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What is the Reserve Bank of India?

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  • Written By: Michael Linn
  • Edited By: Angela B.
  • Last Modified Date: 23 August 2016
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The Reserve Bank of India (RBI), as the central bank of India, manages the country’s monetary policy and holds reserve currency. Primarily concerned with ensuring India’s financial stability, the RBI also maintains liquidity and guarantees depositors' funds. Like most central banks, the Reserve Bank of India acts as the primary lender to the state. Wholly owned by the Indian government and controlled by a central board that provides primary operational oversight, the RBI has more duties than a traditional central bank. Some of the duties include issuing currency, acting as a banker to other banks, regulating the banking system and developing the nation’s financial system.

Monetary policy ensuring the accessibility of currency and credit is under the authority of the Reserve Bank of India. Some of the overarching goals of RBI’s monetary authority include making sure that the financial system is stable and that lending is great enough to create economic growth in the most important and productive sectors. The reserve bank's policy direction is determined by analyzing indicators such as capital flow, money supply, inflation rates and economic output.

Issuing currency in India is a task done solely by the RBI, which also oversees the design and manufacture of paper currency and coinage using printing presses and mints that are owned by India's government. The RBI also develops new ways to enhance security by introducing anti-counterfeiting technology.

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Acting as the bank for the government, the Reserve Bank of India performs many of the same functions for the government that a commercial bank performs for an individual consumer. Included in the central bank’s services to the state is the ability to take deposits, transfer funds and pay debts. When the government needs to raise capital, the RBI is able to facilitate the sale of securities such as bonds and treasury bills to investors.

In addition to acting as the bank for the Indian government, the Reserve Bank of India also acts as the banker for other banks. In this role, the RBI may facilitate intra-bank transfers for lending and borrowing transactions between banks. As a fail-safe mechanism, a bank in dire need of capital may borrow directly from the central bank. This helps to ensure liquidity in the financial market so banks can operate efficiently and effectively. Oversight is also provided to the banking arena through regulating the banking system by setting requirements and using inspections and surveillance to maintain depositor confidence.

The RBI began in 1935 at the suggestion of the Hilton Young Commission. The Reserve Bank of India was initially a private bank but was nationalized in 1949. With the increase in globalization, and with capital flows interconnecting nations, the Reserve Bank of India has a critical role in India’s economic future.

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