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Unit 4: Reserve Bank of India

Bank of Issue Notes
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes
of all denominations.
The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency
notes. The assets and liabilities of the Issue Department are kept separate from those of the
Banking Department. Originally, the assets of the Issue Department were to consist of not less
than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was
not less than 40 crores in value. The remaining three-fifths of the assets might be held in rupee
coins, Government of India rupee securities, eligible bills of exchange and promissory notes
payable in India. Due to the exigencies of the Second World War and the post-war period, these
provisions were considerably modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of 200 crores, of which at least 115 crores should
be in gold. The system as it exists today is known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments
in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact
Government business, via. to keep the cash balances as deposits free of interest, to receive and to
make payments on behalf of the Government and to carry out their exchange remittances and
other banking operations. The Reserve Bank of India helps the Government - both the Union
and the States to float new loans and to manage public debt. The Bank makes ways and means
advances to the Governments for 90 days. It makes loans and advances to the States and local
authorities. It acts as adviser to the Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank
a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in
India. By an amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities
or get financial accommodation in times of need or stringency by rediscounting bills of exchange.
Since commercial banks can always expect the Reserve Bank of India to come to their help in
times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender
of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations. 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. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a licence from the Reserve Bank of India to do banking business

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