Introduction to Central Bank and its Functions

In this presentation, you’ll learn about what a central bank is and what it does. We’ll go over the main job of a central bank, which is to keep the economy stable and healthy. This includes setting interest rates, controlling inflation (how fast prices rise), and making sure the financial system works smoothly. You’ll see how the central bank helps manage the country’s money, oversees banks, and acts as a safety net if other banks have problems. By the end, you’ll understand how central banks affect our daily lives and keep the economy balanced. This presentation is for those who are in high school, college, or just want some general knowledge. I've made this presentation very simple and not too detailed so that everyone can understand the content properly.

1. Central bank and its functions By Varsha Byju

2. Index 01 04 03 02 What is a Central bank? Conclusion Bibliography Functions of central bank

3. What is a Central Bank? 01

4. What is a Central Bank? A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country. It issues currency, regulates money supply, and controls different interest rates in a country. Apart from this, the central bank controls and regulates the activities of all commercial banks in a country.

5. Central Bank of India The Reserve Bank of India (RBI) is the central bank of India, which began operations on Apr. 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create financial stability in India, and it is charged with regulating the country’s currency and credit systems. RBI

6. Functions of Central Bank 02

7. Functions of central bank Currency Authority or Bank of Issue Banker to the Government Banker’s Bank and Supervisor Controller of Money Supply and Credit

8. Central Bank has the sole authority for issue of currency in the country. In India, Reserve Bank of India (RBI) has the sole right of issuing paper currency notes (except one-rupee notes and coins, ( which are issued by Ministry of Finance). The One Rupee note bears the signature of Finance secretary , while other currency notes bear the signature of Governor RBI. Currency Authority or Bank of Issue

9. The Reserve Bank of India acts as a Banker, Agent and a Financial Advisor to the Central Government and all the State Governments. Banker to the Government As a Banker : it carries out all banking business of the government. • It maintains a current account for keeping their cash balances. • It accepts receipts and makes payments for the government and carries out exchange, remittance and other banking operations. • It also gives loans and advances to the government for temporary periods. The government borrows money by selling treasury bills to the Central Bank.

10. Banker to the Government As an agent: the central bank also has the responsibility of managing the public debt. As a financial advisor: the central bank advises the government from time to time on economic, financial and monetary matters.

11. As the banker to banks, the central bank functions in three capacities: (i) Custodian of Cash Reserves : Commercial banks are required to keep a certain proportion of their deposits (known as Cash Reserve Ratio or CRR) with the central bank. In this way, central bank acts as a custodian of cash reserves of commercial banks. There are a number of commercial banks in a country. There should be some agency to regulate and supervise their proper functioning. Being the apex bank, the central bank (RBI) acts as the banker to other banks. In this sense, it bears the same relationship with commercial banks as the latter maintains with the general public. Banker’s bank and S upervisor

12. (ii) Lender of the Last Resort: When commercial banks fail to meet their financial requirements from other sources, i.e. in case of a financial emergency, they approach the central bank to give loans and advances as lender of the last resort. Central bank assists these banks through discounting of approved securities and bills of exchange. (ii) Clearing House: As central bank holds the cash reserves of all the commercial banks, it becomes easier and more convenient for it to act as their clearing house. All commercial banks have their accounts with the central bank. Therefore, the central bank can easily settle claims of various commercial banks against each other, by making debit and credit entries in their accounts. Banker’s bank and Supervisor

13. As a supervisor , central bank regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management,merging,winding up, etc.The control is exercised by periodic inspection of banks and the returns filed by them. Banker’s bank and Supervisor

14. Repo (Repurchase) rate: Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks to meet their short term needs.The central bank advances loan against approved securities or eligible bills of exchange. The Reserve Bank of India (RBI) is empowered to regulate the money supply in the economy through its ‘Monetary Policy’.It is the policy adopted by the central bank of an economy in the direction of credit control or money supply.As RBI has the sole monopoly in currency issue,it can control credit and supply of money. For this,RBI makes use of the following instruments of Monetary Policy: Controller of Money Supply and Credit

15. Bank Rate: A bank rate is the interest rate charged by a nation's central bank to its domestic banks in order for them to borrow money. The interest rates charged by central banks are meant to stabilise the economy. Reverse repo rate: Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country. Controller of Money Supply and Credit

16. Open Market Operations: Open market operations (OMO) refer to buying and selling of government securities by the central bank from/to the public and commercial banks. RBI is authorised to sell or purchase treasury bills and government securities.It does not matter whether the securities are bought or sold to the public or banks because ultimately the amounts will be deposited in transferred from some bank. Sale of Securities by central bank reduces the reserves of commercial bank.It adversely affects the bank’s ability to create credit and therefore decrease the money supply in the economy. Purchase of Securities by central bank increases the reserves and raises the bank’ ability to give credit. Controller of Money Supply and Credit

17. Legal Reserve Requirements (Variable Reserve Ratio Method): According to Legal reserve requirements, commercial banks are obliged to maintain reserves. It is a very quick and direct method for controlling the credit creating power of commercial banks. Commercial Banks are required to maintain reserves on two accounts: (i) Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central bank. A change in CRR affects the ability of commercial banks to create the credit. For instance, an increase in CRR reduces the excess reserves of commercial banks and limits their credit creating power. (it) Statutory Liquidity Ratio (SLR): It refers to minimum percentage of net demand and time liabilities which commercial banks are required to maintain with themselves. SLR is maintained in the form of designated liquid assets such as excess reserves, unencumbered, government and other approved securities or current account balances with other banks. Change in SLR affects the freedom of banks to sell government securities or borrow against them from the Central Bank. An increase in SLR reduces the ability of banks to give credit and vice-versa. The Reserve Bank can influence the credit creation power of the banks by making changes in CRR or/and SLR. Controller of Money Supply and Credit

18. Margin Requirements: Margin is the difference between the amount of loan and market value of the security offered by the borrower against the loan. If the margin fixed by the Central Bank is 40%, then commercial banks are allowed to give a loan only up to 60% of the value of security. By changing the margin requirements, the Reserve Bank can alter the amount of loans made against securities by the banks. • An increase in margin reduces the borrowing capacity and money supply. • A fall in margin encourages the people to borrow more. • RBI may prescribe different margins for different type of borrowers against the security of the same commodity. • Margin is necessary because if a bank gives a loan equal to the full value of security, then bank will suffer a loss in case of fall in price of security. Controller of Money Supply and Credit

19. Conclusion 03

20. The central bank plays a crucial role in a country's economy. Its main functions include issuing currency, regulating monetary policy, managing a country's foreign exchange reserves, and supervising and regulating financial institutions. Additionally, central banks often work to maintain price stability, promote economic growth, and ensure the stability of the financial system. These functions collectively contribute to the overall health and stability of the nation's economy.

21. Bibliography 04

22. Bibliography Websites Byju’s.com,Wikipedia.com,Learncbse.com Books Macro Economics - Sandeep Garg

23. Thank You!