Objectives and Functions of Reserve Bank Of India


The RBI (Reserve Bank of India) is the apex financial institution of the country’s financial system entrusted with the task of control, supervision, promotion, development, and planning. RBI is the queen bee of the Indian financial system which influences the commercial banks’ management in more than one way. The RBI influences the management of commercial banks through its various policies, directions, and regulations. Its role in bank management is quite unique. In fact, the RBI performs the four basic functions of management, viz., planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks. 

In 1921, the Imperial Bank of India was established to perform as the central bank of India by the British Government. But unfortunately, Imperial Bank failed to show its performance up to the mark and didn’t achieve any success as the Central Bank. Then the Government asked the Hilton Young Commission in 1925 to view on this subject.

The commission submitted their reports saying that one single organization can’t be able to act as two separate agencies (both credit and currency control). So, it’s required to set up a brand new central bank. In 1st April 1935, Reserve Bank of India was set up. In January 1949, RBI was nationalized.

Objectives of Reserve Bank of India

To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

The Reserve Bank of India was established with the main motto of regulating all the banks in India. The objective was to keep in check the reserves as well as the issue of bank notes.

So, it was done to secure the monetary stability and thereby to operate the credit system and currency of the country to its own advantage.

Prior to the RBI, the government of India and the Imperial Bank of India were unable to control the Indian financial system by keeping it in check.

Therefore, a committee led by the Hilton and young commission in 1935, shifted the entire financial system to the RBI.

So, the primary target for RBI was to control and regulate the various financial policies and help in the development of the banking facilities throughout India.

The primary objective for the RBI would be to regulate the various banking functions for India in the money market. Thus, they focus mainly on issuing new notes.

The RBI was established with the aim of being a banker’s bank and also the bank for the government. Its task was to promote the economic growth of the country through various frameworks and economic policies of the government.

Functions of Reserve Bank of India

As per the RBI Act 1934, it performs 3 types of functions as that of any other central bank.

They are:

  1. Banking Functions
  2. Supervisory Functions and
  3. Promotional Functions.

The main functions of the RBI are to regulate the money supply in the country. Moreover, it has been directed to take care of agriculture, industry, export promotion etc. The RBI is also responsible for the maintenance of the external value of rupee.

Banking Functions

  • Bank of issue:  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 other Banking Department.
  • 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 the agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir.
  • Banker's Bank: The Reserve Bank of India acts as the banker’s 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 percent of its time liabilities in India.
  • 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 by changing the Bank rate or through open market operations.
  • Custodian of Foreign Reserve: It is the responsibility of the Reserve bank to stabilize the external value of the national currency. The Reserve Bank keeps golds and foreign currencies as reserves against note issue and also meets the adverse balance of payments with other counties. It also manages foreign currency in accordance with the controls imposed by the government.

Supervisory Functions

In addition to its traditional central banking functions, the Reserve Bank has certain non-monetary functions of the nature of supervision of banks and the promotion of sound banking in India.

The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, the liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.

The RBI is authorized to carry out the periodical inspection of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards the more rapid development of the economy and realization of certain desired social objectives.

Promotional Functions

With economic growth assuming a new urgency since independence, the range of the Reserve Bank’s functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking.

The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the Industrial Finance Corporation of India and the State Financial Corporations; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of Indian in 1963 and the Industrial Reconstruction Corporation of India in 1972.

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