Roles And Functions Of Central Bank

Reserve Bank of India, acting as an apex court of the centre, enjoys vast power and functions as per the banking mechanism in India. It has control over the issue of banknotes and the monetary arrangement of the country. These influences and purposes as to the issue of banknotes and currency systems are administered by the Reserve Bank of India Act, 1934. Moreover, the Banking Regulation Act of 1949 authorises specific power and roles to the Reserve Bank.

Main Operations of RBI 

The main operations are those roles that each central bank of every nation executes throughout the world. Fundamentally, these operations are in alliance with the purposes with which the bank is instituted. It comprises the primary operations of the Central Bank. They include the following:

• Issuing the Currency Notes: Only the RBI contains the right or power or control to issue currency notes excluding notes of one rupee and smaller denomination coins. These currency notes are lawful tender that the RBI issues. At present, they contain denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 2,000. The RBI further has authority to issue and withdraw and also to switch these currency notes for different denominations. RBI further issues such notes with consonance to the security of gold bullion, rupee coins, foreign securities, exchange bills, the government of India bonds, and promissory notes.

• Banker to commercial Banks: The central bank acting as an apex institution has compulsory powers to direct, help and control other commercial banks in the nation. The RBI has the power to manage the bank’s reserves and permit other banks in generating credit in the appropriate proportion. Each commercial bank is obligated to sustain a fraction of the reserves with its parent, viz., the RBI. Likewise, in requirement or necessity, these banks advance the RBI. Therefore, it is known to be the lender of the last resort.

• Acting as Banker for the Government: The Central Bank operating as the apex body, is required to operate as an agent of both the state and central government. It executes different banking functions, for instance, admitting deposits, taxes and extending payments representing the government. It sustains government accounts, giving financial counsel to the government. It administers public debts of the government and upholds reserves of foreign exchange in the representation of the government. It gives a facility of overdraft to the government when it faces a financial crisis.

• Exchange Rate Management: It is a necessary function of the RBI. To sustain constancy in the outer value of the rupee, it has to organise domestic policies in that course. Moreover, it needs to arrange and execute the foreign exchange rate policy, which will aid in achieving the exchange rate constancy. To sustain the exchange rate stability, it has to get demand and supply of the foreign currency (U.S Dollar) near to each other.

• Credit Control Function: Commercial banks in the country generate credit as per the demand in the economy. Although if this credit creation is unconstrained or free, then it escorts the economy into inflationary cycles. If credit creation is under the required limit, then it damages the development of the economy. As a central bank of the nation, the RBI has to look for expansion with price constancy. Therefore, it controls the credit creation ability of commercial banks by employing different credit control tools.

•  Supervisory Function: The RBI has been bestowed with enormous powers for administering the banking mechanism in the nation. It has the authority to issue a licence for instituting new banks, start new branches, choose minimum reserves, examine the performance of commercial banks in India and abroad, and direct and guide the commercial banks in India. It could have periodical examinations and audits of the commercial banks in India

Supervisory Functions of RBI 

The reserve bank also performs several supervisory functions. It has the power to control and manage the whole banking and financial system. A few of its supervisory functions are given below.

1. Granting a licence to banks: The RBI gives licence to banks for executing their business. Licence is as well given for starting extension counters, new branches, even to shut down current branches.
2. Bank Inspection: The RBI gives licence to banks functioning as per the directives and in a discreet manner without excessive risk. Additionally, it can inquire for periodical information from banks on different constituents of assets and liabilities.
3. Control over NBFIs: The Non-Bank Financial Institutions are not affected by the functioning of a monetary policy. Though, RBI has the power to issue directives to the NBFIs from time to time concerning their operation. Through periodic examinations, it can manage the NBFIs.
4. Implementation of the Deposit Insurance Scheme: The RBI has instituted the Deposit Insurance Guarantee Corporation to defend the deposits of small depositors. All bank deposits under Rs. One lakh are insured through this corporation. The RBI operates to execute the Deposit Insurance Scheme in case of a bank breakdown.

Conclusion

Central banks are in charge of supervising the monetary system for a country (or group of countries), along with a broad range of other responsibilities, from supervising monetary policy to executing specific goals, for instance, currency stability, low inflation, and full employment. The position of the central bank has developed in significance in the last century. To guarantee the constancy of a country’s currency, the central bank must be the watchdog and authority in the monetary and banking systems.