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Central_bank

The central bank, such as the Reserve Bank of India, serves as the apex financial institution responsible for regulating and stabilizing a nation's monetary and banking system. Its key functions include issuing currency, acting as the government's banker, managing cash reserves, and controlling credit to ensure financial stability. Additionally, it serves as a lender of last resort and facilitates interbank transfers and settlements.

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35 views5 pages

Central_bank

The central bank, such as the Reserve Bank of India, serves as the apex financial institution responsible for regulating and stabilizing a nation's monetary and banking system. Its key functions include issuing currency, acting as the government's banker, managing cash reserves, and controlling credit to ensure financial stability. Additionally, it serves as a lender of last resort and facilitates interbank transfers and settlements.

Uploaded by

andrew kachere
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Central bank is regarded as an apex financial institution in the banking system.

It is
considered as an integral part of the economic and financial system of a nation. The
central bank functions as an independent authority and is responsible for controlling,
regulating and stabilising the monetary and banking structure of the country.

In India, the Reserve Bank of India is regarded as the central bank. It was set up in
1935. Central banks are responsible for maintaining the financial stability and
economic sovereignty of the country.

Also see: Difference Between Central Bank and Commercial Bank

The functions of a central bank can be discussed as follows:

1. Currency regulator or bank of issue

2. Bank to the government

3. Custodian of Cash reserves

4. Custodian of International currency

5. Lender of last resort

6. Clearing house for transfer and settlement

7. Controller of credit

8. Protecting depositors interests

The above mentioned functions will be discussed in detail in the following lines.

Currency regulator or bank of issue: Central banks possess the exclusive right to
manufacture notes in an economy. All the central banks across the world are
involved in issuing notes to the economy.

This is one of the most important functions of the central bank in an economy and
due to this the central bank is also known as the bank of issue.

Earlier all the banks were allowed to publish their own notes which resulted in a
disorganised economy. To avoid this situation the government around the world
authorised the central banks to function as the issuer of currency, which resulted in
uniformity in circulation and balanced supply of money in the economy.
Bank to the government: One of the important functions of the central bank is to
act as the bank to the government. The central bank accepts deposits and issues
funds to the government. It is also involved in making and receiving payments for the
government. Central banks also offer short term loans to the government in order to
recover from bad phases in the economy.

In addition to being the bank to the government, it acts as an advisor and agent of
the government by providing advice to the government in areas of economic policy,
capital market, money market and loans from the government.

In addition to that, the central bank is instrumental in formulation of monetary and


fiscal policies that help in regulation of money in the market and controlling inflation.

Custodian of Cash reserves: It is a practice of the commercial banks of a country


to keep a part of their cash balances in the form of deposits with the central bank.
The commercial banks can draw that balance when the requirement for cash is high
and pay back the same when there is less requirement of cash.

It is for this reason that the central bank is regarded as the banker’s bank. Central
bank also plays an important role in the credit creation policy of commercial banks.

Custodian of International currency: An important function of the central bank is to


maintain a minimum balance of foreign currency. The purpose of maintaining such a
balance is to manage sudden or emergency requirements of foreign reserves and
also to overcome any adverse deficits of balance of payments.

Lender of last resort: The central bank acts as a lender of last resort by providing
money to its member banks in times of cash crunch. It performs this function by
providing loans against securities, treasury bills and also by rediscounting bills.

This is regarded as one of the most crucial functions of the central bank wherein it
helps in protecting the financial structure of the economy from collapsing.

Clearing house for transfer and settlement: Central bank acts as a clearing house
of the commercial banks and helps in settling of mutual indebtedness of the
commercial banks. In a clearing house, the representatives of different banks meet
and settle the inter bank payments.

Controller of credit: Central banks also function as the controller of credit in the
economy. It happens that commercial banks create a lot of credit in the economy
that increases the inflation.
The central bank controls the way credit creation by commercial banks is done by
engaging in open market operations or bringing about a change in the CRR to
control the process of credit creation by commercial banks.

Protecting depositors interests: Central bank also needs to keep an eye on the
functioning of the commercial banks in order to protect the interests of depositors.

Functions of Central Bank Introduction


In the banking system, the central bank is recognized as the most powerful
financial institution. It is considered to be an important part of a country's
economic and financial structure. The central bank is an independent authority
in charge of supervising, regulating, and stabilizing the country's monetary
and banking framework. The Reserve Bank of India is the country's central
bank. It was founded in 1935. Central banks are in charge of ensuring the
country's Financial Stability and Economic sovereignty.

The meaning of central bank is a financial institution that has the privilege of
producing and distributing money (and credit) for a country or a group of
countries. The central bank, in the modern economy, is also responsible for
regulating member banks and formulating monetary policies. This article will
acquaint you with the importance of the central bank with a focus on the
functions of the central bank of India.

Features of Central Bank


The basic nature of Central banks is that they are non-market-based and also
anti-competitive institutions. The key features of a central bank are:
 Most central banks are centralized though there could be central banks
that are not government agencies.
 Even if the central government does not own a central bank, the law
establishes and protects the privileges of a central bank.
 It has a legal monopoly status that enables it to issue cash and
banknotes as opposed to private commercial banks that can issue only
demand liabilities, for example, checking deposits.

Functions of Central Bank


A central bank is deemed as the lender of the last resort, as per Hawtrey ( a
British economist). The central bank is the organ of the government which
controls major financial operations of the government. Through its various
operations, the objectives of the central bank are to support the economic
policy of a country by influencing the way financial institutions behave.
The central bank of India is RBI or Reserve bank of India and it is a statutory
bank. The primary role of RBI in India is to print currency notes and manage
the money supply in the economy of India. Let us now delve into the central
bank and its functions where we will discuss the role of the central bank in the
money market:
 Regulator of Currency- The main function of the central bank is to
print currency notes and RBI has the sole right in the country for this
operation. RBI prints money of all denominations apart from 1 rupee
note. It is the ministry of finance that issues 1 rupee note.
 Banker and Advisor to the Government- This role of the central bank
is of a fiscal agent to the government where the RBI keeps the deposits
of both central and state governments. It also makes payments on
behalf of the government, along with buying and selling foreign
currencies. The various functions of a reserve bank as an advisor is to
tender useful suggestions to the government regarding monetary
policies and other economic matters.
 Custodian of Commercial Banks- As per law, commercial banks need
to keep a reserve that is equal to a certain percentage of the NDTL (net
demand and time liabilities). These reserves help commercial banks
clear cheques by transferring funds from one bank to another. The
resee bank facilitates these transactions as it acts as a custodian and
lender of cash reserves to the commercial banks.
 Custodian and Manager of Foreign Exchange Reserves- To keep
the rates of foreign exchange stable, the reserve bank buys and sells
foreign currencies at international prices. If the supply of foreign
currency decreases in the economy, RBI sells them at foreign
exchanges, and in case of surplus supply, it buys them. RBI is also an
official reservoir of foreign currencies and gold. RBI sells gold to
monetary authorities of other countries at fixed prices.
 Lender of the Last Resort- The RBI grants accommodation to
commercial banks, financial institutions, bill brokers, etc. in the form of
collateral advances or re-discounts. This step is taken in times of stress
so that the financial structure of the country is saved from collapsing.
This lending is done on the basis of government securities, treasury
bills, government bonds, etc.
 Controller of Credit- The Reserve bank of India controls the credit
created by commercial banks. The credit flow in the country is regulated
by means of two methods; quantitative method and qualitative method.
RBI applies tight monetary policies when it observes that there is
enough supply of money which may cause an inflationary situation. It
squeezes the money supply to keep inflation in check.
 Transfer and Settlements- The central bank acts as a “clearinghouse”
by providing free services to commercial banks in transferring and
settling their mutual claims. Since the RBI holds reserves of commercial
banks, it facilitates the clearing of cheques by transferring funds
between banks. The principle of bookkeeping is followed in this
procedure to make transfer entries into their accounts. There is a
separate department operated by the central bank in big cities and trade
centers to transfer and settle the claims of one bank on the other.

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