Reserve Bank of India: Functions and Regulatory Role
Reserve Bank of India: Functions and Regulatory Role
This domain tests the RBI as monetary authority, currency issuer, banker to government and banks, regulator and crisis manager. Questions often compare instruments and identify which function a given action belongs to.
Core functions
- Monetary policy is set by the six-member Monetary Policy Committee: three RBI members including the Governor as chair, and three external members. The Governor has a casting vote. The inflation target is 4% with a tolerance band of 2% to 6%.
- Currency: RBI issues all notes except the ₹1 note, which is issued by the Government of India; coins are minted by the Government and distributed by RBI.
- Banker to government: RBI manages public debt, receives and pays on behalf of government, and gives Ways and Means Advances.
- Banker's bank: banks maintain CRR balances with RBI; RBI acts as lender of last resort.
- Regulator: RBI licenses banks under the Banking Regulation Act, 1949, sets CRR under RBI Act Section 42 and SLR under BR Act Section 24, issues prudential norms, and regulates payment systems under the Payment and Settlement Systems Act, 2007.
Worked example
CPI inflation is 6.4%, above the upper tolerance of 6%. The MPC may raise the repo rate. A higher repo raises the cost at which banks borrow from RBI, transmits to lending rates, reduces credit demand and aggregate demand, and moderates inflation. The reasoning is the policy transmission chain, not an automatic rule: the MPC also weighs growth and whether the shock is temporary.
Traps
- Repo is the rate at which RBI lends to banks; reverse repo absorbs liquidity.
- CRR is cash with RBI; SLR is held in approved securities.
- The RBI does not mint coins.
- Setting income tax and GST is outside RBI's powers.