Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Give the meaning of central bank and Explain its functions.
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Answer
$(I)$ Definition and meaning of Central bank:
Definition:
R. P. Kent defines a central bank as “the institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of the general public welfare.”Meaning:
A central bank is a bank that manages, evaluates and regulates the banking activity in a country.
All the countries in the world have a central bank.
In India, $RBI$ i/e. Reserve Bank of India is the Central bank.
$(II)$ Functions of Reserve Bank of India:
We can classify the functions of $RBI$ into:
$(A)$ Monetary functions and
$(B)$ Non-monetary functions.
$(A)$ Monetary functions $($Monetary responsibilities$):$
$1.$ Bank of issue:
In every country, the Central bank of the country is empowered fully or partially for issuing/making of the currency.
$RBI$ is authorized to issue all the currency notes except for $₹\ 1$ currency note and the currency coins.
It is the Finance Ministry of Government of India who issues $Rs .1$ note currency and currency coins.
The distribution of all the currencies including $Rs.1$ currency note and currency coins lies in the hands of $RBI.$
$2.$ Banker to the government:
$RBI$ is a banker to government i.e. it works as a bank for the government.
It maintains all the banking accounts of the government departments.
As a banker, $RBI$ gives loan to government, deposits money of the government, gives cash for payments of salaries and wages to staff, collects cheques, etc.
$3.$ Bankers’ bank and lender of last resort:
$RBI$ functions as banker to all the scheduled banks in India.
The three functions as a banker to banks are:
$(a)$ Manages cash reserves of banks
$(b)$ Determines direction of credit as well as directs credit policy.
$(c)$ Determines rate of interest for all banks i.e. interest rates for saving deposits, fixed deposits, loans, etc.
$RBI$ also lends money to scheduled banks in case of emergency.
$4.$ Controller of credit:
$RBI$ controls credit creation of the banks by various monetary policy tools like Repo rate, Reverse repo rate, $SLR, CRR$ etc.
$5.$ Custodian of foreign exchange reserves:
$RBI$ holds all the important foreign exchange reserves/currencies like U.S dollars, British pounds, gold, etc. in its custody.
$RBI$ maintains these reserves with them so as to maintain the value of rupee as compared to other currencies under the fixed exchange rate process of $IMF\ ($International Monetary Fund$).$
Fixed exchange rate regime is when the value of a country’s currency, in relation to the value of other currencies, is maintained at a fixed conversion rate by the central bank of a country.
$RBI$ maintains the value of rupee in the world economy by buying and selling these foreign exchange reserves in the open market.
$(B)$ Non-monetary functions of Reserve Bank of India:
$1.$ Regulatory and supervisory functions:
$RBI-$ controls all the functions of commercial and cooperative banks. It supervises various functions like:
$(a)$ licensing of banks,
$(b)$ branch expansion,
$(c)$ liquidity of their assets and
$(d)$ management and methods of working.
$2.$ Promotional functions:
In India, there are many people who still do not hold bank accounts. Due to this, these people are forced to do all the dealings of money, credit in the unorganized money market.
This creates problem for the $RBI$ to find out exact National Income of country as they do*not have any track of the money transacted.
Thus, due to the above mentioned problems faced by $RBI,$ it has to do promotional activities of banks
$RBI$ encourages people to open bank account and also promotes banks to open their branches in the rural areas where people staying there can take benefit of banking services
It also promotes setting up of cooperative banks for the interest of people.
$(3)$ Financial inclusion and development:
Owing to India’s highly diversified economy, it becomes difficult for $RBI$ to reach to all sections of people.
Thus, $RBI$ promotes Financial Inclusion which means providing banking services to low income segments of society at an affordable price.
It provides special credit facilities to agriculture, small scale industries, self-employed people and cottage industries.
$RBI$ also manages the Prime Minister Jan Dhan Yojna.
$RBI$ has made its website very user friendly. It publishes various banking related information and statistics as well as articles of experts on its website. Such publication helps people to promote research related to banking and bringing monetary improvement in the country.
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