What is Role of RBI in Financial Market? Functions & Responsibilities!

The Reserve Bank of India (RBI), which is the Central bank of India, was established in the year 1935. It is an autonomous body under the government of India. The objectives & functions of RBI are stated in the Reserve Bank of India Act, 1934, which is an act of Parliament.

As the world’s largest central bank, the Reserve Bank of India (RBI) has an important role in the Indian financial market. The central bank’s monetary policy is set by the government, and the RBI monetary policy is based on the objectives of price stability, healthy financial system, and a full employment of resources.

Functions of RBI

Quick list of primary objectives of RBI(Official Site):

  • To maintain price stability while keeping in mind the objective of growth. This is done by Monetary Policy.
  • To act as regulator and supervisor of Financial System. This is done to maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public.
  • To act as manager of Foreign Exchange – Foreign Exchange Management Act, 1999.
  • As issuer of currency to give the public adequate quantity of supplies of currency notes and coins and in good quality.

The Reserve Bank of India (RBI) is the central bank of the country, so its functions differ from those of other retail banks.  The Reserve Bank of India was established in 1935 and was privately owned until 1949, when it became wholly owned by the Government of India. The RBI has broader tasks, such as guaranteeing credit, managing payment systems to promote economic development.

Role of the RBI in the financial market

The RBI plays the following role when it comes to the financial markets of a country.

1. Ensuring stability of infrastructure and growth

The financial markets play a very important role in the financial system and only a few organizations in the country have the authority and resources to ensure its stability; one of these organizations is the RBI. A financial market infrastructure (FMI) is a multilateral system of participating institutions whose operator provides for the clearing, settlement and recording of payments, securities, derivatives or other financial transactions. IMFs include PAyment systems, CSDs, securities settlement systems, central counterparties, trade repositories (an entity that maintains electronic records of transaction data), etc.

It is essential that these functions operate as well as possible and that the appropriate infrastructure is in place, because financial markets are channels that concentrate risk in the economy, which, if not properly managed, can transmit shocks to the whole economy. To meet these challenges, the RBI is setting up organisations and committees to monitor and develop the infrastructure of the financial market.

Some of these infrastructures include Securities Settlement System (SSS), Real Time Gross Settlement System (RTGS), Clearing Corporation of India (CCIL), Consistent Dealing and Order Matching System (NDS-OM), etc. NDS-Om, for example, owned by the RBI, is an options-based electronic trading system for government securities. NDS-OM accounts for 90% of government bond trading volume.

What is Role of RBI in Financial Market? Functions & Responsibilities! 1

2. Enabling the growth of payment systems in India

The RBI monitors the operation of these payment infrastructures to ensure their effectiveness and the safety of participants. This role is becoming increasingly important, especially as the country is under pressure to adopt an electronic payment system and comply with international trends.

This is possible only because the RBI ensures the security, efficiency and availability of payment and settlement systems across the country.

3. Oversight of payment and settlement systems

The RBI assigns certain functions to the various other institutions it establishes to regulate and oversee the system. The RBI is also in the process of setting up the legal framework that will govern these arrangements. For example, the RBI has created the PSS (Payment and Settlement Systems Act, 2007).

The Act enables the RBI to lay down norms on the format of money orders, time limits, mode of transfer of money, etc. The RBI is also authorized to access all information regarding the operation of a payment system, to enter and inspect all premises where the payment system is operated, and to conduct audits and inspections.

4. Regulation of OTC derivatives

The trade repositories for over-the-counter derivatives have been set up under the aegis of the RBI and fall under two separate regulatory packages – the Reserve Bank of India Act 1934 and the Futures (Regulation) Act 1952.

OTC derivatives here include interest rate swaps, forward rate agreements, currency swaps, cross-currency swaps, currency options, cross-currency options.

Short note
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5. Other RBI functions

The RBI can influence the money supply by regulating the deposits, reserves (SLR and CRR) that banks have to keep and the interest rates it charges to commercial banks seeking to borrow money. These rates and requirements evolve according to the needs of the economy.

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The RBI also plays an important role in stabilising the value of the Indian currency by holding precious metal and foreign exchange reserves. Another important aspect emphasised by the RBI is the control of its arch enemy – inflation.

Final thoughts

Today we have discussed the role of the RBI in the financial market. Over the past 85 years, the RBI has grown into one of the largest and most trusted organizations in the country. This is still evident today when we look at the RBI in difficult times when the economy is vulnerable to global and domestic turbulence.

The RBI not only increases the scale of growth and scope of the Indian economy, but also ensures that the internal operating environment of the Indian financial markets is stable, robust and evolves in line with global standards.

Frequently Asked Questions

What is the role and functions of RBI?

The Reserve Bank of India is the central bank of India. It is a banking and monetary authority of India. The bank is headquartered in Mumbai, with offices in Delhi and Chennai.

What is a main role of RBI?

The Reserve Bank of India is the central bank of India.

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