Various traditional functions of RBI

As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions. For simplification, the functions of the Reserve Bank are classified into the traditional functions, the development functions and supervisory functions.

Traditional Functions of RBI:

Traditional functions are those functions which every central bank of each nation performs all over the world. Basically these functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks.

  • Issue of Currency Notes
  • Banker to other Banks
  • Banker to the Government
  • Exchange Rate Management
  • Credit Control Function
  • Supervisory Function
1. Issue of Currency Notes:

The RBI has the sole right or author or monopoly of issuing currency notes except one rupee note a coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds.

2. Banker to other Banks:

The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent’s viz. the RBI. Similarly in need or urgency these banks approach the RBI for fund. Thus it is called the lender of the last resort.

3. Banker to the Government:

The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposit taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government.

4. Exchange Rate Management:

It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U. S Dollar) close to each other. 

5. Credit Control Function:

Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into infiationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability.

6. Supervisory Function:

The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new baraches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections audit of the commercial banks in India.

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