General Studies Paper 3 (Indian Economy)
Question:- 103. Briefly highlight the role and functions of RBI as the central bank of the nation. Answer in 150 words.
Nov 01, 2022


The Preamble to the Reserve Bank of India Act, 1934 (the Act), under which it was constituted, specifies its objective as “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage”.



The objectives outlined in the Preamble hold good even after 75 years. However, with the passage of time, the role of RBI has also evolved and scope broadened. The functions of RBI can be categorized as follows:



  1. 1. Monetary policy: One of the most important functions of RBI is the formulation and execution of Monetary Policy and securing monetary stability in India. It is executed through the Monetary Policy Committee. The MPC is entrusted with the decision on the policy repo rate required to achieve the inflation target. The RBI is required to publish, once in every six months, a Monetary Policy Report (MPR).
  2. 2. Regulation and supervision of the banking and non-banking financial institutions, including credit information companies: The Reserve Bank designs and implements the regulatory policy framework for banking and non-banking financial institutions with the aim of providing people access to the banking system, protecting depositors’ interest, and maintaining the overall health of the financial system. Its function of regulating the commercial banking sector, which emerged with the enactment of the Banking Regulation Act, 1949, has over time, expanded to cover other entities. Thus, amendments to the Banking Regulation Act, 1949 brought cooperative banks and regional rural banks under the Reserve Bank’s jurisdiction, while amendments to the Reserve Bank of India Act saw development finance institutions, non-banking financial companies.
  3. 3. Regulation of money, forex and government securities markets and also certain financial derivatives: RBI is the issuer of currency in India. Its functions also include the management of foreign exchange reserves. RBI is the custodian of India’s foreign exchange reserves. Its duty is to maintain adequate level of foreign exchange reserves in the country. Foreign exchange reserve includes-
  • -Foreign Currency Assets (FRAs)
  • -Special Drawing Rights (SDRs)

The legal provision regarding the management of foreign exchange reserves is mentioned in RBI Act 1934.


  1. 4. RBI supervises and regulates the Foreign Exchange Market through the provision of the FEMA Act 1999.


  1. 5. Banker to banks: Banks open their current account with RBI to maintain SLR and CRR. RBI is a common banker for the different banks that enables the settlement of interbank transfers of funds. For special purposes or in need, RBI provides short-term loans and advances to banks. It also acts as the lender of last resort. That means RBI comes to rescue the banks that are solvent (facing temporary liquid problems) but have not gone bankrupt. RBI provides this facility to protect the interest of depositors and to prevent the possible failure of the bank.


  1. 6. Banker to the Central and State Governments: RBI acts as a banker to the government. RBI is the responsible agency for receiving and paying money on behalf of the various government departments. RBI is also authorized to appoint other banks to act as its agent and undertake banking business on the behalf of the government. RBI maintains Central and State Government funds like Consolidated Funds, Contingency Funds, and Public Account. RBI also provides loans to the central/State/UT Government as a banker to the government. It also functions as the Central and State Government’s Debt Manager.
  2. 7. Oversight of the payment and settlement systems: Payment system includes a system enabling credit card, debit card, smart card operations, or money transfer operations, etc The Payment and Settlement Systems Act, 2007 and PSS Regulations, 2008 provide for the RBIto conduct oversight of payment and settlement systems, as part of its mandate.
  3. 8. Currency management: The RBI and the government are in charge of the creation, manufacturing, and overall administration of the national currency with the aim of releasing a sufficient quantity of authentic and clean notes. The Reserve Bank of India has given some bank branches permission to set up currency chests in order to simplify the circulation of rupee notes and coins around the nation (A currency chest is a storehouse where currency notes and rupee coins are stocked on behalf of RBI)
  1. 9. Developmental role: RBI’s developmental role includes creating institutions to build financial infrastructure, ensuring credit to the productive sector of the economy, and expanding access to affordable financial systems.
  2. 10.Research and statistics: Such research undertaken by RBI focuses on issues and problems arising at the national and international levels, having a critical impact on the Indian economy. India is a signatory of Special Data Dissemination Standards (SDDS) as defined by IMF for the purpose of releasing data. Hence, RBI publishes an Annual Report and a Report on Trends and Progress of Banking in India every year. RBI conducts Consumer Confidence Survey and Inflation Expectation Survey on a quarterly basis.



Above all, RBI acts as an advisor to the government when called upon to do that on financial and banking-related matters. Hence, the above points summarize the role of RBI as the central bank of India. Nevertheless, these functions and roles keep expanding with the evolving needs of time.