Money Market and Capital Market in India — Economics STD 12 Commerce / Arts — Question

(A) Introduction: Central Bank is the apex or the supreme monetary banking authority and occupies an important position in the monetary and banking structure of the country.
The guiding principle of a Central Bank is to act only in public interest and for the welfare of the country without regards to profit as primary consideration.
In India, The Reserve Bank of India is the Central Bank. It was established as shareholder’s bank on 1st April, 1935. It was nationalized on 1st January, 1949.

(B) Definitions :
(1) According to M. H. de Kock –
“A Central Bank is one which constitutes the apex of the monetary and banking structure of the country. ”

“(2) According to Prof. W. A. Shaw –
“Central Bank is a bank which controls credit.”

(C) Functions of Central Bank :
(1) Issue of Currency Notes : The Central i Bank has been authorised to print and issue ; currency notes. The RBI enjoys the monopoly of note issue of all denominations except one rupee note. The one rupee note and coins are issued by the Ministry of Finance of the government of India but their distribution is undertaken by RBI.

(2) Banker to the Government: The Central Bank acts as (A) a banker, (B) advisor, and (C) agent to the government. It performs all these functions which commercial banks do for their customers.
As a banker to the government, central bank transacts the business of Central and State governments. It accepts money and makes payments on behalf of these governments.
As an advisor, central bank advises the government on various economic issues and policies.
As an agent, central bank acts as a representative of central bank and attends l the international meetings of IMF and World Bank.
In short, it is a friend, philosopher and guide to the government.

(3) Bankers’ Bank : It supervises, co-ordinates j and controls the operations and activities of the commercial banks. As their bank it undertakes the following functions:
(a) acts as custodian of cash reserve.
(b) acts a lender of the last resort.
(c) provides clearing house function.

(4) Controller of Credit or Money Supply : Central Bank regulates the volume of credit and money supply in the country. The main objective behind this is to maintain price and ; economic stability in the country.
There are various methods which Central Bank uses to control the supply of credit in : the economy. They are –

• Quantitative Measures control the quantity or volume of credit created by the commercial banks. They are bank rate, open market operation and cash reserve ratio.
• Qualitative Measures or Selective Measures deal with the purpose and direction of credit. They are – varying margin requirements, regulation of credit, moral suasion and direct action.

(5) Custodian of Foreign Exchange Reserve of the Country: The Central Bank is also a custodian of country’s gold and major foreign currencies like US dollar, Euro the British Pound, etc. obtained by government from international trade.
The central bank also maintains international liquidity.

(6) Developmental and Promotional Functions : In developing countries like India, a very important function of Central Bank is to promote economic development.

• To promote banking habits among the poor people.
• To provide agriculture finance through NABARD and to promote rural and agricultural development.
• To provide industrial finance through IDBI, SFC and IFCI and boost the growth of industrial sector.
• To provide export – import finance through EXIM bank.
• To encourage small savings through Unit Trust of India.

(7) Data Collection and Publicity : The Central Bank also collects and publishes information relating to agriculture, industrial and financial sectors of the economy, exports and imports, banking, trends in money and capital market, etc.
Its main publications include – Report on Currency and Finance, RBI Bulletin, RBI Journals and various research papers.