In terms of Section 20 of the RBI Act 1934, RBI has the responsibility to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union. In addition to that RBI has the right to transact Government business of the Union in India, as per Section 21 of RBI Act.
RBI carries out the general banking business of the governments through its own offices and commercial banks, both public and private, appointed as its agents. Section 45 of the Reserve Bank of India Act, 1934, provides for appointment of scheduled commercial banks as agents at all places or at any place in India, for purposes that it may specify, “having regard to public interest, convenience of banking, banking development and such other factors which in its opinion are relevant in this regard”. Hence, RBI transacts all banking business of the government, which involves the receipt and payment of money on behalf of the government and carrying out of its exchange, remittance and other banking operations. In return, the governments keep their cash balances on current account deposit with the RBI.
Reserve Bank also acts as lender to the Central and State Governments. RBI provides short-term credit to the Central Government and state Governments to meet any shortfalls in their receipts over disbursements. The Credit to Government includes the sum of the claims of the Central bank (RBI) on the Central Government in the form of holdings of dated securities, ways and means advances, Rupee coins and Treasury Bills etc. The above assets less the Centre’s cash balances with the RBI give Net RBI Credit to Central Government. The net RBI Credit to State Governments consists of loans and advances to state Governments, less Government deposit held in banks.
Commercial banks’ credit to Government represents their investments in long term and short- term Government securities. Under statutory requirement, various financial institutions like commercial banks, the LIC, GIC and subsidiaries, and provident funds are required by law to invest designated minimum proportions of their total assets/liabilities in government securities (and other ‘approved securities’). In this regard, as a regulator of banking, RBI fixes minimum proportions of investments in government securities compared to total assets/liabilities [‘Statutory Liquidity Ratio’ (SLR)] of individual banks. This monetary credit control exercise of RBI has major effects on money supply to the economy.
RBI also acts as adviser to the government on all banking and financial matters, including matters relating to international finance, the mobilisation of resources and banking legislation, among other things