responsible for safeguarding the financial stability of the country. Function of The Central Bank
.Monopoly of note issue:1
.Banker to government:2 .Lender of the last resort:3 . Controller of the credit:4 Monopoly of note issue:1 The central bank of a country is responsible for .issuing currency notes for it
The notes issued should be according to the needs
.of trade and industry :Methods of note issue Currency principle:1 Maximum fiduciary system:2 Proprtional reserve system:3 Note issuance Banker to the Government :2 Central Bank :Is a banker to the government of .the country It performs all services which a commercial banks do .for its customers .…like Collect taxes on behalf of gov’t, pay pensions and salaries to employees
Advisor in financial matters to the government
Agent to the gov’t in international banking and
.financial markets Lender of the last resort:3 The central Bank acts as lender of the last .resort for the commercial banks It helps other banks during their financial .difficulties
For this purpose it advance loans to
..……banks Controller of credit:4 The most important function of central bank in modern times is that of controlling the credit operations of commercial banks by …regulating their credit volume .…For controlling credit C.B use
Bank rate policy:1
Change in reserve ratio:2 .Credit rationing:3 Direct action :4 Credit Control(Monetary policy) Credit control is necessary for …economic stability in a country
Central bank increase or decrease the credit
according to the needs of a country for achieving economic stability through controlling .supply of money Methods of Credit Control It adopts various methods for this …purpose
Bank rate policy :1
Open market operation :2 Credit rationing :3 Direct action :4 Reserve ratio :5 Bank rate policy :1 Bank rate is the rate of interest at which central bank advances loans to the .commercial banks
When central bank increase the bank rate,
commercial banks raise interest rate in giving .out loans ,for decreasing the flow of money
When central bank decrease the bank rate,
commercial banks lower the interest rate in giving .out loans, for increasing the flow of money Open market Operation :2 It refers to purchase and sale of gov’t securities by the central bank in open ,market )Purchase and sale of any kind of paper( …During inflation Central bank sells securities which results decrease in …supply of money …During deflation Central bank purchase securities which results increase in supply of money Credit rationing :3 Under this method Central bank allots credit quota(portion) to commercial banks …on basis of their business
…In case of inflation
…Central bank decrease credit quota …In case of deflation .…Central bank increase credit quota Direct action :4 If commercial banks are following the policy that is inconsistent with the monitory …policy of central bank
It can take direct action by
imposing penalty over commercial banks…Like .banning its new branches Changes in reserve ratios:5 Central bank also control the credit by changing the reserve ratios of commercial ....banks which is normally 25% :In times of inflation Central bank increase the reserve ratio :In times of deflation Central bank decrease the reserve ratio