Posted by Anjali Kaur on Sep 10, 2020

Central Bank and Its Functions

Every country has 1 central bank, it is that bank that looks after other banks but it does not deal with the public. Today we will be learning the meaning of the central bank and its functions.

ReserveBankOfIndia (@RBI) | Twitter

What is Central Bank?

Central Bank is the apex financial institution of the country, that administers the operations of the banking system.

The Major Central Banks includes:

  • Reserve Bank of India.
  • U.S. Federal Reserve System.
  • European Central Bank – ECB.
  • Bank of England – BoE.
  • Bank of Japan – BoJ.
  • Swiss National Bank – SNB.
  • Bank of Canada – BoC.
  • Reserve Bank of Australia – RBA.
  • Reserve Bank of New Zealand.

Functions of Central Bank

1.Bank of Issue

Bank of the issue means central banks have the currency authority. The Central Bank has the sole authority for issuing currency in the country.

For example, In India, the Reserve Bank of India has the sole authority for issuing paper currency notes except 1 Rupee notes and coins which are issued by the Finance Ministry.

All the currency issued by Central Bank is its monetary liability that is, the Central Bank is obliged or is responsible to back the currency with assets of equal value.

2.Banker to the Government

The Central bank acts as a banker agent and a financial advisor to the Central Government and all the State governments.

As a banker, it carries out all banking business of the Government like maintaining Current Account, accepting receipts and making payment, also giving out loans for managing public debts.

As a financial advisor, the Central Bank advises the Government from time to time, economic, financial, and money matters.

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3. Bankers bank and supervisor

Being the apex (prime) bank, the Central Bank acts as a banker to other banks.

a. Custodian of cash reserve

As a custodian of cash reserve, commercial banks are required to give a certain portion of their deposits with Central Bank, in this way, the Central bank acts as a custodian of cash reserve because of commercial banks deposits CRR with the Central Bank.

b. Lender of last resort

As a lender of last resort it makes short term credit available to them, that is, it gives financial loans to commercial banks against approved securities.

c. Clearing house function

Under this, the Central bank holds the cash reserve of all the commercial banks and it becomes easier for the Central Bank to act as their clearinghouse. All commercial banks have their account with the central bank and therefore the central bank can easily settle claims of various commercial banks against each other by making debit and credit entries in their account.

d. As a supervisor

The central bank supervises, regulates, and controls the commercial banks. The regulation may be related to their licensing, branch expansion, liquidity of assets, etc. It also includes periodic inspection of banks.

4. Controller of Credit & Money Supply

The central bank controls the money supply and credit in the best interest of the economy. To do so, the central bank uses the credit control tools.

The methods or instruments used by the central bank to control the money supply in the economy are called the monetary policy.

RBI Governor Shaktikanta Das to address media shortly
Shri Shaktikanta Das, IAS Retd., former Secretary, Department of Revenue and Department of Economic Affairs, Ministry of Finance, Government of India assumed charge as the 25th Governor of the Reserve Bank of India effective December 12, 2018.

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You can read the related post on macroeconomics:

Introduction To Money

Precautions while calculating the national income

Real and nominal GDP

National income

National income formula list

Value-added method

Income method

Expenditure method

GDP and welfare

Domestic territory and national residents

Circular flow of income

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