Functions of the Central Bank (RBI)

The Reserve Bank of India performs a wide range of functions. These are usually grouped into traditional (central banking) functions, promotional/developmental functions, and supervisory functions.

A. Traditional (central banking) functions

1. Bank of note issue. The RBI has the sole authority to issue currency notes (of denominations above one rupee) in the country. A single issuing authority ensures uniformity in the currency, better public confidence, and effective control over the total money supply. Notes are issued under the minimum reserve system, under which the RBI keeps a stated minimum of gold and foreign securities as backing.
2. Banker to the government. The RBI acts as banker, agent, and financial adviser to both the Central and State Governments. It keeps the government's accounts, receives and makes payments on its behalf, manages the public debt, and advises the government on financial and monetary matters.
3. Banker to banks / bankers' bank. All scheduled commercial banks keep a part of their cash reserves with the RBI. The RBI holds these reserves, provides remittance and clearing facilities, and acts as the common banker for the whole banking system.
4. Lender of the last resort. When commercial banks cannot arrange funds from any other source in a difficult situation, they can approach the RBI for financial help by rediscounting eligible bills or borrowing against approved securities. Because the RBI stands ready to help in an emergency, it is called the lender of the last resort, and this role helps prevent bank failures and panic.
5. Custodian of foreign exchange reserves. The RBI keeps and manages the country's reserves of gold and foreign currencies, and works to maintain the external value (exchange rate) of the rupee within a reasonable range.
6. Controller of credit. This is one of the most important functions — the RBI regulates the volume and direction of credit created by commercial banks, using the quantitative and qualitative methods explained in Sections c to e.
7. Clearing house function. Since banks keep accounts with the RBI, it acts as a clearing house where the mutual claims of banks against one another are settled conveniently by adjusting book entries.

B. Promotional / developmental functions

The RBI also actively promotes the growth of the economy — encouraging the spread of banking to rural and unbanked areas, promoting agricultural and industrial finance, supporting the growth of institutions for savings and investment, and fostering financial inclusion so that banking reaches every section of society. …