Central bank

Introduction
 A central bank is an entity responsible for
overseeing the monetary system and policy of a
nation or group of nations.
 Regulating its money supply and availability of
credit
 Central banks seek to keep a nations economy
or an even keel.
 It is controller of credit as well as lifeblood of
economic activity in collecting deposits and
providing credits to states, people, house holds
and businesses is undisputable.
 In all economic systems, banks have the
lending role in planning and implementing
financial policy.
 The primary goal of central banks is to

provide their countries currency with price

stability by controlling inflation.
 A central bank also act as the regulatory

authority of a country’s monetary policy.

 It is the sole provider and printer of notes

and coins in circulation.

Functions of Central Bank
 It may include implementing monetary
policies setting the official interest rate.
 It is used to manage both inflation and the

country’s exchange rate.

 Ensuring that this rate takes effect via a

variety of policy mechanism and controlling

the nations entire money supply.
 The basic function of the central bank is to
control the money supply in the economy.
 It is responsible for issuing currency on

behalf of the government.

 In addition to this basic function, the
central bank performs the following duties
Duties of Central Bank
1. It receives the state revenues, keeps the deposits of
various departments and makes payments on behalf
of government.
2. It keeps the cash reserves of the commercial Banks
acts, as clearing house for the inter bank
transactions as lender of last resort.
3. It supervises the commercial banking system and
ensure smooth running.
4. One of the central banks leading functions is the
setting of the interest rate, it sets a rate which
commercial banks can borrow from the central
bank.
5. It controls the money and capital markets by
changing the supply of money and there by
rate of interest. The main objective is to
keep equilibrium in these markets.
6. It is the custodian of the foreign market also
foreign exchange. It also keeps the closer
check on the external value of the domestic
currency and prevent its deterioration.
7. It is advisor to the government in all the
monetary affairs. It is responsible for
formulation and implementation of
monetary policy.
Objective
 The objective of the central bank is to ensure
the internal and external stability of the
currency.
 Internal stability means keeping the
purchasing power of the money intact and
preventing its deterioration.
 In other words it has to maintain the rate of

inflation with in tolerable limits. If its

curtailment is not feasible all together.
 External stability implies keeping a balance
between export and import or prevention of
the foreign exchange.
 Value of domestic currency from
depreciation in developing countries.
 The central bank also concerned with the

progress and development of the economy.

 It provides financial support to various

development programs.
 Central Banks aim to keep prices stable so

consumers are confident prices will not

fluctuate rapidly.
 The central bank adopts various measures to
control the money supply
 The bank exercise the authority via different

instrument of credit control

 Economic growth is important to central

banks as it generally means more jobs and

better living conditions.
Instruments of credit control
 Open Market Operations: This is the most
frequently used instrument or the routine
practice to control the money supply.
 However its effectiveness depends upon the

perfection of capital and money markets.

 The central bank sells government
securities (called treasury bills) to the
general public if a contractionary policy is
desire.
 In contrast, it buys back these bonds and
diffuses extra money into the economy if an
expansionary policy is to follow.
 This is medium of government borrowing at

present rate of interest.

Bank Rate Policy
 The rate of interest at which the central
bank offers loans to commercial banks or
discount their bills is called Bank rate.
 And the rate at which the commercial banks

extend loans to the general public is called

Market rate.
 A change in the bank rate is followed by a

corresponding change in market rate.

 Thus it is an powerful instrument of credit

control.
 The Variation in capital reserves: All commercial banks
are required by law to keep a proportion of their total
deposits as reserves with the central bank. This is
known as reserves ratio the power of commercial
banks to extend loans is reduced.

 Variation in cash reserves: The commercial Banks are

required to keep fixed proportion of their total
deposits in the cash form standing ready to honor the
check of customers and to avoid solvency problem.
 By increasing this cash reserve proportion, the central
Bank can limit the autonomy of commercial Banks to
credit . However, the Banks may not strictly follow the
advice of central Bank.