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The Reserve Bank of India is India's equivalent of the United States Federal Reserve Bank. It is the country's quasi-governmental central bank [there is in India a very large privately-owned bank called Central Bank of India; this is, needless to say, a separate entity]. As such it functions in largely the same manner. Established in April 1935 under the "Reserve Bank of India Act of 1934," the Reserve Bank of India defines it mission as follows:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and CREDIT system of the country to its advantage." (Emphasis added)
As the above quote from the bank's charter indicates, one of its central responsibilities is managing the country's credit system. As with the U.S. Federal Reserve Bank, the Reserve Bank of India sets interest rates that influence how credit is used. By raising interest rates, credit becomes more expensive, and borrowing slows down. When the Bank lowers rates, borrowing increases because it becomes less expensive for companies and individuals to take out loans. Manipulation of money supplies and credit is an essential component of managing an economy, and that is the role of the Reserve Bank of India.
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