Central Bank of India: Function & Roles

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  • 0:00 The Reserve Bank of India
  • 0:26 Monetary Functions
  • 2:45 Non-Monetary Functions
  • 4:21 Lesson Summary
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Lesson Transcript
Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

The Central Bank of India plays a major role in India's banking system and economy. In this lesson, we'll highlight the bank's specific functions and roles in terms of currency, credit, inspections, promotions and more.

The Reserve Bank of India

India's central bank is known as the Reserve Bank of India (RBI). Its role is to foster financial stability and regulate India's currency and credit.

Founded in 1935, the bank sets monetary policy for the country. It is fully owned by the government of India and is run by a government-appointed board of directors.

Monetary Functions

The core function of the RBI is to set the lending rate between banks. However, as the overseer of India's monetary policy, the bank performs several other functions that are important to the Indian economy.

Issuer of Currency

Although the government is the technical issuer of currency, the RBI actually distributes the notes and coins into the marketplace. It also takes in and destroys currency; in other words, as bills and coins wear out, the RBI ensures that fresh and clean currency is in the marketplace.

A Bank to Banks

Not only does the RBI set the lending rate between banks, it acts as a banker's bank. When banks need money, the RBI can lend money to them since it holds some of their reserves.

In addition to supporting other banks, the RBI has the power to inspect and audit other banks.

Government's Bank

As the central bank, the RBI is the bank of the government. Just like the private banks, RBI can lend money to the government itself; this includes the federal government as well as state governments.

The RBI also plays the role of an advisor to the government on financial and economic issues. Being a prominent institution in India, the RBI can use its resources to guide the government on financing schemes, banking arrangements, international finance and credit decisions.

The RBI also insures deposits made in other banks, up to 100,000 rupees (Rs. 1.00 lakh), including commercial banks. This helps to encourage savings in India, since investors know that their savings are protected against catastrophe.

Credit Control

The RBI controls money as well as bank credit. By controlling credit, it works to stabilize prices and rates for credit exchange.

Exchange Rates

Although the rupee is a floating currency, the RBI does have the power to adjust the rates if deemed necessary. It also manages the foreign exchange market.

Because the role of the bank is to coordinate monetary policy, the RBI also strives to ensure the strength of the rupee against foreign markets and exchanges. To do this, it manages capital reserves that are designated for exchange, and invests these funds responsibly as a means to ensure the strength of the national currency.

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