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International Business_Function of Central Bank.pptx
1. Functions of Central Bank – Explanation, Importance
-Dr. Govind Kumar
Ph.D. MBA B.Sc. UGC-NET&JRF
Associate Professor, DYPIMCAM, Pune
2. Introduction
In the banking system, the central bank is recognized as the most
powerful financial institution. It is considered to be an important
part of a country's economic and financial structure. The central
bank is an independent authority in charge of supervising,
regulating, and stabilizing the country's monetary and banking
framework. The Reserve Bank of India is the country's central
bank. It was founded in 1935. Central banks are in charge of
ensuring the country's Financial Stability and Economic
sovereignty.
The meaning of central bank is a financial institution that has the
privilege of producing and distributing money (and credit) for a
country or a group of countries. The central bank, in the modern
economy, is also responsible for regulating member banks and
formulating monetary policies. This article will acquaint you with
the importance of the central bank with a focus on the functions
of the central bank of India.
3. Features of Central Bank
The basic nature of Central banks is that they are non-market-based and also anti-competitive
institutions. The key features of a central bank are:
•Most central banks are centralized though there could be central banks that are not
government agencies.
•Even if the central government does not own a central bank, the law establishes and protects
the privileges of a central bank.
•It has a legal monopoly status that enables it to issue cash and banknotes as opposed to private
commercial banks that can issue only demand liabilities, for example, checking deposits.
4. Functions of Central Bank
The central bank of India is RBI or Reserve bank of India and it is a statutory bank. The primary role of RBI in India
is to print currency notes and manage the money supply in the economy of India. Let us now delve into the central
bank and its functions where we will discuss the role of the central bank in the money market:
#Regulator of Currency- The main function of the central bank
is to print currency notes and RBI has the sole right in the country
for this operation. RBI prints money of all denominations apart
from 1 rupee note. It is the ministry of finance that issues 1 rupee
note.
#Banker and Advisor to the Government- This role of the central bank
is of a fiscal agent to the government where the RBI keeps the deposits of
both central and state governments. It also makes payments on behalf of
the government, along with buying and selling foreign currencies. The
various functions of a reserve bank as an advisor is to tender useful
suggestions to the government regarding monetary policies and other
economic matters.
5. #Custodian of Commercial Banks- As per law, commercial
banks need to keep a reserve that is equal to a certain percentage
of the NDTL (net demand and time liabilities). These reserves
help commercial banks clear cheques by transferring funds from
one bank to another.
#Custodian and Manager of Foreign Exchange Reserves- To keep the rates of
foreign exchange stable, the reserve bank buys and sells foreign currencies at
international prices. If the supply of foreign currency decreases in the economy, RBI
sells them at foreign exchanges, and in case of surplus supply, it buys them. RBI is
also an official reservoir of foreign currencies and gold. RBI sells gold to monetary
authorities of other countries at fixed prices.
6. #Controller of Credit- The Reserve bank of India controls the credit created by
commercial banks. The credit flow in the country is regulated by means of two
methods; quantitative method and qualitative method. RBI applies tight monetary
policies when it observes that there is enough supply of money which may cause an
inflationary situation. It squeezes the money supply to keep inflation in check.
#Transfer and Settlements- The central bank acts as a “clearinghouse” by providing
free services to commercial banks in transferring and settling their mutual claims.
Since the RBI holds reserves of commercial banks, it facilitates the clearing of
cheques by transferring funds between banks. The principle of bookkeeping is
followed in this procedure to make transfer entries into their accounts. There is a
separate department operated by the central bank in big cities and trade centers to
transfer and settle the claims of one bank on the other.
7. Importance of Central Bank
The central bank is the heart of the monetary system of any country. A
country’s economy is influenced heavily by the actions taken by its
central bank. They are the key governing body that ensures the boom
and bust cycle of the economy and financial markets does not hamper
the direction of the country’s economy. Its central bank ensures the
steady and stable growth of the economy of a country.
Examples of Central Banks
Some of the well known central banks across the world are:
1.Federal Reserve (USA)
2.Reserve Bank of India (India)
3.People’s Bank of China (China)
4.Bank of England (UK)
5.European Central Bank (EU or European Union)