Why RBI is central to the country's economy

The Reserve Bank of India (RBI) is widely known as the lord of interest rates. But besides rate decisions, what's less known is that the central bank wields unmatched influence on various aspects of finance and economy in general.

- Sunitha Natti @Hyderabad

This, in turn, puts a premium on the Governor's job, which has remained unparalleled since RBI's inception in 1935.

Till date, RBI has had 25 governors overseeing banking regulation and monetary policy, and on December 11, former revenue secretary Sanjay Malhotra took over as its 26th Governor. In his first media interaction, Malhotra vowed price and growth stability, but his brief, like his predecessors, goes much beyond chief concerns like inflation and a weakening economy.

While formulating, implementing and monitoring monetary policy or anchoring headline inflation to the 4% target gets the spotlight, the central bank undertakes some other crucial functions such as regulating and supervising financial entities. As forex manager, it facilitates external trade and payments, besides sustaining confidence in the value of rupee and preserving the purchasing power of the currency. As the custodian of currency, it issues, exchanges, and destroys currency notes as well as puts coins in circulation. As the public debt manager, it issues and manages borrowings of state and central governments. To avoid bank runs, central banks assume the role of lender of last resort, lending freely, against quality collateral and at a penal rate of interest.

Clearly, RBI is not any ordinary institution and is unique both in its functions and objectives. If the 2007-08 global financial crisis increased its relevance, it grew multi-fold following the Covid-19 pandemic.

The art of setting interest rates Maintaining macroeconomic stability and financial stability is the holy grail of any central bank. Macroeconomic stability ensures stable prices and sustainable growth, while financial stability keeps the financial system (which includes banks, non-banking financial entities and others) resilient, avoiding financial crises.