Q.Discuss the functions of Central Bank.
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Start your 14-day free trial to unlock the full solution →A central bank issues currency, acts as banker to the government and to other banks, is the lender of last resort, keeps the nation's foreign-exchange reserves, runs the clearing house, and controls credit through monetary policy.
The central bank (the Reserve Bank of India in India) is the apex institution that controls and regulates the entire monetary and banking system of a country. Its main functions are:
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Monopoly of note issue — the central bank has the sole right to issue currency notes (except small coins/one-rupee notes issued by the government). Centralised note issue ensures uniformity, public confidence, and control over the money supply.
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Banker, agent and adviser to the government — it keeps the government's accounts, receives its revenues and makes its payments, manages the public debt, provides short-term loans, and advises the government on economic and financial matters.
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Bankers' bank and custodian of cash reserves — commercial banks keep a part of their reserves (the cash reserve ratio) with the central bank. It thus holds the cash reserves of the banking system and supervises and regulates commercial banks.
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Lender of last resort — when commercial banks face a shortage of funds and cannot borrow elsewhere, the central bank lends to them (by rediscounting bills or against securities), thereby maintaining confidence and stability in the banking system.
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Custodian of foreign exchange reserves — it keeps and manages the country's gold and foreign-exchange reserves and maintains the external stability of the currency's value.
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Clearing-house function — since all banks keep accounts with it, the central bank acts as a clearing house where inter-bank claims are settled conveniently through book entries.
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Controller of credit (monetary policy) — the most important function. The central bank regulates the volume and cost of credit created by commercial banks to achieve price stability and growth, using: …
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