CENTRAL BANKS AND ITS
FUNCTIONS
INTRODUCTION
OF CENTRAL BANK
Central
bank is a apex institute of Monetary and Banking system of a country.
Central bank organizes, supervised and regulate and develop the monetary
system of the country.
Reserve
Bank of India working as Central bank in India. It was established a
shareholder bank in 1939 and Nationalized on 1st January 1949.
Sh. Shaktikanta Das
RBI Governor
FUNCTIONS OF CENTRAL BANK
1.
Bank issues or Currency authority.
2.
Bankers to the government,
3.
Banker’s bank and supervisor.
4.
Controller of Credit and Money
supply.
Bank
issues or Currency Authority.
1. Central bank has a
sole monopoly to issue currency notes .Currency notes issued by Central bank
has legal tender money.
2.
The Central bank issue currency on the basis of MINIMUM RESERVE
SYSTEM.
Under this system RBI maintained a minimum reserve of Rs.
200 Crores of
which Rs.115 Crore is in the form of gold and remaining Rs. 85/- Crores is
in the form of securities.
RBI issues all
Currency notes except one Rs. Note and Coins.
Bankers to the
Government,
1.As a Apex bank, RBI
provide some facilities to the Government as Commercial Banks given to the public.
2.
It received deposits from government and collect cheque and drafts and deposits in government account.
3.
It provides cash to the govt.
4.
It makes payment from govt. behalf of government.
5.
It advances short term loan to the government.
6.
It supply foreign currency to the govt. for external transactions.
As Fiscal agent and
as adviser
(i) As a fiscal agents to the govt., it manages
the public debt.
(ii).
It collect taxes and other payments on the behave of the government.
(iii)
.RBI represent to the govt. in international banks like IMF, World Bank.
As
adviser to the govt.: - Central Bank gives advise to the govt. on all financial
and economic matters, likes trade policy, foreign exchange policy.
Banker’s Bank
1.
Banker’s bank,
2.
As a lender of last resort,
3.
As a clearing agent,
4.
As a custodian of last resort.
AS A SUPERVISOR
Central
Banks supervise and control on the commercial banks.
The
regulation of banks like licensing, expansion of branch and management etc.
Central
bank also do quarterly inspection of the Commercials banks etc.
Controller
of Credit and Money Supply.
•Controller
of Credit and Money Supply: -
Controlling the credit is the most important function of Central banks.
By control of credit , It means , expansion or contradiction of credit as per
need of the economy. Being as apex
institute Central Bank uses, Bank Rate, Open market operation and Change in
reserve ratio.
•Controller
of Credit and Money Supply.
•Control of Credit
through: -
•1.
Bank Rate,
•2.CRR,
•3.SLR,
•4.Repo
Rate
•5.
Reverse Repo Rate,
•6.Open
Market Operations,
7. Margin
requirement.
•BANK
RATE
• Bank rate is the interest rate at
which Central bank provided loan to
commercial banks without any security.
• It is only for Commercials banks
not the public.
•Now
we will discuss the uses of Bank Rate: -
1.In the situation of Excess Demand,
2. In the situation of deficient demand.
•Use of Bank Rate in Excess Demand
(Leads inflationery situation)
(Leads inflationery situation)
•In
the situation of Excess demand: -
1.Central Bank increases their lending rates, which
discourage the banks to borrow more from Central bank because it increases the
cost of borrowing of commercial banks.
2.High bank rate compel the Commercial Bank to increase
lending rate to the public.
3.High rate of interest leads less consumption expenditure
and investment expenditure, which control the excess demand.
•Use of Bank Rate in Deficient
Demand
(leads deflationary situation)
(leads deflationary situation)
In the situation of
Deficient demand : -
1. Central
bank decreases the bank rates that encourage the commercial banks to take more
loan because decrease of Bank rate leads to decrease the cost of borrowing to
the commercial banks, investment will increase.
2. Decrease
in the bank rate further commercial bank decrease lending rate to the public ,
that will encourages the consumers to take loans and consumption expenditure
will increase that further increases.
More Consumption expenditure and investment expenditure will control the deficient demand.
•Repo Rate and Reverse Repo
rate
(in the situation of Inflationary demand.)
(in the situation of Inflationary demand.)
•Repo
Rate
Repo rate is that rate at which commercial bank
borrow money from Central Bank against financials security with agreement to re purchase them
at a later date and as per the rate
determined at the time of borrowing.
Increase in Repo rate will leads to decrease the situation of inflationary demand, because HH reduce
consumption expenditure and start saving and reduce expenditure on investment.
•Reverse
Repo rate
It is rate at
which Central Bank borrow money from commercial bank. In the situation of excess demand leading to increase inflation , reverse repo rate
increases, it leads to encourage the commercial banks to keep more fund to Central bank for more profit and leads to
decrease in lending capacity of lending loan to public and investors ,
inflationary situation will in control.
•OPEN MARKET OPERATION
OMO is another
quantitative instrument to control money
supply or correct excess demand and deficit demand. In the economy.
We will study
OMO in two situation: -
(i)Excess demand
(ii)Deficient demand.
•
OPEN MARKET OPERATION: -
OPEN MARKET OPERATION: -
•Excess
demand
As we know that
excess demand leads to inflation, to control the inflation Central Bank sell
the government security and bonds to the
Commercial bank, due to this operation
the power of Commercial banks to giving
loan will reduce and it helps to control inflation.
•
•Deficient
demand.
•
As we know that
deficit demand leads to deflation, to control the deflation, Central Bank purchase
the government security and
bonds from Commercial bank, due to this operation the power of Commercial
banks to giving loan will increase and
it helps to control deflation
•
•CASH
RESERVE RATIO
•CRR is another important quantitative instrument to correct
Inflation and deflation in the economy.
•CRR refers to minimum
percentage of a banks total deposits which a bank to keep with Central Bank. It
was decided by Central Bank of a
country.
•Suppose a bank total deposit is Rs. 200 crops and rate of
CRR is 10% of total deposit that Rs.20 cores a Commercial bank keep with
Central Bank.
•MARGIN
REQUIREMENT RATE
: -
• MRR is the difference between the current
value of physical security offered for loans and the value of loans granted.
When want to expand credit against a particular commodity , Central bank
reduces PRR ratio which get more loans against their commodity.
Increase in
MRR % reduces the loan and reduces MRR % , increase the loan.
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