Question

List any two functions of the central bank.

Explain any five functions of the Reserve Bank of India.

Explain any two/five functions of central bank of a country.

Answer 1

1. Banker's Bank: The central bank acts as the bank for all commercial banks in the country. When a commercial bank needs funds, it can obtain loans and rediscount its bills with the central bank. Therefore, the central bank is called the 'lender of last resort'. Commercial banks are required to keep a cash reserve with the central bank so as to control credit in the country. The central bank advises commercial banks on matters relating to their business.
2. Credit Control: The central bank exercises both qualitative and quantitative control over the credit-granting capacity of commercial banks in order to maintain stability in prices and foreign exchange. In the absence of such control, commercial banks may lend too much or too little. They may lend to the wrong parties or for unproductive purposes. They may also charge very high rates of interest.
3. Issue of Currency Notes: The central bank has a monopoly over issuing currency notes in the country. In order to inspire public confidence in paper currency, the central bank keeps reserves of gold, silver, etc., for issuing currency notes. The central bank is given a monopoly over note issues in order to maintain uniformity in currency, avoid overissues, and lend prestige to the currency system.
4. Banker to the Government: The central bank acts as a banker, agent, and advisor to the government. As a banker, it receives and makes payments on behalf of the Government. The central bank serves as the Government's agent in financial matters. It advises the government in matters relating to monetary and banking policies. It manages the national debt and issues government securities. It also represents the government at international conferences on monetary and banking matters.
5. Custodian of Foreign Currency Reserves: The central bank is the sole custodian of gold, foreign exchange and all other reserves of the country. It manages these reserves judiciously so as to overcome difficulties in the balance of payments and stabilise the exchange rates. The central bank advises the government to impose restrictions on imports and encourage exports so as to keep the balance of payments in favour of the country.
6. Maintenance of Exchange Rate: The central bank monitors the exchange rate of the home currency in relation to foreign currencies. It tries to maintain stability in the exchange rate in order to promote the country's foreign trade and encourage the flow of foreign investment. The central bank buys and sells foreign currencies in order to maintain a stable exchange rate.
7. Clearing House Facility: As a clearing house, the central bank settles the claims of commercial banks and enables them to clear their dues through book entries. It makes debit and credit entries in their accounts for convenient adjustment of their daily balances with one another. The central bank provides clearing house facility to the commercial banks. In other words, it settles the claims of commercial banks through a process of book entries.
8. Collection and Publication of Data: The central bank conducts surveys and publishes reports and bulletins. It may provide staff training facilities to the personnel of commercial banks. It maintains relations with international financial institutions such as World Bank, International Monetary Fund, etc.