Role and Functions of Reserve Bank of India for Ras /Rts Mains and ras/rts Prelims Examination

Role of RBI

Developmental Role: the developmental role has increased in view of the changing structure of the economy with a focus on SMEs and financial inclusionPriority Sector Lending: Introduced from 1974 with public sector banks. Extended to all commercial banks by 1992In the revised guidelines for PSL the thrust is on ensuring adequate flow of bank credit to those sectors that impact large segments of the population and weaker sections, and to the sectors which are employment intensive such as agriculture and small enterprises
Lead Bank SchemeSpecial Agricultural Credit Plan introduced.
Kisan Credit Card scheme (1998-99)
Focus on credit flow to micro, small and  medium enterprises development
Financial Inclusion
Monetary Policy: the role of RBI has changed from regulating credit and money flow directly to using market mechanisms for achieving policy targets. MP framework has changed to promote financial deregulations and market development. Role as a facilitator rather than as principal actor.M3 as an intermediary targetMultiple Indicator Approach
Regulation of foreign exchangeManagement of foreign exchange
Direct credit controlOpen Market Operations, MSS, LAF
Rupee convertability highly managedFull current ac convertability and some capital account convertability
Banker to the governmentMonetary policy was linked to the fiscal policy due to automatic monetisation of the deficitDelinking of monetary policy from the fiscal policy. From 2006, under FRBM, RBI ceased to participate in the primary market auctions of the central government’s securities.
As regulator of financial sector: As regulator of the financial sector, RBI has faced the challenge of regulating the increasing financial sector in India. Credit flows have increased. RBI had to make sure that financial institutions are regulated in a way to protect the consumers while not impeding economic growth.Reduction in SLR
Custodian of FOREX reservesForex reserves have increased drastically. Need to manage it adequately and avoid inflationary impact
InflationDirect instruments were usedMultiple indicators
Financial StabilityClosed economyIncreased FDI and FII has made financial stability one of the policy objectives.
Money MarketNarsimhan Committee (1998) recommended reforms in the money market


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