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in Central Bank - Functions and Credit Control by (56.2k points)

Explain the functions of the Reserve bank of India ?
Or
What are the activities performed by the central bank? Explain.

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Functions of the Reserve Bank of India are divided into two categories:
(a) Central bank functions
(b) General bank functions

(a) Central bank functions of the Reserve Bank of India:

(i) Bank of issuing note : The Reserve bank has a legal right to issue and circulate the currency of the country. Monopoly of note issue rests with the Reserve Bank of India. It brings uniformity in the currency. To make currency notes available in adequate quantity, Reserve bank uses the minimum reserve system. Under this system, RBI keeps a reserve of? 115 crore in the form of gold and foreign securities worth of ? 85 crore as a maximum reserve fund with itself.

(ii) Banker’s bank and controller : The Reserve bank regulates and controls all activities of the scheduled commercial banks. It performs the functions of a banker for all other banks in the country. The Reserve Bank essentially keeps a part of the cash reserves of all commercial banks as financial deposits, with a point of view to meet liabilities of these banks in the time of crises. It also re discounts their bills and keeps an eye on their activities.

(iii) Government’s banker, agent and advisor: The Reserve Bank acts as an associate in achieving higher growth rate of the country. The Reserve Bank accepts receipts and makes payments on behalf of government. It advises the government on banking and financial matters.

(iv) Custodian of foreign exchange reserve : The Reserve Bank is the custodian of a country’s stock of gold and foreign currencies. The Reserve Bank maintains the stability of exchange rate fixed by the government. It buys and sells foreign currency according to the requirement, to maintain the stability.

(v) Clearing house function : The Reserve Bank settles the claims of various banks against one another with the minimum of cash with use of cheque, draft, etc. The Reserve Bank acts as a mediator in payments and funds transfer.

(vi) Regulation and control of credit : The Reserve Bank acts as a controller and regulator of quantity of currency and credit. The total money in circulation and its dynamism directly affects inflation and deflation in a country’s economy. The Reserve Bank uses monetary policy measures for expansion and contraction of credit.

(vii) Publication of Journals : The Reserve Bank publishes magazines, journals, bulletins, etc: In these publications, the Reserve Bank puts forward the type of policies to be adopted to meet the challenges associated with the economy.

(b) General banking functions of the reserve Bank :

  1. Accepting deposits from central government, state government and commercial banks.
  2. Borrowing loans from commercial and foreign banks if needed.
  3. Advancing loans to central government, state governments and commercial banks.
  4. Sale and purchase of foreign securities.
  5. Re discounting of commercial bills.
  6. Sale and purchase, and discounting of foreign bills.
  7. Opening accounts in foreign banks.
  8. Providing locker facility.

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