The Central Bank (RBI) — Functions and Methods of Credit Control

The Reserve Bank of India (RBI) is India's central bank, established in 1935 under the Reserve Bank of India Act, 1934, and nationalised in 1949. Unlike a commercial bank, it does not ordinarily transact business with the general public; instead it regulates and supports the entire banking and monetary system of the country.

Principal functions of the RBI:

• Sole right of note issue — the RBI alone is authorised to issue currency notes (coins and the one-rupee note are issued by the Government of India), which keeps the currency uniform and preserves public confidence in it.
• Banker to the government — the RBI manages the banking business, public debt, and remittances of both the union and the state governments, including the Government of Andhra Pradesh.
• Banker's bank and lender of last resort — commercial banks keep their cash reserves with the RBI and can borrow from it during a liquidity crunch, which is why the RBI is described as the economy's 'lender of last resort.'
• Controller of credit — the RBI regulates both the volume and the direction of credit that commercial banks create, in line with the needs of price stability and growth.
• Custodian of foreign exchange reserves — the RBI holds and manages the country's foreign exchange reserves and administers exchange control regulations.
• Promotional and developmental functions — supporting agricultural and rural credit, financial inclusion, and the orderly development of India's money and capital markets.

The RBI controls credit through two broad classes of instruments.

Quantitative (general) methods, which act on the overall volume of credit in the economy:

• Bank rate — the rate at which the RBI extends long-term finance to commercial banks.
• Repo rate and reverse repo rate — the rate at which the RBI lends to banks (repo) and borrows from banks (reverse repo) for the short term against government securities; these are the RBI's principal day-to-day policy tools today.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) — the minimum reserves banks must hold with the RBI, and in approved liquid assets, respectively.
• Open market operations — the RBI's buying and selling of government securities in the open market to inject or absorb liquidity from the banking system.

Qualitative (selective) methods, which act on the direction and purpose of credit rather than its total volume:

• Margin requirements — varying the share of a loan a borrower must fund from personal resources against a given security, to discourage speculative lending against particular goods. …