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Role and Function of the Reserve Bank of India (RBI)

In every country there is one organization which works as the central bank. The function of the
central bank of a country is to control and monitor the banking and financial system of the
country. In India, the Reserve Bank of India (RBI) is the Central Bank.

The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of regulator of
the banking system in India. The Banking Regulation Act 1949 and the RBI Act 1953 has given
the RBI the power to regulate the banking system.
The RBI has different functions in different roles. Below, we share and discuss some of the
functions of the RBI.

RBI is the Regulator of Financial System

The RBI regulates the Indian banking and financial system by issuing broad guidelines and
instructions. The objectives of these regulations include:

Controlling money supply in the system,

Monitoring different key indicators like GDP and inflation,
Maintaining peoples confidence in the banking and financial system, and
Providing different tools for customers help, such as acting as the Banking

RBI is the Issuer of Monetary Policy

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well.
The main objectives of monitoring monetary policy are:

Inflation control
Control on bank credit
Interest rate control

The tools used for implementation of the objectives of monetary policy are:

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),

Open market operations,

Different Rates such as repo rate, reverse repo rate, and bank rate.

RBI is the Issuer of Currency

Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also takes
action to control circulation of fake currency.

RBI is the Controller and Supervisor of Banking Systems

The RBI has been assigned the role of controlling and supervising the bank system in India. The
RBI is responsible for controlling the overall operations of all banks in India. These banks may

Public sector banks

Private sector banks
Foreign banks
Co-operative banks, or
Regional rural banks

The control and supervisory roles of the Reserve Bank of India is done through the following:

Issue of Licence: Under the Banking Regulation Act 1949, the RBI has been given
powers to grant licenses to commence new banking operations. The RBI also grants
licenses to open new branches for existing banks. Under the licensing policy, the RBI
provides banking services in areas that do not have this facility.
Prudential Norms: The RBI issues guidelines for credit control and management. The
RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such,
they are responsible for implementation of international standards of capital adequacy
norms and asset classification.
Corporate Governance: The RBI has power to control the appointment of the chairman
and directors of banks in India. The RBI has powers to appoint additional directors in
banks as well.
KYC Norms: To curb money laundering and prevent the use of the banking system for
financial crimes, The RBI has Know Your Customer guidelines. Every bank has to
ensure KYC norms are applied before allowing someone to open an account.
Transparency Norms: This means that every bank has to disclose their charges for
providing services and customers have the right to know these charges.
Risk Management: The RBI provides guidelines to banks for taking the steps that are
necessary to mitigate risk. They do this through risk management in basel norms.
Audit and Inspection: The procedure of audit and inspection is controlled by the RBI
through off-site and on-site monitoring system. On-site inspection is done by the RBI on
the basis of CAMELS. Capital adequacy; Asset quality; Management; Earning;
Liquidity; System and control.
Foreign Exchange Control: The RBI plays a crucial role in foreign exchange
transactions. It does due diligence on every foreign transaction, including the inflow and

outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee.
The RBI also takes necessary steps to control the current account deficit. They also give
support to promote export and the RBI provides a variety of options for NRIs.
Development: Being the banker of the Government of India, the RBI is responsible for
implementation of the governments policies related to agriculture and rural
development. The RBI also ensures the flow of credit to other priority sectors as well.
Section 54 of the RBI gives stress on giving specialized support for rural development.
Priority sector lending is also in key focus area of the RBI.

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the
interest of investors. It was set up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
3. Intermediaries:
For intermediaries it provides a competitive professional market.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives of
SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,

Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud
and cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc. These
insiders have sensitive information which affects the prices of the securities. This information is
not available to people at large but the insiders get this privileged information by working inside
the company and if they use this information to make profit, then it is known as insider trading,
e.g., the directors of a company may know that company will issue Bonus shares to its
shareholders at the end of year and they purchase shares from market to make profit with bonus
issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying
securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce the
sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange
and increase the business in stock exchange. Under developmental categories following
functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate
the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in any

(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
The Organisational Structure of SEBI:

1. SEBI is working as a corporate sector.

2. Its activities are divided into five departments. Each department is headed by an executive
3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
4. SEBI has formed two advisory committees to deal with primary and secondary markets.
5. These committees consist of market players, investors associations and eminent persons.
Objectives of the two Committees are:
1. To advise SEBI to regulate intermediaries.
2. To advise SEBI on issue of securities in primary market.
3. To advise SEBI on disclosure requirements of companies.
4. To advise for changes in legal framework and to make stock exchange more transparent.
5. To advise on matters related to regulation and development of secondary stock exchange.