This document discusses the role and functions of central banks. It explains that central banks act as the leader of the money market in each country, supervising commercial banks and regulating currency and credit. Central banks have objectives like promoting financial stability, maintaining currency value, ensuring price stability, and promoting economic growth. They engage in various activities like issuing currency, managing foreign exchange reserves, acting as a lender of last resort, and conducting monetary policy through tools like bank rates, open market operations, and reserve requirements. The document provides details on various monetary policy tools and their objectives.

1. Pratiksha

2.  In
every country there is one bank which acts
as the leader of the money market,
supervising, controlling and regulating the
activities of commercial banks and other
financial institutions.
 According
to the statutes of Bank of
International Settlements, “the bank of the
country to which has been entrusted the
duty of regulating the volume of currency
and credit in that country”

3. Objectives of
Central Bank
Promote
financial
institutions
Maintain
internal value
of currency
Preserve the
external value
of currency
Ensure price
stability
Promote
economic
growth

4.  Monopoly
of Note Issue
 Custodian of Foreign Exchange Reserve
 Banker to the Government


Public Debt functions
Advisor to the Govt on economic reforms
 Banker
to the Banks
 Controller of Credit
 Promoter of Economic Development

5.  Custodian
 Lender
of cash reserves
of last resort
 Clearing
agent

6.  It
means the regulation of the creation and
contraction of credit in the economy.
 Objectives





of Credit control
Stability of Internal Price-level
Checking Booms and Depressions
Promotion of Economic Development
Stability of the Money Market
Stability in Exchange Rates

7.  Quantitative
controls are designed to
regulate the volume of credit created by the
banking system. These measures work
through influencing the demand and supply
of credit.
 Qualititative
measures, on the other hand,
are designed to regulate the flow of credit in
specific uses.

8. Quantitative Methods Qualitative or
Selective Methods
Bank Rate Policy
Issue of directives
Variation in
Reserve ratios
Restriction of purpose
Open market
Operations
Margin requirements
Credit rationing
Rate of interest
Moral persuasion

9.  Bank
rate refers to the official minimum lending
rate of interest of the central bank.
 It is the rate at which the central bank advances
loans to the commercial banks by rediscounting
the approved first class bills of exchange of the
banks.
 Hence, bank rate is also called as the discount
rate.

10.  Theory
of Bank Rate- affects the supply of
credit.
 Working


of Bank Rate
Inflationary scenario
Deflationary scenario
 The
Process of Bank Rate Influence
 Limitations
for Bank Rate

11.  Open
market operations refer to the
purchase and sale of securities by the central
bank.
 In its broader sense, the term includes the
purchase and sale of both government and
private securities.
 But, in its narrow connotation, open market
operations embrace the purchase and sale of
government securities only

12.  Theory
of Open Market Operations
 Objectives





of Open Market Operations
To eliminate the effects of exports and imports
to gold under the gold standard.
To impose a check on the export of capital.
To remove the shortage of money in the money
market.
To make bank rate more effective.
To prevent a „run on the bank‟.

13.  Conditions





for OPM
Institutional Framework
Legal Framework
Maintenance of a Definite Cash Reserve Ratio
Non-operation of Extraneous Factors
Non-existence of Direct Access of Commercial
Banks to the Central Bank
 Limitations
for OPM

14.  Variable
Reserve Ratio refers to the
percentage of the deposits of the
commercial banks to be maintained with the
central bank, being subject to variations by
the central bank.
 In
other words, altering the reserve
requirements of the commercial banks is
called variable reserve ratio.

15.  Theory

of VRR
The theory underlying the mechanism of variable
reserve ratio is that by varying the reserve
requirements of the banks, the central bank is in a
position to influence the size of credit multiplier
of the banks and therefore the supply of credit in
the economy.
 Working
of Variable Reserve Ratio
 Limitations
of VRR

16. o


Distinguish between
essential and nonessential uses of bank
credit.
Only non-essential uses
are brought under the
scope of central bank
controls.
Affect not only the
lenders but also the
borrowers.








Features of Selective
Measures
Divert the flow of credit
Regulate a particular sector of
the economy
Regulate the supply of
consumer credit.
Stabilise the prices of inflation
sensitive goods.
Stabilise the value of
securities.
Correct an unfavourable BoP
Bring under the control of the
central bank
Exercise control upon the
lending operations of the
commercial banks.
Objectives

17.  Margin
Requirements
 Regulation of Consumer Credit


They limited the amount of credit that might be
granted for the purchase of any article listed in
the regulations; and
They limited the time that might be agreed upon
for repaying the obligation
 Rationing


of Credit
Fixes a limit upon its rediscounting facilities for any
particular bank.
Fixes the quota of every affiliated bank for financial
accommodation from the central bank.

18.  Control

through Directives
With direct power of controlling bank advances
either by statute or by mutual consent between
the central bank and commercial banks.
 Moral
Suasion
 Direct
Action
 Publicity

19. 





The selective controls embrace the commercial banks
only and hence the nonbanking financial institutions are
not covered by these controls.
It is very difficult to control the ultimate use of credit by
the borrowers.
It is rather difficult to draw a line of distinction between
the productive and unproductive uses of credit.
It is quite possible that the banks themselves through
manipulations advance loans for unproductive purposes.
Selective controls do not have much scope under a
system of unit banking.
Development of alternative methods of business
financing has reduced the importance of selective
controls.

20. 
Quantitative or general methods or instruments.
Bank rate
 Open Market Operations
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio (SLR)


Qualitative or selective methods or instruments.






Variation of Margin Requirements
Credit Authorization Scheme (CAS) & Credit
Monitoring Arrangement (CAM)
Control of Bank Advances
Differential Interest Rates
Credit Squeeze Policy
Moral suasion

21.  The
main objective of monetary policy pursued by
the Reserve Bank of India is that of „controlled
monetary expansion.‟
 Objectives of Monetary policy are:
 Expansion in the supply of money, and
As incomes grow the demand for money as one of the
components of savings tends to increase.
 Increase in money supply is also necessitated by gradual
reduction of non-monetised sector of the economy.


Restraint on the secondary expansion of credit.

While exercising restraints, care should be taken that
the legitimate requirements of agriculture, industry and
trade are not adversely affected

24.  Recent
changes in the Monetary Policy of RBI
past 3 months.
 Impact
of the RBI‟s monetary policy on the
economy
 Impact
of the Monetary policy on the
performance of the Banks