What does the RBI do for us?
The Reserve Bank of India, or RBI, was established in 1934 and was privately owned. Its role was that of a private bank with the additional responsibilities of regulating all other banks in the country and acting as a banker to the government. In 1949, the nationalization of the RBI happened. And since then, the RBI has been owned by the Government of India and the role of the central bank expanded.
RBI is the sole* issuer of Indian currency notes: RBI issues all INR currency notes and coins, *except the one rupee note and coin, which are issued by the Finance Ministry of India. All other notes are legal tender only after the signature of the RBI Governor. The RBI is responsible for distributing all notes and coins.
RBI uses the Minimum Reserve System (MRS) to print money to ensure the supply of money in the country. Under the MRS, the RBI has to keep at least a Rs 200 crore reserve, which should contain Rs 115 crore worth of gold and foreign currencies as the rest.
Controller of Credit: RBI has a major influence on business boom and bust cycles, since they control the ease of credit flow in the economy. They restrict or ease up the credit flow according to the country’s economic needs to fight inflation and deflation when necessary. Basically, they don’t want to have too much or too little money in the system and they raise or drop rates in the economy to ensure reaching their targets.
Banker to the Indian Government: As with any entity, governments need a bank to store their money too. RBI has to act as the banker, agent and advisor of the GOI and state governments. Along with this, the RBI can help these governments with any matters of economic significance they require help with.
Lender of Last Resort: The RBI also acts as the “banker of banks” to all the commercial banks in the country. When they are in crisis and in need of capital, the RBI can step in to help them by lending them money, thus earning the name “Lender of Last Resort”.
Guardian of Forex Reserves: To keep the forex exchange rates stable, the RBI has to regularly buy and sell different foreign currencies. They have to maintain forex reserves so that India can deal with times of crisis as well as possible.
That’s most of what RBI is tasked to do, and seems a lot. And most of this is difficult because they are dealing with things on such a major scale that something that worked in the past might not work in a similar situation in the future.
Anyways, now you know what your central bank is and what they do. And if you enjoyed this article, you can read more from me here. And do let me know if you want a specific topic covered. Subscribe for free to receive more posts like this every day!