Question

Describe the main functions of the Reserve Bank of India.

Hint:

RBI = “Bank of Banks” → Issues currency, controls money supply, and safeguards the economy.

Answer 1

Step 1: Introduction.
The Reserve Bank of India (RBI) is the central bank of the country, established in 1935. It regulates the issue of currency, controls credit, manages foreign exchange, and supervises banks to ensure financial stability in the economy.
Step 2: Main Functions of RBI.
1. Issue of Currency: RBI has the sole authority to issue currency notes (except the one rupee note and coins, which are issued by the Government of India). This maintains uniformity and public confidence in the monetary system.
2. Monetary Control: RBI controls the supply of money and credit in the economy through monetary policies like Repo Rate, Reverse Repo Rate, and Cash Reserve Ratio (CRR).
3. Lender of Last Resort: In times of financial crisis, RBI provides emergency finance to commercial banks to ensure liquidity and stability.
4. Regulation of Banks: RBI supervises commercial banks, co-operative banks, and other financial institutions. It issues licenses, regulates reserves, and ensures sound banking practices.
5. Foreign Exchange Management: RBI manages foreign currency reserves and ensures stability of the Indian Rupee in the international market under FEMA (Foreign Exchange Management Act).
6. Control of Inflation and Deflation: By adjusting monetary tools, RBI ensures price stability and economic growth.
7. Promotion of Development: RBI supports agriculture, small industries, and rural development through credit policies and financial inclusion measures.
Step 3: Conclusion.
Thus, the Reserve Bank of India performs multiple functions such as issuing currency, controlling credit, regulating banks, managing foreign exchange, and promoting overall financial stability in the economy.