CRR) between 3 per cent and 15 pr cent of aggregate demand and time liabilities. Apart from this statutory control over the commercial banks, the RBI can also direct the scheduled banks to maintain 100 per cent caash reserve against all deposits received after a specific date. Further, the scheduled banks are required to submit weekly statements of their transactions to the RBI.