Functions of RBI: The Short Answer
The Reserve Bank of India (RBI) is India's central bank. Its main functions are: (1) monetary authority (keeps inflation near the 4% target through the Monetary Policy Committee), (2) issuer of currency (sole right to issue banknotes, Section 22), (3) banker to the Government, (4) banker to banks and lender of last resort, (5) regulator and supervisor of banks, NBFCs and other financial bodies, (6) manager of foreign exchange under FEMA 1999, (7) regulator of payment systems under the PSS Act 2007, (8) manager of public debt, (9) developmental role (financial inclusion, rural credit) and (10) consumer protection (RBI Ombudsman).
Key takeaway for bank exams: Match each function to its law and section: currency Section 22, banker to Government Sections 20–21 (states 21A), CRR Section 42, inflation target Section 45ZA, MPC Section 45ZB, foreign exchange FEMA 1999, payments PSS Act 2007, bank regulation Banking Regulation Act 1949. As of October 2026 the Governor is Sanjay Malhotra and the policy repo rate is 5.50%.
Facts are checked against the RBI Act 1934, the RBI website ("About Us" and MPC press releases) and the Government's gazette of 25 March 2026 on the inflation target. For the full list of Governors, see RBI Governor list 1935 to 2026.
RBI Basic Facts for Bank Exams
| Point | Fact |
|---|---|
| Set up on | 1 April 1935, under the RBI Act 1934 |
| Recommended by | Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926) |
| Nationalised | 1 January 1949 (fully owned by the Government of India) |
| Headquarters | Mumbai (moved from Kolkata in 1937) |
| First Governor / first Indian Governor | Sir Osborne Smith / C. D. Deshmukh |
| Governor (Oct 2026) | Sanjay Malhotra (since 11 December 2024) |
| Central Board | Governor, up to 4 Deputy Governors, 4 directors from local boards, 10 Government-nominated directors, 2 Government officials (up to 21 members) |
| Local boards | Mumbai, Kolkata, Chennai, New Delhi |
| Financial year | April to March (changed from July–June from 2020-21) |
| Emblem | Tiger and palm tree |
Function 1: RBI as Monetary Authority (Inflation Targeting and MPC)
- The RBI's monetary policy aims at price stability while keeping growth in mind.
- Under Section 45ZA, the Central Government, in consultation with the RBI, sets the inflation target once in five years. The gazette of 25 March 2026 kept it at 4% CPI inflation with a band of 2% to 6% for 1 April 2026 to 31 March 2031.
- Under Section 45ZB, the Monetary Policy Committee (MPC) decides the policy repo rate. It has 6 members (3 from the RBI including the Governor, and 3 external members appointed by the Government); the Governor has a casting vote in a tie; quorum is 4; it meets at least 4 times a year.
- At its 63rd meeting (5–7 October 2026) the MPC raised the repo rate by 25 bps to 5.50%; SDF 5.25%, MSF and Bank Rate 5.75%. Details: RBI monetary policy October 2026 highlights.
- The RBI fails the target if average inflation stays outside 2–6% for three consecutive quarters; it must then report the reasons to the Government.
- Tools: repo, SDF, MSF, CRR, SLR, open market operations and more. See monetary policy tools of RBI.
Function 2: RBI as Issuer of Currency
| Point | Fact |
|---|---|
| Legal power | Section 22 of the RBI Act: sole right to issue banknotes in India |
| Exception | ₹1 notes and all coins are issued by the Government of India (Ministry of Finance); the ₹1 note carries the Finance Secretary's signature, other notes the Governor's |
| Coins law | Coinage Act 2011; the RBI only distributes coins |
| Reserve system | Minimum Reserve System (since 1957): at least ₹200 crore of gold and foreign assets, of which at least ₹115 crore in gold |
| Note presses | RBI's subsidiary BRBNMPL at Mysuru and Salboni; the Government's SPMCIL at Nashik and Dewas |
| Clean note policy | The RBI replaces soiled and mutilated notes and withdraws old series |
Function 3: RBI as Banker to the Government
- Banker to the Central Government by law (Sections 20 and 21) and to State Governments by agreement (Section 21A).
- Keeps the Governments' accounts, receives and makes payments, and gives temporary loans called Ways and Means Advances (WMA); overdraft if the WMA limit is crossed.
- Advises the Government on financial matters.
Function 4: RBI as Manager of Public Debt
- Issues and manages Government securities (G-secs), Treasury Bills and State Development Loans for the Central and State Governments.
- Runs auctions, keeps records and pays interest and principal on the debt. Individuals can buy G-secs and T-bills through RBI Retail Direct. See money market instruments in India.
Function 5: RBI as Banker's Bank and Lender of Last Resort
- Banks keep a part of their deposits with the RBI as Cash Reserve Ratio (CRR) under Section 42; CRR is 3% (see CRR and SLR rate 2026).
- Banks borrow from the RBI through the Liquidity Adjustment Facility (repo) and the Marginal Standing Facility (MSF) in an emergency.
- As lender of last resort, the RBI supplies money to a sound bank facing a sudden shortage, to stop a panic.
- Provides inter-bank settlement through its accounts.
Function 6: RBI as Regulator and Supervisor of the Financial System
| Who | Main law |
|---|---|
| Commercial banks, small finance banks, payments banks, RRBs | Banking Regulation Act 1949 |
| Co-operative banks | BR Act (as applicable to co-operative societies) |
| NBFCs | Chapter IIIB of the RBI Act 1934 (Scale Based Regulation) |
| Housing Finance Companies | Regulated by RBI since August 2019 (NHB supervises) |
| Asset Reconstruction Companies | SARFAESI Act 2002 |
| Credit information companies | CIC (Regulation) Act 2005 |
The RBI licenses banks, sets capital and exposure rules, inspects them, and can supersede a bank's board or impose a moratorium. Read more in types of NBFC in India and important banking acts in India.
Function 7: RBI as Manager of Foreign Exchange
- Manages India's foreign exchange reserves and intervenes in the forex market to curb excess volatility in the rupee (the RBI does not fix a target exchange rate).
- Administers the Foreign Exchange Management Act (FEMA) 1999, which replaced FERA 1973.
- Authorises dealers in foreign exchange (banks and money changers).
Function 8: RBI as Regulator of Payment and Settlement Systems
- Under the Payment and Settlement Systems Act 2007, the RBI authorises and oversees payment systems through the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
- The RBI itself runs RTGS and NEFT (available 24×7); NPCI runs UPI, IMPS, RuPay and NACH under RBI authorisation. See NEFT, RTGS, IMPS and UPI difference.
Function 9: Developmental and Promotional Role of RBI
- Financial inclusion (no-frills accounts, Business Correspondents, Financial Inclusion Index) – see financial inclusion schemes in India.
- Priority sector lending targets for banks – see priority sector lending targets.
- Helped set up institutions such as NABARD (1982), NHB (1988), IDBI (1964) and UTI (1964); its stakes in NABARD and NHB were later transferred to the Government (2019).
- Financial literacy campaigns and fintech support through the Reserve Bank Innovation Hub (RBIH).
Function 10: Consumer Protection by RBI
- Runs the free RBI Ombudsman system under the Reserve Bank – Integrated Ombudsman Scheme 2026 (in force from 1 July 2026): compensation up to ₹30 lakh plus ₹3 lakh. See RBI Ombudsman Scheme 2026.
- Sets KYC and fair-practice rules for banks: KYC norms in banking.
RBI Subsidiaries List
| Subsidiary | Role |
|---|---|
| DICGC (Deposit Insurance and Credit Guarantee Corporation) | Insures bank deposits up to ₹5 lakh per depositor per bank |
| BRBNMPL (Bharatiya Reserve Bank Note Mudran Pvt Ltd) | Prints banknotes (Mysuru, Salboni) |
| ReBIT (Reserve Bank Information Technology Pvt Ltd) | IT and cyber security for the RBI and regulated entities |
| IFTAS (Indian Financial Technology and Allied Services) | Runs the financial network (INFINET) and IT services |
| RBIH (Reserve Bank Innovation Hub) | Promotes fintech innovation |
Functions of RBI with Sections: Quick Revision Table
| Function | Law / section |
|---|---|
| Sole issuer of banknotes | RBI Act, Section 22 |
| Banker to Central Government | Sections 20, 21 |
| Banker to State Governments | Section 21A (by agreement) |
| Business the RBI may do | Section 17 |
| CRR | Section 42 |
| Government directions to RBI | Section 7 |
| Inflation target | Section 45ZA (4%, 2–6%, to March 2031) |
| Monetary Policy Committee | Section 45ZB |
| NBFC regulation | Chapter IIIB (Sections 45-I to 45-QB) |
| Bank regulation | Banking Regulation Act 1949 |
| Foreign exchange | FEMA 1999 |
| Payment systems | PSS Act 2007 (BPSS) |
Functions of RBI Questions with Answers (Practice Set)
Q1. Under which section of the RBI Act does the RBI have the sole right to issue banknotes? (a) Section 17 (b) Section 22 (c) Section 42 (d) Section 45ZB Answer: (b). Section 22.
Q2. Who issues the ₹1 note in India? (a) RBI (b) Ministry of Finance, Government of India (c) SBI (d) NPCI Answer: (b). It carries the Finance Secretary's signature.
Q3. The RBI acts as banker to State Governments under: (a) Section 20 (b) Section 21 (c) Section 21A (d) Section 42 Answer: (c). Section 21A, by agreement with each state.
Q4. For which period has the 4% (2–6%) inflation target been notified in March 2026? (a) 2021–2026 (b) April 2026 to March 2031 (c) 2026–2028 (d) April 2025 to March 2030 Answer: (b).
Q5. How many members does the Monetary Policy Committee have? (a) 4 (b) 5 (c) 6 (d) 7 Answer: (c). 3 from the RBI and 3 external members.
Q6. The RBI was nationalised in: (a) 1935 (b) 1947 (c) 1949 (d) 1969 Answer: (c). 1 January 1949.
Q7. Which law does the RBI use to manage foreign exchange? (a) FERA 1973 (b) FEMA 1999 (c) PMLA 2002 (d) PSS Act 2007 Answer: (b). FEMA replaced FERA.
Q8. Which RBI subsidiary insures bank deposits? (a) BRBNMPL (b) ReBIT (c) DICGC (d) IFTAS Answer: (c). DICGC, up to ₹5 lakh per depositor per bank.
Q9. Temporary loans given by the RBI to the Government to meet cash mismatches are called: (a) Repo (b) Ways and Means Advances (c) MSF (d) Cash Management Bills Answer: (b). WMA.
Q10. The policy repo rate after the RBI's October 2026 policy is: (a) 5.25% (b) 5.50% (c) 5.75% (d) 6.00% Answer: (b). 5.50% (SDF 5.25%, MSF and Bank Rate 5.75%).
Functions of RBI FAQs
What are the main functions of RBI?
Monetary authority, issuer of currency, banker to the Government, debt manager, banker's bank and lender of last resort, regulator and supervisor of banks and NBFCs, manager of foreign exchange, regulator of payment systems, developmental role and consumer protection.
Why is RBI called the banker's bank?
Because banks keep their reserves (CRR) with the RBI, borrow from it, settle payments through it, and turn to it as the lender of last resort.
Who decides the repo rate in India?
The six-member Monetary Policy Committee under Section 45ZB of the RBI Act, chaired by the RBI Governor. It raised the repo rate to 5.50% on 7 October 2026.
Does RBI print coins?
No. Coins are minted by the Government of India under the Coinage Act 2011; the RBI only puts them into circulation.
When was RBI established and nationalised?
It was set up on 1 April 1935 under the RBI Act 1934 and nationalised on 1 January 1949.
What is the inflation target of RBI for 2026?
4% CPI inflation with a tolerance band of 2% to 6%, notified on 25 March 2026 for April 2026 to March 2031.
Practice Next
- Mock tests: RBI Functions and Organisation Quiz 01, IBPS and SBI Clerk Banking Awareness Mock Test 01, IBPS PO Mains Banking Awareness Mock Test 04 and SBI PO Mains Banking Awareness Mock Test 03.
- Related notes: RBI Governor list 1935 to 2026, monetary policy tools of RBI, repo rate history year-wise and banking awareness for bank exams.
- Exam details: SBI Clerk 2026 notification.
- Browse all study notes.