CENTERAL BANK AND ITS FUNCTIONS

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)

•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)

 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.)

•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: -

•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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