Main Function Of Central Bank

Topics: Central bank, Inflation, Monetary policy Pages: 10 (3452 words) Published: October 14, 2008
Main Functions
Central bank is the apex body of the banking structure. Each and every country has the central bank but their name differs from country to country. In India the central bank is called RBI and the functions are as follows:

Issuer of currency:
Under section22 RBI has right to issue the currency note. •RBI has separate department for the issue of the currency note. •Issues and exchanges or destroys currency and coins not fit for circulation. •Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. •RBI is required to maintain the foreign reserve exchange of 200 crores out of which 150 crore should be in the form of gold.

Banker to Government:
RBI acts as a government banker, agent and advisor to both central government and state government. •RBI keeps the cash balance, free of interest and also receives and make payments in the behalf of government and carry out other banking operations. •It provides loans to both union and state government and also helps them to clear the public debt. •It gives advice to the government on all matters relating to monetary and banking.

Bankers Bank and Lender of Last Resort:
According to banking companies’ act of 1949, every schedule bank has to maintain the cash balance of 5% demand liabilities, and 2% time liabilities. •In 1962 the system was abolished and it was said that 3% of the cash reserve will be saved on aggregate deposit liabilities. •The schedule bank can borrow the money from the RBI on the basis of securities. •RBI being the apex body has to give his helping hands to all the commercial banks in the case of banking crisis, so it is called as Lender of Last Resort.

Control of Credit:
RBI has the power to influence the volume of credit created by banks in India and it could be done by increasing the bank rates and open market operations. •According to banking regulation act of 1949 RBI can ask any particular bank not to lend to a particular person on the basis of securities. •Every bank has to take licence from the RBI and this licensed can be cancelled if the bank fails to work properly. •Each and every bank has to seek order from RBI before opening any new branch. •Every bank must send weekly return to RBI to show its assets and liabilities. •RBI has power to inspect the accounts of any commercial banks.

Custodian of Foreign Exchange Reserve:
RBI is called a reservoir of gold and foreign currencies. It has the power to sell gold at fix prices to other countries. It also buys and sells foreign currencies at international price. •Manages the Foreign Exchange Management Act, 1999.

It fixes the exchange rate.
It supplies the foreign currency to importers and persons visiting foreign countries. •Objective to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. •It always works under the limit of IMF and bring stability in foreign exchange rate.

Collection and Publication of Data:
RBI collects information relating to banking and other financial sector of economy. •It publishes two reports which are monthly and annually. •In monthly bulletin RBI not only provide statically and other information in summary form but also important studies and investigation. •Annual publication deals with report on currency and finance.

Monetary Authority:
Formulates implements and monitors the monetary policy. •Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and financial system functions. •Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. • Keep the eye on commercial bank in order to safeguard the national...
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