Question

State three functions of central bank.

Hint:

Other important functions include being the "Banker's Bank and Supervisor," "Lender of Last Resort," and "Custodian of Foreign Exchange Reserves." Any three of these would be a correct answer.

Answer 1

Step 1: Understanding the Concept:
A central bank is the apex financial institution responsible for overseeing and managing a country's monetary system and banking structure.

Step 2: Detailed Explanation of Three Functions:
\begin{enumerate} \item Monopoly of Note Issue (Currency Authority): The central bank has the sole legal authority to issue currency notes in a country. This function ensures uniformity in the currency, helps the bank control the money supply, and builds public faith in the monetary system. In India, the Reserve Bank of India (RBI) performs this function. \item Banker, Agent, and Advisor to the Government: The central bank acts as the government's banker by maintaining its accounts, receiving payments, and making payments on its behalf. It also manages public debt and provides short-term loans (ways and means advances) to the government. As an agent and advisor, it advises the government on monetary and financial policies. \item Controller of Credit and Money Supply: This is one of the most important functions. The central bank uses various monetary policy tools to regulate the amount of credit created by commercial banks and the overall money supply in the economy. The main objectives are to maintain price stability (control inflation) and promote economic growth. Tools include the repo rate, reverse repo rate, Cash Reserve Ratio (CRR), and open market operations (OMO). \end{enumerate}