What does the RBI Governor do?
If you’ve been following the news, then you’ll know that much has been made of the leaving of Raghuram Rajan and his replacement, Urjit Patel. Newspapers reckon Urjit Patel, a respected economist who worked at the IMF from 1990 to 1995 and has stints at both Reliance and BCG, will perhaps toe the line a little more and hog the limelight a little less than his predecessor, Raghuram Rajan. But let’s set aside the office gossip for a minute and try and understand what the RBI Governor does. The RBI Governor is the head of the Reserve Bank of India, which is the Central Bank of India. The economy of a country is governed by two key economic policies - a Fiscal Policy and a Monetary Policy. The Fiscal Policy is steered –framed and implemented by the Government, in our case the BJP and Arun Jaitley specifically, while the RBI and the governor, who is its head, govern the Monetary Policy.
What is the Monetary Policy? Other than framing, implementing and monitoring Monetary policy to ensure price stability and adequate flow of credit, the RBI also has the following functions:
Control the Repo Rate, reverse Repo Rate, Cash reserve Ratio etc
Monitor key financial indicators like GDP and Inflation
Maintain confidence in the system Self Study Question: What happens when the RBI increases the Repo rates? What is the link between Inflation and Interest rates?
Regulation of the Financial System- They in charge of framing the rules and regulations under which various banks, both nationalized and private, operate. They are in charge of ensuring public confidence, protecting depositors’ money, and ensuring that cost –effective banking services are provided to the public by the financial system
Manage Foreign Exchange- The RBI manages the Foreign Exchange Management Act, 1999. India is not completely capital convertible. The RBI can maintain the value of the Indian Rupee and take corrective action if it becomes too dear or too cheap.
Issuer of currency: Yes, the RBI is in charge of issuing, exchanging and destroying currency not fit for circulation. But no, they do not print money as and when they please. What they are in charge of is to give the public adequate supplies of currency notes and coins of good quality
Monetary Policy Control: TO further our second point, they control inflation, bank credit and interest rates.
Banker to Government and other banks: The RBI is the banker to the government and state governments. It also maintains all the banking accounts of all scheduled banks.
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