Reserve Bank of India — Role and Functions

Standing above every commercial, cooperative and regional rural bank in India is the Reserve Bank of India (RBI), the country's central bank. Unlike a commercial bank, the RBI does not exist to earn a profit from ordinary banking business with the general public; its purpose is to regulate the monetary and banking system of the entire country in the interest of overall economic stability.

Issue of currency. The RBI holds the sole legal authority to issue currency notes in India (other than one-rupee notes and coins, which are issued by the government), so that the country's currency supply is managed by a single, accountable authority rather than by individual banks.

Banker to the government. The RBI manages the banking transactions of both the central and state governments — accepting their receipts, making payments on their behalf, and managing their public debt.

Banker's bank. Every commercial bank keeps a part of its own cash reserves with the RBI, and the RBI acts as a lender of last resort to commercial banks in times of genuine financial need, in much the same way that a commercial bank is a bank for the ordinary public.

Controller of credit. Through tools such as the cash reserve ratio, the bank rate and open-market operations, the RBI expands or contracts the volume of credit that commercial banks are able to create, directly influencing inflation, investment and overall economic activity — the practical application of the credit-creation principle discussed earlier in this chapter.

Custodian of foreign exchange reserves. The RBI holds and manages the country's foreign exchange reserves and regulates the foreign exchange market, working to keep the exchange rate of the rupee reasonably stable. …