Main functions of a Central Bank
Functions of Central Bank
Central bank of every country is established with view to regulate currency notes and money supply in the economy. Some important functions of a central bank are given below:
1. Issue of currency authority: The first and foremost important function of Central Bank is to issue currency notes. It has its various departments which issue currency notes and coins for the public of a country.
2. Credit control: Central Bank controls credit creation capacity of commercial bank to control inflationary and deflationary gap of the economy. For this purpose, it adopts quantitative and qualitative methods of monetary policy.
3. Banker to the government: The Central Bank acts as a banker to the government, both central and state. It carries out banking business of the government and the government keeps its cash balances on current account with the Central Bank. It accepts government deposits and grants loans.
4. Banker to banks: A Central Bank is a bank of government and other commercial banks of the country. It grants loans to the commercial banks to fulfill their needs of funds. It is not for the common people of the country.
The Central Bank holds a part of the cash reserve of banks, lends them short term funds and provides them with centralised clearing and remittance facilities. The Central Bank also supervises, regulates and controls the commercial banks.
5. Lender of last resort: The Central Bank lends to such institutions in order to help them at times of stress, so as to save the financial structure of the nation from collapse. The Central Bank acts as lender of the last resort through discount house on the basis of treasury bills, government securities and bonds.
6. Custodian of foreign exchange reserves: Central Bank of a country manages and controls the foreign exchange reserve and gold. It can sell gold to get foreign exchange and also can purchase foreign currencies at international prices.
7. Other functions: Apart from above primary functions, a Central Bank also performs the following subsidiary functions:
(i) Dealing in foreign exchange.
(ii) Discounting bills of different banks.
(iii) Dealing in government securities.
(iv) Accepting deposits without interest.
(v) Managing agricultural credit.
(vi) Regulating developmental, industrial and commercial activities in India.
Role of RBI in Economic Development
Reserve Bank of India is the Indian Central Bank, which was incorporated on April 1, 1935 as shareholders’ bank. Majority of shares were held by the Central government. After independence, Reserve Bank of India was nationalised on April 1, 1949. Reserve Bank of India performs the following functions:
1. Primary Functions
(i) Issuing currency notes, (except one rupee note, which is issued by Ministry of Finance).
(ii) Working as banker of banks.
(iii) Controlling bank rate or rate of interest.
(iv) Bank of the government.
(v) Controlling exchange rate.
2. Subsidiary Functions
(1) Dealing in foreign exchange.
(ii) Discounting bills of different banks.
(iii) Dealing in government securities.
(iv) Accepting deposits without interest.
(V) Managing clearing houses.
(vi) Managing agricultural credit.
(vii) Extending short term loans to banks and Financial
Information System (FIS) By performing the above mentioned functions the Reserve Bank of India contributes towards the economic development of the country.
