WALKING THE TIGHT ROPE

The primary duty of central banks is to regulate the flow of money. The RBI, however, has a few associate roles, making the job of its chief more difficult. Here’s a low-down

MONETARY POLICY

The central bank n 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

BANK AND WATCHDOG

Banks have to fulfil n customers’ cash requirements as billions move around every day Banks need a mechanism to n transfer money and settle transactions. As the banker to banks, the RBI oversees this system

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

GOVT’S BANKER

Managing the Central n and state govt’s banking transactions is a key role of the RBI This sometimes brings it in conflict n with its other major task of controlling inflation

The RBI also has to ensure that t n he money borrowed by the govt does not “crowd out” private investment

The RBI is a regulator and trader of n government securities