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Powerful Weapon at the Disposal of Central Government

BY: gunda ramesh babu | Category: Finance | Submitted: 2010-12-12 03:36:00
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Article Summary: "The RBI was established under the Reserve Bank of India Act, 1934 on April 1, 1935 as a private shareholders' bank but since its nationalization in 1949, is fully owned by the Government of India..."


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The RBI was established under the Reserve Bank of India Act, 1934 on April 1, 1935 as a private shareholders' bank but since its nationalization in 1949, is fully owned by the Government of India. The Preamble of the RBI describes the basic functions as 'to regulate the issue of Bank notes and 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'. Thus, unlike the current trend in many countries, there is no explicit mandate for price-stability or formal inflation targeting, but the mandate appears to be similar to that of the Federal Reserve of the USA. The twin objectives of monetary policy in India have evolved over the years as those of maintaining price stability and ensuring adequate flow of credit to facilitate the growth process. The relative emphasis between the twin objectives is modulated as per the prevailing circumstances and is articulated in the policy statements. Consideration of macro-economic and financial stability is also subsumed in the mandate. The RBI is also entrusted with the management of foreign exchange reserves (which include gold holding also), which are reflected in its balance sheet. While RBI is essentially a monetary authority, its founding statute mandates it to be the manager of public debt of the Government of India and banker to the Government.

The function of regulating and supervising of banks has been assigned to the RBI by a separate legislation enacted in 1949, while the regulation of Non-Banking Finance Companies (NBFCs) has been entrusted to it through an amendment to the RBI Act. The powers for regulation of money markets, government securities market, fore market and gold are derived from the RBI Act and the regulation explicitly entrusted through government notifications under the Securities Contracts (Regulation) Act. The regulation of current and capital account transactions of the external sector was assigned to the RBI under another statute in 1999, replacing an earlier one in 1973.

It has responsibility for issue of coins and distribution.

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