Question

What is a Central Bank? Discuss its important functions.

Hint:

Think "issuer, banker, regulator, policy-maker, forex manager, and payments operator" — that's the central bank.

Answer 1

A central bank is the apex monetary authority of a country responsible for issuing currency, regulating the banking system, managing foreign exchange and reserves, and conducting monetary policy to achieve macroeconomic objectives such as price stability, growth, and financial stability (e.g., RBI in India). 
Key functions: 

(1) Note-issuing authority: Monopoly of currency issue provides control over money supply and seigniorage. 

(2) Banker to government: Maintains government deposits, manages public debt, and undertakes ways and means advances. 

(3) Banker's bank & lender of last resort: Holds cash reserves of banks, provides liquidity during stress, and settles interbank payments. 

(4) Monetary policy: Uses policy rate, reserve requirements (CRR/SLR), open market operations, and liquidity facilities to influence credit and interest rates. 

(5) Regulation and supervision: Licenses and oversees banks and key financial institutions, sets prudential norms, and promotes soundness. 

(6) Exchange management: Manages foreign exchange reserves, intervenes in forex market, and implements exchange control frameworks. 

(7) Payment and settlement systems: Develops and regulates secure, efficient payments infrastructure (RTGS, NEFT, fast payments). 

(8) Financial inclusion and development: Promotes credit to priority sectors, fosters innovation and financial literacy. 
Objectives and trade-offs: Maintaining low and stable inflation while supporting growth and safeguarding financial stability often requires balancing instruments and clear communication (inflation targeting frameworks help anchor expectations).