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Functions Of Central Bank - Everything You Need To Know Research Team | Posted On Tuesday, July 31,2018, 06:58 PM

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Functions Of Central Bank - Everything You Need To Know



Functions Of Central Bank

The Central bank is the core bank of a country. It performs various functions which are very important for the growth and development of the Nation. Reserve Bank of India popularly called RBI is the Central Bank in India.

RBI regulates the volume of credit and currency in India, pumps in money when the market is dry and pumps out money when there is excess credit.

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Functions Of Central Bank

1. Issue of Currency:

The main job of RBI is issuing currency to gain control over the volume of credit and currency in India. Rupee Notes circulate across the country as legal tender. RBI has to maintain reserves in the form of gold and foreign securities as per statutory rules against the rupee notes issued.

India’s total foreign exchange (Forex) reserves are more than US$426 Billion. RBI issues all rupee currency notes in India except one rupee notes and small coins which are issued by Government mints.

RBI regulates the currency of India which is the rupee and the total money supply in the economy. As RBI issues currency, people’s confidence in the currency is maintained. Currency supply is adjusted to demand in the economy.

2. Central Bank is the banker to the Government:

RBI functions as the banker to the Government which is both Central and State Governments. RBI carries out the banking business of the Government. It functions as the banker, agent and advisor to the Government.

RBI makes and receives payments on behalf of the Government. RBI keeps the banking accounts and balances of the Government, after making the disbursements and remittances.

RBI functions as an advisor to the Government and gives advice on all monetary and economic matters. RBI gives loans and advances to the Government for temporary periods of time as and when necessary. RBI also manages the public debt in India.

SEE ALSO: Types Of Deaths Covered And Not Covered In Term Insurance

3. Central Bank functions as a banker’s bank and supervisor:

There are many banks in India and it is the duty of RBI to regulate and supervise them. RBI functions as the banker’s bank. RBI functions as a custodian of the banks cash reserves. Banks in India are required to maintain a certain percentage of their deposits with the Central Bank (RBI).

The Central bank is also a lender of last resort. If banks are short of funds they can take loans from the Central Bank and get trade bills discounted. The Central Bank functions as a bank of central clearance, settlements and transfers.

4. The Central Bank is the controller of credit and money supply:

The Central Bank controls credit and money supply in India which consists essentially of two parts.

  • These are currency
  • And also credit

The Central Bank has an important objective of price stability along with full employment. Credit and money supply are controlled by adopting various quantitative and qualitative measures.

Take a look at the instruments of the money policy:

Bank rate: This is the rate at which the Central Bank lends to commercial banks. If there are conditions of excess demand and pressure from inflation, the Central bank increases the bank rate. This forces commercial banks to raise the rate of interest. This means demand for loans fall. A decrease in the bank rate has an opposite effect. Bank rate is also called repo rate. The repo rate is 6.25%. The reverse repo now stands at 6%.

Open market operations: This is the buying and selling of Government securities by the Central Bank to the public and other banks. When the Central Bank sells Government securities to commercial banks, money flows into the Central Bank which reduces cash reserves of banks. When the Central Bank buys Government securities, banks ability to give credit goes up as cash reserves of banks increase.

Cash reserve ratio: Commercial banks have to keep a certain percentage of total deposits with the Central Bank as cash reserves. This is called the cash reserve ratio. CRR is currently 4%.

If the Central Bank wants to curtail the credit capacity of banks, the Central Bank simply raises the CRR. If the Central Bank wants to increase availability of credit with banks, it just reduces the CRR.

Commercial banks in India must maintain reserves with the Government called SLR (Statutory Liquidity Ratio). These reserves are maintained in the form of gold reserves, cash, and government approved securities before providing credit to customers. When SLR is raised, banks ability to give credit reduces. It’s the opposite (expansion of credit), if SLR is reduced.

5. Central Bank maintains exchange control:

Central Bank makes sure the external value of the currency is maintained. The Central Bank adopts suitable measures like exchange control system to meet this objective. The citizens of India are required to deposit foreign currency or deposits received with the RBI. If he needs foreign exchange he makes an application with the RBI.

6. Clearing House Function:

A bank would receive a cheque drawn on some other bank from their customers, which they have to realize from drawee banks. In much the same way, cheques from a particular bank are drawn and passed into the hands of other banks. These cheques have to be realized from drawee banks. Independent and separate realization of each cheque will take a lot of time. So, the central bank offers clearing facilities where banks can come together and set off cheque claims.

See also: Types Of Cheques

7. Central Bank is responsible for collection and publication of data:

The Central Bank has the responsibility of collecting and compiling statistical information relating to banking and other financial sectors in India.

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