What is the most important function of RBI?

Being a central bank of India, RBI serves a critical role in regulating the financial transactions in the country. Some of the important functions of RBI are listed below:

• Issue of Bank Notes

• Banker to the Government

• Custodian of the Cash Reserves of Commercial Banks

• Custodian of country’s forex reserves

• Lender of last resort

• Controller of credit

Now let us discuss these RBI functions in detail:

The Issuer of Bank Notes

The most important function of RBI is the issuance of currency notes and coins, except the one rupee note and coin which are issued by the Ministry of Finance. All other notes bear the signature of the RBI Governor. However, the agency of distribution of all notes and coins issued by the Government of India is the Reserve Bank of India.

Banker to the Government

Another chief function of RBI is that it takes care of the banking needs of the government, which includes maintaining & operating the deposit accounts of the government, collecting the receipts of funds, and making payments on behalf of the Government of India. It also represents the Indian Government, as a member of the International Monetary Fund and the World Bank.

Custodian of Cash Reserves of Commercial Banks

Commercial banks are required to maintain the cash reserves at a rate decided by the RBI in its monetary policy.

Custodian of Foreign Exchange Reserve

Another of the important functions of RBI is maintaining a reserve of foreign currencies that enables the RBI to deal with any crisis situation.

Lender of the Last Resort

Often regarded as the banker of banks, the RBI acts as a parent to all commercial banks in India. Thus, it becomes the lender of the last resort for all banks when they are in a crisis situation. RBI helps them by lending money, although at higher RoI, to sail through the tide of financial difficulties.

Controller of Credit

RBI controls the credit created by the commercial banks in India, in accordance with the economic priorities of the government of India. RBI uses quantitative and qualitative methods to control and regulate the flow of money in the market. These are implemented by announcing monetary policies at regular intervals. The monetary policy involves the management of interest rates and money supply. The central bank of India tweaks the money supply to achieve objectives such as liquidity, inflation, and consumption.