Functions of Reserve Bank of India (RBI) & UPSC PYQs

The Reserve Bank of India (RBI) is the central bank of India, established in 1935 and nationalised in 1949. It regulates monetary policy, issues currency, and maintains price stability and financial stability in the economy. It also acts as the banker to the Government of India and to commercial banks.

This topic of ‘Reserve Bank of India (RBI)’ is important from the perspective of the UPSC Civil Services Examination, particularly under General Studies Paper III (Indian Economy), Banking, Monetary Policy, Inflation, Financial Markets, and Economic Development.

Reserve Bank of India (RBI):

• The Reserve Bank of India (RBI) was established on April 1, 1935, as India's central banking institution, operating under the Reserve Bank of India Act, 1934. 

• Initially headquartered in Calcutta, it relocated to Bombay (now Mumbai) in 1937. The RBI regulates banking operations in India in accordance with the Banking Regulation Act, 1949.

• The RBI is led by a Governor, supported by up to four Deputy Governors.

• Currently, Shri Sanjay Malhotra serves as the 26th Governor of the RBI. 

• The RBI's key decisions are made by its Central Board of Directors, as stipulated in Section 8 of the RBI Act. This board can have a maximum of 21 members; currently, there are 14 serving members.

Functions of RBI

• Monetary Authority: The Reserve Bank of India (RBI) serves as the monetary authority of India, formulating and executing monetary policy to maintain price stability and economic growth.

• Regulation and Supervision of Banks and NBFIs: It regulates and supervises banks and Non-Banking Financial Companies(NBFCs), and its approval is mandatory for opening new banks or branches, appointing top management in banks, and even nominating directors to bank boards. In public interest, and after consulting the Government of India, RBI can also supersede the Board of Directors of a bank.

• Regulation of Financial Markets: The RBI also regulates the Government Securities (G-Sec) market, the money market, and the foreign exchange (forex) market.

• Management of Foreign Exchange Reserves: It manages foreign exchange reserves, holding them with the Bank for International Settlements, other central banks, and foreign commercial banks, and investing them in sovereign or sovereign-backed securities.

• Debt Manager of Government: It also handles current and capital account management and functions as the debt manager for both central and state governments.

• Banker to the Government: As the banker to the government, the RBI maintains government accounts, provides Ways and Means Advances, and acts as a portfolio manager for surplus government cash balances. It also advises the government on monetary and banking-related matters.

• Banker to Banks: Additionally, the RBI is the banker to banks, maintaining their accounts, enabling interbank fund transfers, and acting as the lender of last resort.

• Issuer of Currency: As the sole issuer of currency in India, the RBI ensures an adequate supply of clean and counterfeit-free notes.

• Regulation of Payment and Settlement Systems: It regulates the payment and settlement systems and undertakes policy research and data dissemination through its publications like the Annual Report and Report on Trend and Progress of Banking in India.

• Developmental Role: The RBI also plays a developmental role by promoting schemes such as the Kisan Credit Card and ensuring adequate credit to Priority Sectors, which include agriculture, education, housing, exports, Micro and Small Enterprises (MSEs), social infrastructure, and weaker sections of society.

UPSC Previous Year Questions and Practice Questions

Functions of Reserve Bank of India PYQs

Q1. Consider the following statements: [2021]

1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.

2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.

3. The Governor of the RBI draws his power from the RBI Act.

Which of the above statements are correct?

1. 1 and 2 only 

2. 2 and 3 only 

3. 1 and 3 only 

4. 1, 2 and 3 

Answer: C

Statement 1 is correct: According to Section 8 of RBI ACT 1934, A Governor and (not more than four) Deputy Governors are to be appointed by the Central Government. 

Statement 2 is incorrect: According to Section 7 of RBI ACT 1934, The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider it necessary in the public interest. There is no such provision in the constitution of India. Statement 3 is correct: The Governor of the RBI draws his power from the RBI Act 1934. The RBI was nationalised in 1949.

Q2. The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following? (2012) 

1. Other banks retain their deposits with the RBI. 

2. The RBI lends funds to the commercial banks in times of need. 

3. The RBI advises the commercial banks on monetary matters. 

Select the correct answer using the codes given below: 

1. 2 and 3 only 

2. 1 and 2 only 

3. 1 and 3 only 

4. 1, 2 and 3

Answer: D

Statement 1 is correct: The Reserve Bank acts as the Banker, Agent, and Adviser to the Government of India and states. It performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. 

Statement 2 is correct: RBI lends money to all the commercial banks of the country. 

Statement 3 is correct: The RBI is also providing advisory functions to banks on financial matters and also on general economic problems. 

Q3. In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following? (2021) 

1. Lending to trade and industry bodies when they fail to borrow from other sources 

2. Providing liquidity to the banks having a temporary crisis 

3. Lending to governments to finance budgetary deficits 

Select the correct answer using the code given below. 

1. 1 and 2 only

2. 2 only 

3. 2 and 3 only

4. 3 only 

Anwer: B

In India, the central bank’s function as the ‘lender of last resort’ usually refers to providing liquidity to banks that are facing temporary financial difficulties and are unable to meet their obligations. A “lender of last resort” means that the RBI (also called banker of banks) offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.