Page 122 - DMGT401Business Environment

Unit 5: Monetary Policy

put into circulation through the RBI. The Bank also exchanges notes and coins of one Notes
denomination into those of other denominations as demanded by the public. The RBI has
15 full-fledged issue offices and 2 sub-offices, along with 4,127 currency chests where the
stock of new and re-issuable notes, rupees and coins are stored at the end of March 1997.
2. Banker to Government: The Reserve Bank of India acts as the banker to the central
government as also to the governments of the constituent units of India's federal system.
Banks transact the banking business of the Government of India and accordingly perform
the following functions: accept money on account of the government, make payment on
its behalf, and carry out exchange remittance and other banking operations, including the
management of public debt. The RBI plays an important role in financing government
expenditure.
In addition to financial transaction, the Bank acts as the agent of the government in respect
of India's membership of the International Monetary Fund and International Bank of
Restructuring and Development. It also acts as an adviser to the government on banking
and financial matters.

Ways and Means Advances: The Bank can make "Ways and Means Advances", i.e., temporary
advances to both the Central and state governments to bridge the temporary gap between
receipts and payments. The maximum maturity period of these advances is three months.

3. Banker's Bank: RBI has extensive powers to control the commercial banking system. All
scheduled banks are under a statutory obligation to maintain a certain minimum of cash
reserve which is to be decided by the RBI against their demand and time liabilities. With
this, the RBI determines the deposits/credit creating ability of the bank. The RBI provides
financial assistance to scheduled commercial banks and state co-operative banks in the
form of discounting of legible bills, loans and advances against approved securities. The
RBI is expected to help banks in their crises. RBI is not only a banker's bank but it also
works as a lender of last resort.
4. Controller of Credit: The RBI functions as the controller of credit. As such, it regulates the
quantity of credit and the rate at which it is made available. It does this through the use of
general and selective controls.
5. Exchange Management and Control: The RBI is required to stabilise the external value of
the rupee. For this purpose, it functions as the custodian of the nation's foreign exchange
reserves. It is obligatory for the RBI to buy and sell currencies of all the members of the
IMF. In this field the RBI has following dimensions:

(a) To administer the 'foreign exchange control'.
(b) To choose the exchange rate system and fix or manage the exchange rate between
the rupee and other currencies.
(c) To exchange reserve.

(d) To interact or negotiate with the monetary authorities of the Sterling Area, Asian
Clearing Union and other countries, and with international financial institutions
such as the IMF, World Bank and the Asian Development Bank.
The RBI administers 'exchange control' in terms of the Foreign Exchange Management Act
(FEMA). The objective of exchange control is to limit the demand of foreign exchange in
keeping with its supply. The RBI manages this through the buying and selling of foreign
exchange from and to scheduled banks, which are the authorised dealers in the Indian
Foreign Exchange market. The Bank also manages the investment of reserves in gold
accounts abroad and the shares and securities issued by foreign government and
international banks or financial institutions.

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