Q.What is Clearance House?
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Functions of the Central Bank
The Bank That Sits Above All Other Banks
Every economy has one special institution that does not serve ordinary customers, yet stands at the apex of the entire financial system. In India it is the Reserve Bank of India. The central bank is not just “a big bank” — it is the guardian of the currency, the banker to banks, and the financial arm of the government.
Central Bank = the apex monetary institution that controls, regulates and supervises a country's money supply, banking system and credit, and acts as banker to the government.
The Key Functions
1. Issue of Currency (Sole Currency Authority)
The central bank has the exclusive monopoly to issue currency notes (in India, all notes except the one-rupee note and coins issued by the government). Why give this power to one body? Because a single issuing authority ensures uniformity, public confidence, and effective control over the total money supply. Multiple issuers would breed distrust and instability.
2. Banker to the Government
The central bank manages the government's banking transactions — it keeps government deposits, receives and makes payments on its behalf, and manages public debt. In this role it acts as the government's banker, agent and adviser:
- Banker — maintains the government's accounts and handles its receipts and payments.
- Agent — buys and sells foreign exchange, manages public borrowing and debt (including operations touching gold and forex reserves).
- Adviser — counsels the government on monetary, financial and economic policy.
3. Bankers' Bank and Supervisor
Just as households bank with commercial banks, commercial banks bank with the central bank. It:
- Holds a part of every bank's reserves (the CRR).
- Acts as lender of last resort, lending to banks in crisis so the system does not collapse.
- Runs the clearing house to settle inter-bank claims.
4. Custodian of Foreign Exchange Reserves …
Banks settle the claims they have against one another through a common institution. TS Intermediate 1st-year Economics calls this arrangement a clearing house. …
A Clearing House is a central arrangement — generally run by the central bank (the Reserve Bank of India) — where representatives of different banks meet to set off (adjust) the cheques and claims they hold against one another, and only the net amount due from or to each bank is finally settled. Acting as the clearing house for banks is one of the important functions of the central bank, because it makes inter-bank settlement quick, safe and economical and avoids the physical movement of large sums of cash.
Meaning of Clearing House
A clearing house is an institution or arrangement where banks settle their mutual claims against each other. When a customer of one bank deposits a cheque drawn on another bank, the two banks have claims on each other. Instead of settling each cheque separately in cash, all such claims are brought to the clearing house, set off against one another, and only the net balance is paid or received by each bank.
Role of the Central Bank
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- CBSE 2026Set 58/2/11 markMCQQ.Identify, which one of the following is not a function of Reserve Bank of India as a bank, agent and advisor to the government. Options : (A) Carries out banking business of the government. (B) Manages national debt. (C) Advises on financial matters. (D) Conducts periodic inspections.
›Reveal solutionSolution
The RBI acts as banker, agent, and advisor to the government — handling its accounts, managing public debt, and offering policy counsel. Periodic inspections of commercial banks fall under its regulatory role, not its government-service functions. Answer: (D).
The Reserve Bank of India wears many hats, but the question isolates one specific role: its relationship with the government. When the RBI serves as "bank, agent and advisor," it performs three distinct services for the Union and state governments.
As banker to the government, the RBI maintains the government's accounts — receiving revenues, making payments on behalf of ministries, and handling day-to-day cash management. Think of it as the government's current account: tax collections flow in, salaries and subsidies flow out, all routed through the central bank. This is option (A).
As agent, the RBI manages the government's borrowing program. When the Centre needs to raise funds, it issues securities (treasury bills, dated securities); the RBI conducts these auctions, services the interest payments, and handles redemptions at maturity. This debt-management function — ensuring the government can borrow smoothly and at reasonable cost — is captured in option (B).
As advisor, the RBI offers expert counsel on monetary policy, exchange-rate strategy, financial-sector reforms, and macroeconomic stability. The Finance Ministry consults the RBI before major policy announcements; the Governor sits on key committees. This is option (C). …
- CBSE 2026Set ANNUAL1 markQ.Write the answer in one sentence: Write the name of the institution which issues currency in India.
›Reveal solutionSolution
Currency in India is issued by the Reserve Bank of India (RBI).
The Reserve Bank of India (RBI), as the central bank, has the sole right to issue currency notes in India (except the one-rupee note and coins, which are issued by the Government of India through the Ministry of Finance …
- CBSE 2026Set ANNUAL1 markMCQQ.Central Bank is an apex financial institution of a country that (A) controls the entire banking system and money supply. (B) acts as banker to the Government. (C) issues currency. (D) All of the above.
›Reveal solutionSolution
A Central Bank controls the banking system/money supply, acts as the government's banker, AND issues currency -- all at once.
The Central Bank (e.g. the Reserve Bank of India) is the apex monetary institution of a country and performs several functions together, not just one: (a) it controls and regulates the entire banking system and the supply of money/credit in the economy through monetary policy tools; (b) it acts as banker, agent and adviser to the Government, managing its accounts, receipts and payments, and providing loans/advances; (c) it has the sole a …
- CBSE 2025Set ANNUAL1 markQ.Write the answer in one sentence: Who is the banker of banks in India?
›Reveal solutionSolution
The banker of banks in India is the RBI.
The Reserve Bank of India (RBI), as the central bank, acts as the 'banker of banks' (bankers' bank): it holds the cash reserves of commercial banks, provides them with banking facilities, settles inter-bank claims, and acts as their lender of last …
- CBSE 2025Set ANNUAL1 markMCQQ.RBI was established in the year(a) 1933(b) 1934(c) 1935(d) 1936
›Reveal solutionSolution
The RBI Act was passed in 1934, and the Reserve Bank of India itself started functioning as India's central bank on 1 April 1935.
The need for a dedicated central bank in India was recognised well before independence, to centralise currency issue, manage the banking system, and regulate credit. This led to the Reserve Bank of India Act, 1934, which laid down the RBI's constitution, powers, and functions.
Following the passage of this Act, the Reserve Bank of India was formally constituted and commenced its operations on 1 April 1935. At the time of its founding, the RBI was set up as a shareholders' bank with private ownership, headquartered initially in Calcutta (later moved to Bombay/Mumbai). It was subsequently nationalised in 1949, after which it has functioned entirely as a government-owned institution.
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- CBSE 2024Set ANNUAL1 markQ.Point out a difference between a central bank and a commercial bank by giving a point.
›Reveal solutionSolution
Central bank regulates the system; commercial banks deal directly with the public.
The central bank (RBI in India) is the apex institution of a country's monetary and banking system — it has the sole right to issue currency, acts as banker to the government and to other banks, and regulates/controls the entire banking system (through CRR, SLR, repo rate, etc.); it does not ordinarily deal directly with the general public. A commercial bank, by contrast, is a profit-seeking institution that directly accepts deposits from, and extends loans/credit to, …
- CBSE 2022Set ANNUAL1 markQ.Fill in the blank: Central bank of India is ______.
›Reveal solutionSolution
The central bank of India is the Reserve Bank of India (RBI).
The Reserve Bank of India (RBI), established in 1935, is the central bank of the country. As the apex monetary institution, it issues currency, acts as banker to the government and to commercial banks, is the lender of last resort, manages foreign exchange, …
- CBSE 2022Set ANNUAL1 markQ.Give a reason why the Central Bank enjoys a special status in the banking structure of a country ?
›Reveal solutionSolution
The Central Bank is special because it is the apex monetary authority — sole note-issuer, banker to government and banks, and controller of credit.
The Central Bank (e.g. the Reserve Bank of India) enjoys a special status in a country's banking structure because it is not an ordinary commercial bank seeking profit — it is the apex institution that sits at the top of and regulates the entire banking system. It alone has the legal authority to issue currency notes, it acts as banker, agent and financial adviser to the government, it is the 'banker's bank' and lender of last resort to commercial banks, and it controls the overall volume and cost of credit in the economy through monetary policy instruments (bank rate, CRR, SLR, open market operations, etc.) in order to maintain monetary and price stability. No …
- CBSE 2022Set ANNUAL1 markQ.Define a central bank.
›Reveal solutionSolution
A central bank is the apex institution that controls a country's currency, credit and banking system; in India this is the RBI.
Every modern economy needs a single, authoritative institution at the top of its banking structure to ensure monetary stability and orderly growth of credit. A central bank performs this role: it has the sole right to issue currency notes, acts as banker, agent and financial adviser to the government, acts as banker to commercial banks (holding their reserves and lending to them as lender of last resort), and regulates the overall volume of credit and money supply in the economy through monetary policy instruments. Unlike a commercial bank, a central bank does not deal directly with the public for profit — its obj …
- CBSE 2022Set ANNUAL1 markQ.Who regulates monetary policy?
›Reveal solutionSolution
The central bank of the country — the RBI in India's case — regulates monetary policy.
Monetary policy refers to the policy of the central bank with regard to the control of the supply of money and the cost and availability of credit, with the objective of achieving price stability, full employment and economic growth. Since the central bank is the apex monetary authority — the sole issuer of currency and banker to all commercial banks — it alone has the instruments (bank rate, repo/reverse repo rate, CRR, SLR, open market operations) needed to expand or contract credit across the whole banking system. In India, t …
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