Question

Explain the "Banker’s Bank and Advisor" function of the Central Bank of a nation.

Hint:

The Central Bank regulates commercial banks and advises the government on economic policies.

Answer 1

The Central Bank, such as the Reserve Bank of India (RBI), plays a crucial role in managing the financial system and regulating monetary policies. Two of its key functions are: 1. Banker’s Bank:
- The Central Bank regulates and supervises commercial banks.
- It provides liquidity support by acting as a lender of last resort.
- It ensures banks maintain the required Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). 2. Advisor to the Government:
- The Central Bank advises the government on monetary policies, economic growth strategies, and financial stability.
- It helps in managing public debt, foreign exchange reserves, and fiscal policies.
- It assists in formulating inflation control measures and interest rate policies. Conclusion: The Central Bank ensures financial stability, supports the banking system, and provides critical policy advice to the government.