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Unit 2: Reserve Bank of India

(i) The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible Notes
securities.
(ii) Can get financial accommodation in times of need or strictness by rediscounting bills of
exchange.

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Caution Since 1957, the Reserve Bank of India is required to maintain gold and foreign
exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The
system as it exists today is known as the minimum reserve system.
Controller of Credit

The Reserve Bank of India is the controller of credit:
1. It has the power to influence the volume of credit created by banks in India by changing
the Bank rate or through open market operations.
2. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any
particular bank or the whole banking system not to lend to particular groups or persons
on the basis of certain types of securities.
3. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.

4. Every bank has to get a license from the Reserve Bank of India to do banking business
within India.

5. The license can be cancelled by the Reserve Bank of certain stipulated conditions are not
fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch.

6. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its
assets and liabilities.

7. The Reserve Bank has also the power to inspect the accounts of any commercial bank.
These powers of the Bank to call for information are also intended to give it effective control of
the credit system.

Custodian of Foreign Reserves

1. The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
2. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell
at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange
fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed
at 1sh.6d. Though there were periods of extreme pressure in favour of or against the rupee.

3. After India became a member of the International Monetary Fund in 1946, the Reserve
Bank has the responsibility of maintaining fixed exchange rates with all other member
countries of the IMF.
4. The Reserve Bank has to act as the custodian of India’s reserve of international currencies
i.e. forex balances are acquired and managed by the Bank.

5. The RBI has the responsibility of administering the exchange controls of the country.

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