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Question
Answer the following question:
How does a Central Bank (for example RBI) transfer funds from one place to another? Illustrate.
Solution
Commercial banks have to mandatorily deposit a fixed percentage of their deposits with the Central Bank. The Central Bank uses this money to settle the claims of one bank by the other. In other words, the Central Bank undertakes transfer of funds from one bank to the other to settle inter-bank claims. In addition to this, the Central Bank also buys and sells securities on behalf of the government. By buying securities, it transfers money from the government’s account to the account of the security holders. Similarly, when it sells securities, it transfers money into the government’s account. Thus, in these ways, the Central Bank (RBI) transfers money from one place to the other.
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