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Every country has an organisation that works as the central bank. The main
function of the central bank is to control and monitor the banking and finance
system of a country. In India, The Reserve Bank of India (RBI) serves as the
Central Bank.
There are many things for which the RBI is responsible such as controlling
inflation, regulating banking system, issuing bank notes, acting as lender to
banks, controlling credit, and monetary policy and so on and so forth.
Here are things to know about the functioning of RBI:
1. Control of inflation: Inflation is the supply of excess money relative to the
goods and services produced resulting in increased prices. It occurs when the
demand increases and there is shortage of supply. RBI controls inflation using
monetary policy. It controls borrowing rates for banks by setting the repo rate.
When RBI wants to control inflation it increases these rates. As a result, banks
and other lenders are required to pay a higher interest rate to the Central Bank
in order to obtain money. They pass this on to their customers by charging a
higher rate of interest for lending money. This reduces the availability of money
in the economy as well as demand and helps in controlling inflation.
2. Issuer of Bank Notes: The RBI has the sole right to issue currency notes. At
present, notes of Rs 10; Rs 100; Rs 500; and Rs 1,000 are only printed. The
printing of Re 1, Rs 2 and Rs 5 has been stopped. However, the RBI has powers
to print currency notes of up to Rs 10,000 denomination. But, an amendment to
the Reserve Bank of India Act, 1934 will be needed if any note of higher
denomination has to be printed.
3. Banker to Government: As banker to the government the RBI manages the
banking needs of the government. It has to maintain and operate the
governments deposit accounts. It collects receipts of funds and makes payments
on behalf of the government. It represents the Government of India as the
member of the IMF and the World Bank.
4. Payment system: The RBI takes part in the payment system as a user of the
system, a service provider and is also the regulator of the systems. As a user it
deals with the cheque based clearing operations. It also participates as a user in
the Electronic Clearing Service (ECS) and (Electronic Funds Transfer) EFT systems
for making its own internal payments to its employees, vendor payments etc.
Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market
Operations, would also be settled through the respective components of
payment systems. As a provider it manages the Centralised Funds Management
Systems (CFMS), Negotiated Dealing System (NDS) and Real Time Gross