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Here are the many roles an RBI governor has to juggle

business Updated: Aug 21, 2016 18:20 IST
Gaurav Choudhury
New RBI governor

Passers by are reflected on the logo of the Reserve Bank of India (RBI) outside its headquarters in Mumbai.(AFP Photo)

The primary duty of most central banks in the world is to regulate the flow of money and credit. The Reserve Bank of India, however, has a few associate duties, making the job of the central bank’s chief more difficult compared to global peers.

Read: Urjit Patel appointed 24th RBI governor, will hold post for 3 years

Here’s the low-down on the major tasks that the RBI governor has to perform:

Monetary policy

•The central bank uses monetary tools to influence demand and prices.

•In times of weak growth and low prices, it is usual for the RBI to cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.

•When inflation is high, it raises interest rates to temper demand and cool prices.

•The government and the RBI have agreed on a new monetary policy framework that makes containing inflation the central bank’s topmost duty.

•A six-member panel headed by the RBI governor will decide on interest rate decisions to keep inflation between 2% to 6% in the next five years.

Read: 5 challenges Urjit Patel will face as the new RBI governor

Banker’s bank and watchdog

•The RBI is a watchdog for banks.

•Banks have to fulfil customers’ cash and borrowing requirements as billions of funds move around accounts every day.

•Banks need their own mechanism to transfer funds and settle inter-bank transaction. As the banker to the banks, the RBI oversees this system.

•The RBI is also the ‘lender of last resort’ for banks. If a bank is struggling to stay solvent and facing a liquidity problem, the RBI can come to its rescue to protect the depositors’ interests.

•The RBI has overseen weak banks’ takeover by the stronger banks to protect depositors’ interests, preventing bank failures in India

Government’s banker

•Managing the government’s banking transactions is a key RBI role.

•the RBI acts as the government’s banker (both state and the Centre) that sometimes brings it in conflict with its other major task of controlling inflation.

•As the government’s banker, the RBI has to keep interest rates low, but faces a dilemma in times of high inflation; it has to keep lending rates high.

•The RBI also has to ensure that a high fiscal deficit — shorthand for the amount of money the government borrows to fund its expenses — does not “crowd out” private sector with enough for banks for lending to industry and households.

•The RBI is a regulator of government securities and also a trader in government securities.

•Also, as the government’s merchant banker conducting state bond auctions, it enjoyed substantial control over liquidity.

Currency custodian

•Foreign exchange management is a major RBI function.

•As the currency administrator, it prints money, as the custodian of foreign exchange reserves, it is responsible for preventing volatility in currency markets.

•Banks, corporations, brokers, individuals and governments buy and sell currencies every day. That explains the daily fluctuations in the currency prices according to changing demand and supply situation.

•As the country’s central bank, the RBI has a responsibility to prevent the economy from currency shocks.

•It closely tracks developments in local and global financial markets.

•Central banks world over intervene through buying or selling of currencies through banks. To prop up a weak rupee, the RBI sells dollars in the market and vice versa.