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Brief History
The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935. The Bank was constituted to * Regulate the issue of banknotes * Maintain reserves with a view to securing monetary stability and * To operate the credit and currency system of the country to its advantage. The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949. An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.

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With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.

ROLES AND FUNCTIONS OF RESERVE BANK OF INDIA

The Reserve Bank is the umbrella network for numerous activities, all related to the nations financial sector, encompassing and extending beyond the functions of a typical central bank. Monetary Authority Issuer of Currency Banker and Debt Manager to Government Banker to Banks Regulator of the Banking System Manager of Foreign Exchange Regulator and Supervisor of the Payment and Settlement Systems Development Role

Monetary Authority
Monetary policy refers to the use of instruments under the control of the Central bank to regulate the availability, cost and use of money and credit. The goal: achieving specific economic objectives, such as low and stable inflation and promoting growth. The main objectives of monetary policy in India are: Maintaining price stability Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth Financial stability The relative emphasis among the objectives varies from time to time, depending on evolving macroeconomic developments.

Issuer of Currency
The Reserve Bank is the nations sole note issuing authority. Along with the Government of India, we are responsible for the design and production and overall management of the nations currency, with the goal of ensuring an adequate supply of clean and genuine notes. The

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Reserve Bank also makes sure there is an adequate supply of coins, produced by the government. In consultation with the government, we routinely address security issues and target ways to enhance security features to reduce the risk of counterfeiting or forgery.

Banker and Debt Manager to Government

Managing the governments banking transactions is a key RBI role. Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public. As a banker to the central government, the Reserve Bank maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds. We also act as the banker to those state governments that have entered into an agreement with us.

Banker to Banks
Like individual consumers, businesses and organisations of all kinds, banks need their own mechanism to transfer funds and settle inter-bank transactionssuch as borrowing from and lending to other banksand customer transactions. As the banker to banks, the Reserve Bank fulfils this role. In effect, all banks operating in the country have accounts with the Reserve Bank, just as individuals and businesses have accounts with their banks.

Regulator of the Banking System

Banks are fundamental to the nations financial system. The central bank has a critical role to play in ensuring the safety and soundness of the banking systemand in maintaining financial stability and public confidence in this system. As the regulator and supervisor of the banking system, the Reserve Bank protects the interests of depositors, ensures a framework for orderly development and conduct of banking operations conducive to customer interests and maintains overall financial stability through preventive and corrective measures.

Manager of Foreign Exchange

With the transition to a market-based system for determining the external value of the Indian rupee, the foreign exchange market in India gained importance in the early reform period. In recent years, with increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market.

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Regulator and Supervisor of the Payment and Settlement Systems
Payment and settlement systems play an important role in improving overall economic efficiency. They consist of all the diverse arrangements That we use to systematically transfer moneycurrency, paper instrument such as cheques, and various electronic channels. The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, we focus on the development and functioning of safe, secure and efficient payment and settlement mechanisms.

Development Role
This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring that credit is available to the productive sectors of the economy, establishing institutions designed to build the countrys financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.

RBIs ROLE IN CONTROLLING INFLATION

Among the several goals of RBI , controlling inflation is one of the most important. When inflation is rising and intimidating to twist out of manageable state, as it is today, the RBI role comes into picture. Generally in such a situation it tightens the monetary policy which means reducing the amount of liquidity (money supply or floating money) in the economy. The complete effect of the policies adopted by RBI take some time to show the result , which may be one year or so, but still it is considered as the most effective way to control such macroeconomic issues. Now the question arises as to how RBI control the floating money in the economy. Among several tools of monetary policy two of the most important are the cash reserve ratio (CRR) and the liquidity adjustment facility (LAF). Liquidity Adjustment Facility is a kind of policy that allows banks to borrow money through repurchase agreements. These are used to aid banks in resolving any kind of short-term cash shortages during periods of economic instability or from any other form of stress caused by

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any forces which are beyond their control. In other words, it allows banks to respond to liquidity pressures in an efficient manner and hence it is used by governments to assure basic stability in the financial markets. Some of the steps taken by RBI in order to tighten the monetary policy includes raising of the Interest rates such as the repo rate and the reverse repo rate in recent months and the hike in Cash Reserve Ratio. Beside this , another major step taken by RBI was to stop buying dollars in the international market and hence allow the rupee to rise against the dollar. It is believed that this step would control inflation. The rational behind this kind of belief is that if rupee appreciates then goods and services which are imported into the country would be accessible at cheaper prices in the domestic markets and simultaneously the condition for export will become unfavourable to some extent .This would reroute some of the goods, which were earlier exported, to the domestic markets and hence support the supply side constraints which is the reasons for high inflation. So essentially, RBI has taken steps for the benefit of the economy as a whole by controlling inflation. But the interests of the exporters and thus the balance of payment of the country are still a matter of concern.

RBIs ROLE IN CONTROLLING FOREIGN EXCHANGE

With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect from June 1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to "facilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India".

The new Act has brought about structural changes in the exchange control administration. Regulations have been framed for dealing with various types of transactions. These regulations are transparent and have eliminated case-by-case approvals. All current account transactions are free from restrictions except o 8 transactions prohibited by the Government of India. o 11 transactions which require prior permission of the Government of India and o 16 transactions on which indicative limits are fixed by the Government and release of foreign exchange beyond those limits requires permission from the Reserve Bank. All Regional Offices of the Department have in turn been authorised to release exchange for such transactions. For capital account transactions, the Reserve Bank regulations provide for general permissions/automatic routes for investments in

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India by non-residents, investments overseas by residents and borrowings abroad, etc. The Department ensures timely realisation of export proceeds and reviews, on a continuous basis, the existing rules in the light of suggestions received from various trade bodies and exporters' fora. The Department collects data relating to forex transactions from authorised dealers on a daily basis for exchange rate management and on a fortnightly basis for monthly quick estimates of balance of payments and quarterly balance of payments compilation. The Department lays down policy guidelines for risk management relating to forex transactions in banks. The Department is also entrusted with the responsibility of licensing banks/money changers to deal in foreign exchange and inspecting them. There is a "Standing Consultative Committee on Exchange Control" consisting of representatives from various trade bodies and authorised dealers which meets twice a year and makes recommendations for policy formulation. With a view of further improving facilities available to NRIs and removing irritants, the Department is also engaged, on an on-going basis, in reviewing and simplifying the procedures and rules.