Role of RBI in the Indian Economy: Since its inception, the Bank of India (RBI) has been the nation’s sole player in economic development and monetary stability. Today we will examine the roles, functions, and contributions of the Reserve Bank of India (RBI) to the Indian economy. Keep Reading to find out!

How Did RBI Come to Be?

The Bank of India (RBI) was the bank for private stockholders, and the Reserve Bank (Transfer of Public Ownership) Act of 1949 led to its nationalization. The Reserve Bank of India is a legal entity with sufficient certainty, a unitary state, and the ability to sue or be prosecuted through its name.

Functions of Reserve Bank of India

As India’s central bank, the Reserve Bank of India (RBI) performs various tasks, including regulating monetary policy, issuing currency, overseeing foreign exchange, and serving as the Indian government’s bank.

Thus, the Role of RBI in the Indian Economy in ensuring economic and monetary stability. We examine the RBI’s previous involvement in the Indian economy and its current position below. 

RBI’s Previous Functions

Before the formal establishment of inflation targets in 2016, the RBI served in various capacities.

• Liquidity and interest rates are supervised to keep growth under control.

• They helped regulate inflation by changing liquidity and interest rates.

• They borrowed money on behalf of the government to keep them running. And they also ensured the stability of the financial system by overseeing banks and NBFCs. Nobel Laureate Joseph Stiglitz stated that the sub-prime crisis wouldn’t have occurred if RBI Governor had been the U.S. Fed Governor!

Current Role of Reserve Bank of India

1. Country’s Monetary Regulatory

 The RBI was already dedicated to building a monetary policy basis for explaining the country’s economic issues and maintaining low and stable inflation while pursuing the goal of growth.

2. Inflation control

The Reserve Bank of India (RBI) aims to limit mid-term inflation to 4% (+/- 2%). It also supervises if the banks and other financial institutions are doing their job regarding financial inclusion. The bank sets the key interest rate: The standard repo rate is set by a 6 Federal Reserve Board led by the RBI President.

3. Foreign Currency exchange Regulator 

The U.S. Foreign Corrupt Practices Act (“FEMA”) envisions RBI playing a vital role in foreign currency regulation. The government banks play a critical role in raising financial literacy among the general public, and it also monitors whether financial firms are carrying out their responsibilities in terms of financial inclusion.

4. Banker to Government

In India, only the Bank of India (RBI) has the authority to issue treasury bills. A separate agency called this same issue debt is in charge of issuing bank notes. On the proposal of the National Board, the Central Government dictates the size of bank notes, as well as the discontinuation of banknotes. The RBI serves as a lender to the state and federal governments. In its service, it distributes and buys government bonds.

5. Creates bank policies

The Bank of India (RBI) has the authority to award licenses to begin banking operations in India and the authority to revoke a duty of disclosure to a banking corporation. The authenticity of article 23 of the Companies Bill, 1949, was challenged in a case brought under Section 167.

6. Banker’s bank

The RBI controls, restrict, and constrains foreign exchange trading. It grants banks or financial institutions permission to function as government agencies in the Forex market. It established the “Depositor Information and Awareness Scheme.”

It’s the bankers to banks because it issues and manages currency notes and holds reserves to ensure macroeconomic stability. So, the vital role of the RBI is critical to the country’s economic growth and pricing stability.

7. Objectives of the monetary policy

The term “monetary policy” refers to procedures used to control the amount of money in circulation in a given economy. See below, there are two kinds of monetary policy instruments, and the monetary authority uses the instruments to achieve predetermined goals.

Quantitative or General Tools

1. Bank Rate Policy (BRP)

The Bank Rate Policy (BRP) is a very important technique used in monetary policy to influence the volume or the quantity of credit. The efficiency of the bank rate as a monetary policy tool depends on the existing banking network, interest elasticity of investment demand, and the strength of the money market.

2. Open Market Operation (OMO)

The open market operation refers to the purchase and sale of short-term and long-term securities by the RBI in the open market. The OMO is used to wipe out the shortage of money in the money market, influence the interest rate structure, stabilize the market for government securities, etc.

3. Variation in the Reserve Ratios (VRR)

Commercial Banks have to keep a certain proportion of their total assets in Cash Reserves with the Reserve Bank of India (RBI). These reserve ratios are Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). Any change in the VRR changes commercial banks’ reserves positions.

Qualitative Instruments or Selective Tools 

The qualitative instruments are also known as the Selective Tools of monetary y policy. These tools are for discriminating between different uses of credit, and they can be discrimination favoring export over import or essential over non-essential credit supply. This method can influence the lender and borrower of the credit.

1. Fixing Margin Requirements

The margin refers to the proportion of a loan that a borrower has to raise to get finance for his purpose. A change in a margin implies a change in the loan size. 

2. Consumer Credit Regulation 

This method encourages credit supply for the needy sector and discourages it for other non-necessary sectors. 

3. Publicity 

Central banks can issue directives, guidelines, and suggestions for commercial banks regarding reducing credit supply for speculative purposes. 

4. Credit Rationing 

Directives guide commercial l banks in framing their lending policy. 

5. Moral Suasion 

The central bank can penalize banks by changing some rates or even putting a ban on a bank. And can restrain commercial banks by reducing credit supply for speculative purposes.

6. Control via Directives 

Under this technique, it issues constant directives to all commercial institutions. These directives guide commercial banks in framing their lending policy.

In Closing

RBI was established to foster the banking business and not impede such business growth. The RBI’s monetary policy deals with almost all other vital topics such as financial stability, financial markets, interest rates, credit delivery, regulatory norms, financial inclusion, and institutional developments.

The Reserve Bank of India (RBI) is India’s Central bank. Role of RBI in the Indian Economy in overseeing monetary policy, issuing currency, managing foreign exchange, and working as a government bank.

The central bank also has a key role in creating financial awareness. How about beginning your online stock market journey with FinGrad? With a host of top experts in the industry, your journey can be all the easier.

That’s all for the article on Role of RBI in the Indian Economy, we hope you enjoyed it. Happy investing!

Tags: Conclusion For role of RBI in Indian economy, Developmental role of RBI, Does RBI regulates foreign exchange?, Role of RBI in Indian economy Class 10, Role of RBI in Indian economy PDF, Role of RBI in Indian economy ppt, Role of RBI in Indian economy Wikipedia, What are the 3 main functions of RBI?, What are the five main functions of RBI?, What is meant by RBI?, What is RBI role in banking?, What is the role of RBI in economic development?, Role of RBI in the Indian Economy, What is the role of RBI in Indian economy Class 10?, What role does Reserve Bank play in the economy?, Who is Authorised by RBI to deal in foreign exchange? What is the role of RBI in foreign exchange market?, Who regulates foreign currency exchange?