Rameshwar's IAS

Functions of the RBI

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“Regulating the bank notes issuances and maintaining reserves to safeguard the monetary stability within India alongwith generally operating the credit and the currency framework to its advantage,” reads the Preamble of the Reserve Bank of India Act, 1934, under which RBI was founded. Even after 75 years, the Preamble's objectives remain relevant. The Reserve Bank's role and priorities have evolved over the past 75 years in tandem with shifting national priorities and global developments, as can be seen from its current array of functions. In essence, the Reserve Bank has demonstrated dynamism and adaptability to meet an evolving economy's demands. The formulation and implementation of monetary policy with the goals of maintaining price stability and ensuring adequate credit flow to productive sectors of the economy has been a core function of the Reserve Bank over the past 75 years. In recent times, the objective of preserving financial stability was added to these.

From external account management to oversight of banks and non-banking financial institutions, as well as money, government securities, and foreign exchange markets, its mission has been to ensure financial stability. The Reserve Bank is in charge of creating and enforcing the regulatory policy framework for both banking and non-banking financial institutions. Its goals are to provide individuals with access to the banking system, safeguard the interests of depositors, and ensure the stability of the financial system as a whole. With the Banking Regulation Act of 1949, it began regulating the commercial banking sector but has since expanded to include other organizations. Cooperative banks and regional rural banks were brought under the Reserve Bank's control by amendments to the Banking Regulation Act of 1949, and development finance institutions, non-banking financial companies, bankers to banks, and primary dealers were brought under the Reserve Bank's control by amendments to the Reserve Bank of India Act.

In a similar vein, the unpredictability of the global economy before and during the Second World War necessitated the allocation and intervention of limited foreign exchange reserves by sovereign governments. Under the Defence of India Rules of 1939 and the Foreign Exchange Regulation Act of 1947, the Reserve Bank initially regulated foreign exchange transactions. As the economy matured over time, the role shifted from regulating foreign exchange to managing it. The Reserve Bank was entrusted with a variety of developmental roles after independence, particularly in the field of credit delivery, as the emerging nation attempted to meet the aspirations of a large and diverse population. The Reserve Bank began performing a variety of developmental functions during the 1950s and 1951 economic planning era to expand and deepen the agricultural and industrial credit structure, promote capital formation and savings, and encourage capital formation. In the sixties and seventies, one important part of its role was to build institutions. The state-induced or state-supported developmental efforts were the focus of the strategy for nearly four decades. As a result, the development strategy explicitly acknowledged the role of the financial sector and financial markets. India's economic and financial policies underwent a paradigm shift in the wake of the balance of payments and foreign exchange crisis of 1991.

Liberalization, privatization, globalization, and coordinated efforts to strengthen both established and emerging institutions and market participants were all part of the reform approach. To make the new policy framework work, the Reserve Bank used international best practices in areas like prudential regulation, banking technology, a variety of monetary policy instruments, management of the external sector, and currency management. In the deregulated regime, the financial system experienced rapid expansion, which necessitated expanding and deepening access to banking services. The Reserve Bank has been actively balancing the relationship between banks and customers throughout the new millennium; putting an emphasis on financial inclusion; putting in place administrative tools to deal with complaints from customers; ensuring the development and oversight of secure and robust payment and settlement systems, as well as adhering to the clean note policy. The national economy and financial system have also become increasingly integrated with the globalizing world over the past one and a half decades. India is exposed to global shocks as a result of rising global integration, which has its advantages in terms of expanding the scope and scale of economic growth. As a result, the Reserve Bank was tasked with ensuring financial stability. This, in turn, has necessitated effective coordination and consultation with other domestic and international regulators. The Reserve Bank's primary functions are described in greater detail in the subsequent chapters.

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