The central bank has six main functions: 1) Issuing currency notes, 2) Acting as the bank and advisor to the government, 3) Functioning as the bank for commercial banks, 4) Maintaining foreign exchange and gold reserves, 5) Lending to commercial banks during times of need, and 6) Controlling credit and implementing monetary policy through quantitative and qualitative methods. The quantitative methods include adjusting the bank rate, conducting open market operations, and varying reserve ratios. The qualitative methods include changing margin requirements, regulating consumer credit, acting as a bank clearinghouse, publishing reports, using moral suasion, and taking direct actions.

1. FUNCTIONS OF CENTRAL
BANK

2. FUNCTIONS OF CENTRAL
BANK
Issue of Currency Notes
Banker to Government / Government’s Bank
Bankers’ Bank
Custodian of Foreign Exchange Reserves
Lender of the Last Resort
Credit Control / Monetary Policy

3. ISSUE OF CURRENCY
The Reserve Bank of India (RBI) which is our Central
Bank has the monopoly of currency note issue except
one rupee notes. The one rupee notes and coins are
issued by the Finance Ministry of Government of
India. The system governing the issue of note in
India is Minimum Reserve System.

4. BANKER TO GOVERNMENT
The Central Bank is also functioning as the
banker, agent and advisor to the Government
in financial matters

5. BANKERS’ BANK
The Central Bank functions as the bankers’ bank. It
is called so because it performs the functions of
controlling the commercial banks and giving
assistance to them.

6. CUSTODIAN OF
FOREIGN EXCHANGE RESERVES
The Central Bank is the custodian of Foreign Exchange and the Gold
reserves of the nation.

7. LENDER OF THE LAST RESORT
Since the Central Bank lends to the commercial
banks in times of needs, it is called the lender of the
last resort

8. CONTROLLER OF CREDIT
(MONETARY POLICY)
Two important methods are used to
control credit
Quantitative
Method
Qualitative
Method

9. QUANTITATIVE METHODS OF CREDIT
CONTROL
Bank Rate
It is the official minimum rate at which the Central Bank of a country rediscount
approved bills of exchange or lends money on approved securities. In times of
inflation, when Central Bank wants to restrict money supply, it raises bank rate. On
the other hand, when the Central Bank wants to increase money supply, it reduces
bank rate.

10. QUANTITATIVE METHODS OF CREDIT
CONTROL
Open Market Operation
It refers to buying and selling of securities in the open market by the Central Bank. In
times of inflation, the Central Bank sell securities in the open market and during
deflation, securities are bought back from open market

11. QUANTITATIVE METHODS OF CREDIT
CONTROL
Variation in Reserve Ratio
Cash Reserve Ratio (CRR) refers to that part of total liabilities of Commercial Banks
kept with the Central Bank as reserve. As an anti-inflationary measure, Reserve Ratio
is raised in times of inflation and in times of deflation, Reserve Ratio is lowered.

12. QUALITATIVE METHODS OF CREDIT
CONTROL
1. Changing the Margin Requirements
Margin is the difference between the face value of security and amount of loan
sanctioned against the security. By increasing or decreasing the margin,
lending for particular purpose can be restricted or enlarged

13. QUALITATIVE METHODS OF CREDIT
CONTROL
2. Regulation of Consumer Credit
Through the regulation of consumer credit, lending for the consumption of
unnecessary commodities can be controlled. This helps to control price level
successfully.

14. QUALITATIVE METHODS OF CREDIT
CONTROL
3. Bank of Central Clearance
Central Bank acts as clearing house for the commercial banks. It is easy for the
central bank to perform this function as the member banks keep deposits with
it.

15. QUALITATIVE METHODS OF CREDIT
CONTROL
4.Publication of Reports
Another important function of the Central Bank is the publication of Reports
relating to banking, currency, finance etc

16. QUALITATIVE METHODS OF CREDIT
CONTROL
5. Moral Suasion
This method involves advice, request and persuasion with the commercial bank
to co-operate with the central bank in implementing it’s Credit Policies

17. QUALITATIVE METHODS OF CREDIT
CONTROL
6. Direct Action
Direct action includes cancelling the license, charging high rate of interest,
refusing re-discounting facilities to the banks etc