The term Reserve Bank of India (RBI) has been given to it with a specific reason. The RBI which is also called the Central bank of the country has numerous functions and responsibilities to fulfill. Founded in 1934 initially as a Private Bank, subsequently it is taken over the Govt. of India mainly to manage issue, currency notes, manage Foreign Exchange, Credit Control and licensing of Banks. Now RBI has the onerous task of managing inflation, inter alia. For this purpose RBI has been empowered to prescribe various Reserves to be kept with them to contain and limit the volume of floating currency in the market- in Banks, Post office, in Companies, and people at large. They are mainly into two types. One in the form of Cash to be deposited by Banks out of their demand and time deposits, called Cash reserve Ratio (under sec. 42 of RBI Act 1934). This apart banks also have to invest certain percentage of their deposits into the Government bonds and loans under Sec 24 of Banking Regulation Act 1949. These reserves are meant to contain inflation and to protect the interest of depositors. Because of this, RBI has got its name.
One of the functions of RBI, is to serve as the Banker to the Central Govt- take care of their receipts and payments like an accountant. Also RBI serves as the Guardian for banks and help them whenever they are in need. Whenever banks are in dire need of short term funds for their unexpected financial commitments RBI lends them at the bank Rate prescribed by it. When the banks borrow from RBI against the Bills/Bonds RBI charges interest rate which is termed as Repo rate The rate of interest is used to reduce or increase the money supply. Recently RBI reduced the Repo rate by 25 bps. This will lead to more funds in the coffers of Banks which could help them to lend more to the needy like Industries, Agriculture, Housing loans etc., This will also lead to reduction in the Loan interest rates charged by banks. For various sectors. There is always a persisting complaint against commercial banks is that the reduction in interest rates by RBI is not passed on to consumers of Bank loan products.