Functions of the Reserve Bank of India — Traditional Central Banking Functions

The RBI performs the same core functions that any modern central bank performs, adapted to India's needs.

1. Sole authority of note issue. Under Section 22 of the RBI Act, the RBI has the exclusive right to issue currency notes in India (except one-rupee notes and coins, which are issued by the Government of India, though the RBI puts them into circulation). Note issue is managed through the Issue Department, which is kept legally and functionally separate from the Banking Department. The system followed today is the Minimum Reserve System, under which the RBI is required to keep a minimum reserve of gold and foreign securities (currently a stipulated minimum value of such assets) against which it can issue currency of any amount the economy genuinely needs — replacing the older, more rigid Proportional Reserve System.

2. Banker to the Government. The RBI acts as banker, agent and financial adviser to both the Central Government and State Governments — it maintains their accounts, receives and makes payments on their behalf, manages their public debt (floating and servicing government loans and Treasury Bills), and advises them on economic and monetary matters.

3. Banker's Bank. Every scheduled commercial bank in India is required to keep a part of its deposits with the RBI (the Cash Reserve Ratio). The RBI holds these balances, clears inter-bank cheques and payments, and — most importantly — acts as the lender of last resort, lending to banks facing a genuine, temporary shortage of funds so that a solvent bank never has to fail merely for lack of ready cash.

4. Controller of Credit. Because commercial banks create credit through lending, the RBI regulates the total volume, cost and direction of that credit using quantitative and qualitative tools (detailed in the next section) — this is the RBI's single most important function for managing inflation and supporting growth. …