Central banks and it's functions Flashcards
What is a central banks? What is the name of the central bank of india?
A central bank is an apex (supreme institution) which controls, operates, regulates, and directs the banking system of the country. The central bank of india is Reserve Bank of India
What is the name of the central bank of USA and UK
USA - Federal Reserve System
UK - Bank of England
Functions of RBI 1
Issuing authority - the RBI is the sole authority for the issuing of currency above 1 rs
Who issues coins and RS 1 note in india
Ministery of Finance issues coins and RS 1 note
Second function
The RBI acts as an agent, banker, and financial advisor to the government
How does the RBI function as an I) agent ii) banker iii) financial advisor to the government?
I) as an agent - it manages public debt
ii) as an financial advisor - it advises the government for investments and economic, financial, and monetaty status
iii) as banker - current account manager,
accepts receipts and makes payments,
gives loans
3rd function
Banker and superviser to the bank
- Custodian of cash reserves
- lender of last resort
- clearing house
What is the function of Custodian of cash reserves?
Commercial banks are supposed to keep a part of their deposits with the central bank (Cash Reserve Ratio)
What is the function of lender of last resort ?
If the commercial banks fail to meet their financial requirements then they can ask the RBI for loans
What is the function of clearing house?
Since the banks hold the deposits of all commercial banks they can settle inter bank receipts and payments
What is Repo rate and how does the RBI control the repo rate to control money supply
Repo rate is the rate at which the RBI gives loan to the commercial bank for short term needs.
If repo rate is increased, the rate of borrowing increases and in turn lending rate also increases, less people take loans so credit creation is less
What is bank rate and how does RBI control it for money supply
Bank rate is the rate at which bank lends loan to commercial banks for long term needs.
It has the same effect as repo rate
What is reverse repo rate?
When banks have surplus deposits they can deposit it with RBI and earn interest. if reverse repo rate is increased then the bank deposits more and lending capability of the bank becomes negative
What are legal reserve requirements of RBI
1) Cash Reserve Ratio - the minimum percentage that the bank gives to RBI.
2) Statuary Liquid Ratio - the minimum percentage that the bank has to keep with themselves. maintained in various forms of liquid reserves.
What are the qualitative measures of the RBI for Credit Control
1) Moral Suasion - The RBI persuades and pressures the banks to regulate them and control them.
2) Selective credit control - - The RBI tells bank to give credit or not give to certain sectors. this can be used in a positive and negative way.
