Which of the following are the functions of the Reserve Bank of India?

1. The RBI shall recommend the denominational values of the notes as well as the discontinuance of issue of notes.

2. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa.

3. Setting of Inflation targeting.

4. Maintaining price stability in the economy.

Select the correct answer answer using the codes given below:

Solution

● Statement 1 is correct: The RBI shall recommend the denominational values of the notes as well as the discontinuance of issue of notes (Section 24 of the Reserve Bank of India Act, 1934). Further, it is on the recommendation of the RBI that the Central government may declare that any series of bank notes shall cease to be legal tender (Section 26) ● Statement 2 is correct: Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the Reserve Bank buys and sells foreign currencies and also protects the country's foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently, India has a Foreign Exchange Reserve of around US$ 650 billion. ● Statement 3 is incorrect: To maintain price stability, inflation needs to be controlled. The Government of India sets an inflation target for every five years. RBI has an important role in the consultation process regarding inflation targeting. The current inflation-targeting framework in India is flexible in nature. The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years. ● Statement 4 is correct: The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.