Central Bank Functions, Objectives And Importance

Central Bank Functions

Central Bank Functions: A central bank is often called the "lender of last resort." This means it steps in to provide money to the economy when regular banks can't cover a shortage. Essentially, the central bank prevents the country's banking system from collapsing.

However, the main job of central banks is to make sure the value of a country's money stays steady by controlling inflation. They also regulate a country's monetary policy and are the only ones who make and print the paper money and coins.

It's been proven over time that central banks work best when they are separate from the government's financial plans. This way, they aren't influenced by the politics of any administration. Also, a central bank should have no interests in regular banking businesses.

Central Bank Functions Key Points

• Central banks handle a country's monetary policy and control how much money is available, aiming to keep inflation low and the economy growing steadily.
• On a big scale, central banks affect interest rates and use open market operations to manage borrowing and lending costs across the economy.
• On a smaller scale, central banks set the reserve ratio for regular banks and step in as the last resort lenders when needed.

Central Bank About

Central bank stands out as the most potent financial institution, constituting a pivotal component of a country's economic and financial architecture. Functioning as an independent authority, it assumes the crucial responsibilities of overseeing, regulating, and stabilizing the monetary and banking systems within the nation. The Reserve Bank of India or RBI is the main bank of the country. It started in 1935. All around the world, central banks have a job to make sure money matters are stable and the country's independence in economic decisions is protected.

Characteristics of Central Bank

Central banks exhibit distinctive features that set them apart from market-driven entities and underscore their non-competitive nature. Key attributes include centralization, establishment and protection of privileges by law, and a legal monopoly status enabling the issuance of currency and banknotes—a privilege not held by private commercial banks.

Central Bank Objectives

Central banks, often referred to as the lender of last resort, operate as a critical government organ, overseeing major financial operations. Their multifaceted objectives aim to bolster a country's economic policy by influencing the behavior of financial institutions. In the Indian context, the RBI, a statutory bank, assumes the primary role, managing currency notes' production and overseeing the money supply. The central bank's functions extend to various domains, highlighting its role in the money market:

1. Regulator of Currency: The central bank, such as the RBI, is exclusively authorized to print currency notes, playing a pivotal role in managing the nation's currency supply.
2. Banker and Advisor to the Government: Functioning as a fiscal agent, the central bank manages government deposits, executes payments on behalf of the government, and provides valuable advice on monetary policies and economic matters.
3. Custodian of Commercial Banks: Mandated by law, commercial banks maintain reserves, with the central bank acting as a custodian and lender of cash reserves, facilitating interbank transactions.
4. Custodian and Manager of Foreign Exchange Reserves: The central bank manages foreign exchange rates by buying and selling currencies internationally and serves as the official repository of foreign currencies and gold.
5. Lender of the Last Resort: In times of financial stress, the central bank extends collateral-based advances or re-discounts to various financial entities, preventing the collapse of the country's financial structure.
6. Controller of Credit: The Reserve Bank of India and similar central banks control how much money banks create using different methods to avoid inflation.
7. Transfer and Settlements: Acting as a clearinghouse, the central bank provides services for transferring and settling mutual claims among commercial banks, streamlining the clearing of cheques and facilitating fund transfers.

Importance of Central Bank

Central banks serve as the heart of a country's monetary system, exerting profound influence over its economy. Their actions play a crucial role in mitigating economic cycles, ensuring steady and stable growth, and safeguarding the overall direction of the nation's economy.

Examples of Central Banks

1. Federal Reserve (USA)
2. Reserve Bank of India (India)
3. People’s Bank of China (China)
4. Bank of England (UK)
5. European Central Bank (EU or European Union)

Emergence of Central Banks

• Looking back in the past, one could argue that the influence of central banks began to rise with the establishment of the Bank of England in 1694.
• It is widely accepted that the concept of the modern central bank took shape in the 20th century, responding to challenges within commercial banking systems.
• From 1870 to 1914, when global currencies were tied to the gold standard, maintaining price stability was relatively straightforward due to the limited availability of gold.
• This restriction made it difficult for inflation to surge through a simple decision to print more money. During this time, the central bank mainly made sure that gold could be exchanged for currency by issuing notes backed by the country's gold reserves.
• However, World War I brought an end to the gold standard. It became evident that, in times of crisis, governments dealing with budget deficits (due to the costs of war) and seeking more resources would resort to printing additional money. However, this practice led to inflation as governments increased the money supply.