Q.(a) Describe the functions of Reserve Bank of India.

(a) The RBI's functions are note issue, banker to government, bankers' bank, custodian of forex reserves, controller of credit and developmental functions. (b) The vicious circle of poverty is Nurkse's idea that low income causes low saving/demand → low investment → low productivity → low income again, keeping poor countries poor on both the supply and demand sides.

(a) Functions of the Reserve Bank of India

• Note issue: The RBI has the sole monopoly of issuing currency notes (except one-rupee notes and coins) and keeps the required reserves against them.
• Banker to the government: It manages the banking accounts of the Central and State Governments, receives and makes payments on their behalf, and manages public debt.
• Bankers' bank: It acts as banker to all commercial banks — it keeps their cash reserves, acts as lender of last resort, and is the clearing house.
• Custodian of foreign-exchange reserves: It maintains and manages the country's gold and foreign-exchange reserves and stabilises the external value of the rupee.
• Controller of credit: It regulates the supply of money and credit through quantitative tools (Bank Rate, CRR, SLR, repo rate, open-market operations) and qualitative tools.
• Developmental and promotional functions: It promotes agricultural credit, industrial and rural finance, and the growth of banking and financial institutions.

(b) Vicious Circle of Poverty (with diagram — described)

The concept was explained by Ragnar Nurkse: 'A country is poor because it is poor.' Poverty perpetuates itself through a circular chain of forces that operate on both the supply side and the demand side.

• Supply side: Low income → low saving → low investment → deficiency of capital → low productivity → low income (the circle repeats).
• Demand side: Low income → low purchasing power → low demand → low inducement to invest → deficiency of capital → low productivity → low income (again the circle repeats). …