Question

Describe any two functions of the Central Bank.

Answer 1

The Reserve Bank of India performs the following functions as the central bank.

1. Monopoly of Note Issue: Generally, a country's central bank has the monopoly to issue currency notes. The government grants the central bank the exclusive right to give notes on its behalf. In India, one rupee note is issued by the Ministry of Finance. The Reserve Bank of India issues all other currency notes. To inspire public confidence in paper currency, the central bank keeps reserves of gold and silver against the issue of notes. 
2. Government's Bank: The central bank acts as a banker, fiscal agent and advisor to the Government. It makes and receives payments on behalf of the Government. It floats and manages public debts for the Government. As a fiscal agent the central bank advises the Government on matters concerning monetary and banking policies. It also serves as a representative of the Government in international conferences on monetary and economic matters.
3. Controller of Credit: Commercial banks create credit by lending money. They may create too much or too little credit. The level of credit in the country causes fluctuations in the price level. It becomes necessary to exercise control over credit so as to ensure stability in the economy. The central bank exercises strict control over the credit-granting capacity of commercial banks. This is the most important function of a central bank. Credit control is both qualitative and quantitative in nature.
4. Lender of the Last Resort: Whenever a commercial bank needs financial assistance, it may borrow from other commercial banks. However, other commercial banks may not be in a position to provide funds to the bank in need. In such a case, the central bank provides funds to a commercial bank by granting loans or purchasing its securities. In this way, the central bank acts as the lender of the last resort.