What are the powers and restrictions on the Reserve Bank of India?

Reserve Bank of India is responsible to monitor and regulate the activities of all the Indian banks, through its monetary policy and observation power. The power is, however, is limited to a certain extent.

Reserve Bank of India

The Reserve Bank of India started as a private shareholders' bank but it was nationalized in 1949. After the nationalization, it had taken up the responsibility of the interests and requirement of the Indians, as a citizen of a newly independent nation.

The origin of the RBI is from the recommendation of the Hilton Young Commission through the Reserve Bank of India Act 1934. The said Commission suggested the establishment of a Central bank to facilitate the banking service throughout the country and a separate function of credit control and issuance of currency.

The RBI started the operations in the year 1935, and since then its functionality has impacted the financial stability of India and that was made possible only because of the several functions and responsibilities laid out by the Preamble of the Reserve Bank of India 1934. Recently it was amended by the Finance Act 2016.

What are the functions of the RBI?

There are several functions of the RBI which can be categorized as traditional, development functions and supervisory functions.

1. Monetary Policy: It is the responsibility of RBI to regulate the monetary policies by their implementation. It is the aim of the RBI to achieve the goal of price stability in the country by the adoption of the guidelines for inflation targeting the Government. The RBI ensures the regulation on the inflation prices through the use of money supply, interest rates and availability of credit and is responsible for regulating the monetary system of the country.

2. Banker to the Banks: To all the other banks of India, RBI serves as the guide by giving them directions and controlling the bank reserves through the Cash Reserves that every commercial bank is to have a record with the RBI.

3. Banker to the Government of India: The Reserve Bank of India also acts as an agent and merchant banker to the Government of India and maintains its accounts along with providing it financial assistance and advice. It is the banker of the Government. It also makes and receives payment on behalf of the Government and carries out all the functions of a bank for the Central Government of India such as exchange, public debt management, remittance among several other functions.

4. Issuance of Currency notes: As per Sec. 22 of the RBI Act, RBI is responsible for the issuance of banknotes. The currency notes can be issued only by RBI. It also responsible for the exchange of the damaged currency notes for new ones and for regulating the good quality cash in the market.

5. Exchange Rate Management: The domestic policies are prepared by The RBI. The policies maintain the value of the rupee and help in achieving the stability of the exchange rate. The stability in the exchange rate is necessary because it brings both the demand and the supply of foreign currency closer to each other as per the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Only the RBI can prohibit and regulate the foreign exchange deals and empower institutions by issuing a license for acting as authorized agents for foreign exchange in the market.

6. Supervision over other banks: RBI, along with acting as the banker of banks, also supervises the activities of the banks in India through the conduct of audits of such banks and regulatory activities of an establishment of their branches and granting them license to carry on some transactions subject to conditions implied. Section 22 of the Banking Companies Act, 1949 grants such authority to RBI. The function of the RBI includes supervision of the entire banking system.

7. Credit Control: This is one of the most important functions of the RBI that is conducted through various tools. One of the important tools is by checking the capacity of the creation of credit as if it goes unregulated then it may result in an inflationary cycle. To manage the credit, the RBI uses instruments of quantitative measures, qualitative measures and selective measures.

8. Development of the agriculture sector: RBI evaluates the credit needs of the agriculture sector and controls the banks and financial institutions that finance the sector by establishing Regional Rural banks and NABARD. It enables credit availability for such sectors to help the rural parts of India. Providing finance to industries for the development sector by setting up financial institutions such as IDBI, SIDBI, EXIM among several others are one of the major roles of RBI.

9. Data Collection and Publication of reports: The statistical data are collected regarding savings, inflation, deflation, interest rates, investments among others, as they are significant for making policies.

10. Export promotion: RBI supports EXIM and ECGC while encouraging facilities for supporting foreign trade like exports, financially.

What are the restrictions imposed on RBI?

The RBI does not have absolute power, rather it is subject to certain restrictions, they are as follows:

• Restricted scope of monetary policy in economic development. The RBI is limited to observe whether the process of economic development is being hindered for the requirement of adequate funds.

• RBI has a limited role in the credit controlling procedure subject to inflationary pressure.

• RBI is affected by the unfavourable banking habits of the Indian citizens who prefer to use cash rather than negotiable instruments or online transactions. Therefore, the cash keeps on circulating but hardly gets back to the bank as a deposit. This hampers the credit creating capacity of the banks.

• Underrated money market to cover the weak money market that limits the coverage.

• Another hindrance that is faced by the RBI is the existence of black money due to the already existing wrong banking habits allowed by the RBI policies of cash transactions. The existence of black money in the economy limits the working of the monetary policy. The black money is not recorded since the borrowers and lenders keep their transactions secret. Consequently, the supply and demand for money also not remain as desired by the monetary policy.