FUNCTIONS OF CENTRAL BANK

FUNCTIONS OF CENTRAL BANK WITH SPECIAL REFERENCE TO RBI

INTRODUCTION:
The Central bank is the bank which stands as the lender of money, issue notes and coins, supervises, controls and regulates the activities of the banking system and acts as the banker to the government. In the pyramidal financial structure of a modern economy, the central bank lies at the top. In other words, the central bank acts as the head of the banking institutions in the country. The central bank is the apex institutions of the monetary and banking structure of a country. It seeks to manage a macro economy in such a fashion as to promote social welfare. At present there is no country in the world of any importance that does not have a central bank. The establishment of a central bank in a modern economy is essential as it is the apex institution of a countrys financial as well as monetary system. Thus, every independent country should have a central bank for organizing, running, supervising, regulating and developing its monetary system. Moreover, implementation of the governments economic policy requires the presence of central bank which stands as the undisputed leader of the money market. Thus, the central bank is one of the inventions of modern civilization. The Risks Bank of Sweden was set up in 1956 and the Bank of England was started in 1694. However, Bank of England started functioning as the Central Bank of England in 1884. The Bank of England is the oldest Central Bank in the world. Thus, the first central bank was established in the eighteenth century. Twelve Federal Reserve Banks in America started functioning in 1913. A phenomenal growth of central banks took place in various countries after the Second World War. There are nearly 150 Central Banks operating throughout the world. In each and every country there is a central bank. The Twelve Federal Reserve Banks in America are quasi-government banks. The coordinating central body of these banks is the Federal Reserve Board. They are an admixture of private ownership and public control. They are not guided by the profit motive like other private enterprises. The Reserve Bank of India, the Central Bank of our country was set up in 1935. The evolution of central banking was traced out from the note issuing function of banking system. Commercial banks were given powers to issue currency notes in the nineteenth century. However, there were problems in issuing notes due to lack of uniformity, over-issue or under-issue of notes. Therefore, note-issuing powers were gradually shifted to the central bank i.e. The Reserve Bank of India.

FUNCTIONS OF CENTRAL BANK

CENTRAL BANKING (HISTORICAL BACKGROUND):

There is a long history, which has been traced to as far back as 1773, of the efforts to set up a banking institution in India, with some elements of central bank. Matters relating to currency and exchange such as monetary standard and the exchange rate received far more attention than the subject of banking. The two main functions of a central bank i.e. note issue and banker to Government were carried out in several countries by an existing bank or a new bank set up for this purpose. Banks enjoying a monopoly of note issue and the sole right to act as bankers to Government acquired other functions such as holding cash reserves of commercial banks, rediscounting their bills and managing clearing house. A clear concept of central banking was emerged and central banking came to be regarded as a special category of business, quite distinct from commercial banking. It was only at the beginning of the twentieth century that the term central bank came to be used in India in the official dispatches. It was proposed to amalgamate the three Presidency Banks into one strong institution. The central banking functions envisaged for the new institution were not only those of note issue and banker to Government but also maintenance of gold standard, promoting gold circulation as well as measuring and dealing with requirement of trade for foreign remittances. The amalgamation of the Presidency Banks took place in 1921. The new institution called Imperial Bank of India was not entrusted with all the central banking functions. Currency management remained with government. Central banking came to be entrusted as a separate class of business distinct from commercial banking. Therefore, in 1926, the Hilton Young Commission recommended the setting up of an institution, the Reserve Bank of India which was to be on trusted with pure Central banking functions. It was to take over from the Imperial Bank such of the central banking functions as that institution had been performing till then. The Gold Standard and Reserve Bank of India Bill, was introduced in the Legislative Assembly on January 25, 1927 to implement the recommendations of the Hilton Young Commission. In January, 1928 the Government of India published a new Gold Standard and Reserve Bank of India Bill. The Bill broadly followed the 1927 Bill as amended by the joint committee. The Bill also provided for the shareholders bank.

FUNCTIONS OF CENTRAL BANK

DEFINITIONS OFCENTRAL BANK:

According to R.P.Kent, Central Bank is an institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of the general public welfare. The essential feature of a central bank is its discretionary control over the monetary system of the country. The Central bank also acts as the leader of the money market and in that capacity; it supervises, controls and regulates the activities of the commercial banks. A Bank is called as a central bank because it occupies an important position in the monetary and banking structure of the country in which it operates. Thus, the central bank is an institution whose main function is to help, control and stabilize the monetary and banking system of the country in the national economic interest. According to W.A.Shaw, the Central Bank is that Bank which controls credit. Paul Samuelson defines Central Bank as a bank of bankers. Its duty is to control the monetary base or high powered money. According to De Kick the guiding principle of Central Bank is that it should act only in the public interest and for the welfare of the country and without regard to profit as primary consideration. Central banking is a new phenomenon. It is a twentieth century financial institution. The Central Bank of the Federal Reserve System in USA was established by 1913. The Reserve Bank of India was set up on 1st April 1935 under the Reserve Bank of India Act, 1934. The Imperial Bank of India was set up by the amalgamation of the three Presidency Banks, in 1921 which had performed a few Central Banks functions. The Imperial Bank served as a banker to the Government and in same capacity as a bankers bank till the establishment of the Reserve Bank of India in 1935. The need for Central Bank in India was stressed by the Royal Commission on Indian Currency and Finance popularly known as the Hilton Young Commission, in 1926. The Commission also suggested the name Reserve Bank of India for the countrys Central Bank. The Indian Central Banking Enquiry Committee also made a strong recommendation for the establishment of the Reserve Bank. Accordingly, a fresh bill was introduced in the Indian Legislative Assembly on 8 September, 1933. This Bill was passed and received the assent of the Governor General on 6th March, 1934 and became the Reserve Bank of India Act, 1934. The Reserve Bank of India was constituted in accordance with this Act and commenced its operations from 1st April, 1935.
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Richer countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. Examples include the European Central Bank (ECB) and the Federal Reserve System in the United States. Some central banks are publicly owned, and others are privately owned. For example, the United States Federal Reserve is a quasi-public corporation. There is no standard terminology for the name of a central bank, but many countries use the "Bank of Country" form (e.g., Bank of England, Bank of Canada, and Bank of Russia). Some are styled "national" banks, such as the National Bank of Ukraine; but the term "national bank" is more often used by privately-owned commercial banks, especially in the United States. In other cases, central banks may incorporate the word "Central" (e.g. European Central Bank, Central Bank of Ireland). The word "Reserve" is also often included, such as the Reserve Bank of India, Reserve Bank of Australia, Reserve Bank of New Zealand, the South African Reserve Bank, and U.S. Federal Reserve System. Many countries have state-owned banks or other quasi-government entities that have entirely separate functions, such as financing imports and exports. Typically a central bank controls certain types of short-term interest rates. These influence the stock- and bond markets as well as mortgage and other interest rates.

INTEREST RATES:
By far the most visible and obvious power of many modern central banks is to influence market interest rates; contrary to popular belief, they rarely "set" rates to a fixed number. Although the mechanism differs from country to country, most use a similar mechanism based on a central bank's ability to create as much fiat money as required. The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds. As an example of how this functions, the Bank of Canada sets a target overnight rate, and a band of plus or minus 0.25%. Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band; in principle, the capacity to borrow and lend at the extremes of the band are unlimited. Other central banks use similar mechanisms.
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It is also notable that the target rates are generally short-term rates. The actual rate that borrowers and lenders receive on the market will depend on (perceived) credit risk, maturity and other factors. For example, a central bank might set a target rate for overnight lending of 4.5%, but rates for (equivalent risk) five-year bonds might be 5%, 4.75%, or, in cases of inverted yield curves, even below the short-term rate. Many central banks have one primary "headline" rate that is quoted as the "central bank rate." In practice, they will have other tools and rates that are used, but only one that is rigorously targeted and enforced. A typical central bank has several interest rates or monetary policy tools it can set to influence markets. Marginal lending rate (currently 1.75% in the Euro zone) a fixed rate for institutions to borrow money from the central bank. (In the USA this is called the discount rate). Main refinancing rate (1.00% in the Euro zone) the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans. (In the USA this is called the federal funds rate). Deposit rate (0.25% in the Euro zone) the rate parties receive for deposits at the central bank.

OPEN MARKET OPERATIONS:

Through open market operations, a central bank influences the money supply in an economy directly. Each time it buys securities, exchanging money for the security, it raises the money supply. Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security. The main open market operations are: Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off. Buying or selling securities ("direct operations") on ad-hoc basis. Foreign exchange operations such as forex swaps.

FUNCTIONS OF CENTRAL BANK

CAPITAL REQUIREMENTS:
All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. For international banks, including the 55 member central banks of the Bank for International Settlements, the threshold is 8% of risk-adjusted assets, whereby certain assets (such as government bonds) are considered to have lower risk and are either partially or fully excluded from total assets for the purposes of calculating capital adequacy. Partly due to concerns about asset inflation and repurchase agreements, capital requirements may be considered more effective than deposit/reserve requirements in preventing indefinite lending.

EXCHANGE REQUIREMENTS:
To influence the money supply, some central banks may require that some or all foreign exchange receipts be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with non-convertible currencies or partiallyconvertible currencies. In this method, money supply is increased by the central bank when it purchases the foreign currency by issuing (selling) the local currency. The central bank may subsequently reduce the money supply by various means, including selling bonds or foreign exchange interventions. There are two types of central bank: The autonomous and the semi-autonomous. The autonomous central bank is politically and financially independent. Its Governor is appointed for a period of time which is incommensurate with the terms in office of incumbent elected politicians, so that he is not subject to political pressures. The autonomous central bank's budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Prime examples of autonomous central banks are Germany's Bundes bank and the American Federal Reserve Bank. The second type of central bank is the semi autonomous one. This is a central bank that depends on political parties and, especially, on the Ministry of Finance. Its budget is allocated to it by the Ministry or by the legislature. The upper echelons of such a bank - the Governor and the Vice Governor - can be impeached by politicians. This is the case with the National (People's) Bank of Macedonia which has to report to Parliament. Such dependent banks fulfill the function of an economic advisor to the government. The Governor of the Bank of England advises the Chancellor of the Exchequer about the desirable level of interest rates.
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ORGANIZATIONAL STRUCTURE OF RBI

Establishment:The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. Preamble:The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:"to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Central Board:The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act. Appointed/nominated for a period of four years Constitution: Official Directors Full-time : Governor and not more than four Deputy Governors Non-Official Directors Nominated by Government: ten Directors from various fields and one government Official Others: four Directors - one each from four local boards Local Boards:-One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi. Membership: consist of five members each appointed by the Central Government for a term of four years Functions: To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.

FUNCTIONS OF CENTRAL BANK

BOARD FOR FINANCIAL SUPERVISION (BFS):

The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. Objective:Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Constitution:The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. BFS meetings:The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. Functions:Some of the initiatives taken by BFS include: restructuring of the system of bank inspections introduction of off-site surveillance, strengthening of the role of statutory auditors and Strengthening of the internal defenses of supervised institutions.
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The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions. Current Focus: supervision of financial institutions consolidated accounting legal issues in bank frauds divergence in assessments of non-performing assets and Supervisory rating model for banks.

Legal Framework:Umbrella Acts: Reserve Bank of India Act, 1934: governs the Reserve Bank functions Banking Regulation Act, 1949: governs the financial sector Acts governing specific functions: Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market Indian Coinage Act, 1906:Governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market Acts governing Banking Operations: Companies Act, 1956:Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalization of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881 Offices: Have 22 regional offices, most of them in state capitals.

FUNCTIONS OF CENTRAL BANK

Training Establishments: Three, namely, College of Agricultural Banking, Bankers Training College and Reserve Bank of India Staff College are part of the Reserve Bank Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT) Subsidiaries:Fully owned: National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) Majority stake: National Bank for Agriculture and Rural Development (NABARD) The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India.

OWNERSHIP OF RBI:The Reserve Bank of India was constituted as a shareholder`s bank, based on the model of leading foreign central banks. The share capital of the bank was Rs. 5 Crores divided into shares of Rs. 100 each Rs. 2, 20,000 were subscribed by the central Government and remaining amount was subscribed by the private shareholders. After independence, the government of India took decision to nationalize the Reserve bank, realizing the need for a close integration of the monetary and credit policies of the bank and the macro-economic policies of the Government.
Reserve Bank of India Mumbai, Maharashtra, India 1 April 1935 Dr. D Subbarao India Indian Rupee INR www.rbi.org.in

Headquarters Established Governor Central Bank of Currency ISO 4217 Code Website

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THE IMPORTANT FUNCTIONS OF CENTRAL BANK:

1} Monopoly power of Note-Issue:Issue of currency notes is regarded as one of the most important functions of a central bank. According to De Kock, The privilege of note issue was almost everywhere, associated with the origin and development of Central Banks. In fact, until the beginning of the twentieth century, they were generally known as banks of issue. Central bank print money, distribute notes and coins, intervene in foreign-exchange markets to regulate the national currency`s rate of exchange with other currencies and manage foreign-asset reserves to maintain the external value of national currency. Commercial banks in many countries enjoyed the power to issue notes in the nineteenth century. However, the notes issued by them lacked uniformity. Governments in many countries began to perform this function. But, governments could not be prevented from over-issuing or under-issuing notes. Therefore, the central bank has been given the monopoly power of note issue. It has been empowered to do so in the interest of uniformity and to bring a balance between the demand for money and the supply of money. Being the sole supplier of money in the economy, the central bank regulates the volume of currency in circulation. Today, all Central Banks are given exclusive monopoly of note-issue. The main function of the Central banks is to bring about monetary stability. Regulation of the volume of the currency and credit in the country is necessary to maintain the stability of the monetary unit. A Central Bank may perform this function more effectively because: It brings about uniformity in the note-circulation and avoids the danger of overissue of notes. It facilitates better regulation of note-issue. It gives notes a distinctive prestige. It enables the Central Bank to control the credit creation activity of the commercial bank. It inspires the confidence of the people. However, the Central Bank does not enjoy uncontrolled powers to issue currency notes. It adopts certain principles while issuing notes.

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The Central Bank has to keep in view three points while issuing notes. They are uniformity, elasticity and security. It has to follow rules and regulations framed by the government. It has to maintain reserves of gold, silver and selected foreign securities in fixes proportion to inspire public confidence in the paper currency and its convertibility.

2} Banker`s Bank:Commercial banks are required, by law or convention, to keep a certain percentage of their deposits as reserve with the central bank. These reserves can be used for the purpose of controlling the activity of the banks and assisting the banks in times of difficulties. These deposits with the Central Bank strengthen the confidence of the people in the banking system of a country. It can be used to influence the credit activities of the banks. Thus, the central bank acts as a custodian of cash reserves. Banks draw cash balances from the central banks and when the situation demands. As a banker`s bank, it acts as a lender of last resort. If the commercial banks face serious liquidity crises they approach the central bank and it extends its lending hand to them either by discounting bills or buying securities from them. This sort of accommodation makes the central bank a lender of last resort. Central banks also acts as a friend, philosopher and guide to other banks in the country. In the words of Geoffrey Crowther, the Central Bank stands to the member banks in exactly the same relation as the member banks themselves to the public. The central bank acts as a bank for clearance and settlement. The central banks, exercises a strict control over the banking system of a country and acts as the guardian of the money market.

3} Controller of Credit:In a modern credit-oriented economy, bank credit is an important component of money supply. Being profit seeking institutions, commercial banks may adopt a policy of under expansion or contraction of credit to suit their needs. This may lead to inflation of deflation, neither of which is desirable. To ensure price stability the supply of bank credit is to be regulated. Therefore, this task has been entrusted with the central bank. Through its credit control policy, central bank seeks to curb the lending potential of commercial banks. The basic objective is to keep the supply of bank credit within limits. Controlling the volume, direction and quality of credit is one of the most important outstanding functions of the central bank.
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The central bank uses a number of qualitative and quantitative weapons to control the volume and direction of credit. The volume of credit can be regulated through different measures like bank rate, open market operations, change in the reserve ratio etc. These known as quantitative weapons. Central bank can also influence the direction of credit through qualitative weapons like margin requirement, regulation of consumer credit, direct action etc. the central bank has to use the weapons which are suitable for the economic conditions of the country.

4} Banker to the Government:Central banks provide bank deposit and borrowing facilities to the government while simultaneously acting as the government`s fiscal agent and underwriter. The central bank acts as a banker, agent and advisor to the government. As a banker of the government, it has to maintain banking accounts of both central and state government. It makes and receives payments on behalf of the government as it acts as the agent to the government. It also provides short-term loans and advances to the government to enable the later to tide over its financial difficulties. It also advises the government in necessary monetary and financial matters such as money borrowing, loan repayment, deficit financing, control of inflation etc. The central bank performs the same functions as the commercial bank performs for its customers. The central bank receives deposits of money, cheques and drafts and also makes payment on behalf of the Government. It manages public debt and undertakes the sale and purchases of securities on behalf of the Government. It represents the Government on various International financial bodies like I.M.F (International Monetary Fund), I.B.R.D etc. It also acts as an advisor to the government on various economic matters. It gives expert advice to the Government on monetary banking and other matters. It pays interest on the Government borrowing.

5} Custodian of Foreign Exchange Reserves:Central banks interfere in foreign exchange markets to regulate the national currency`s rate of exchange with other currencies and manage the foreign-asset reserves to maintain the external value of the national currency. It also acts as a sole custodian of gold and foreign currencies for the purpose of issuing notes and for controlling a deficit in the balance of payments. In holding gold and foreign currency the central bank intends to stabilize the external value of the country`s currency. It is equally important like internal price stability. The central bank has tom ensure that the normal short-term fluctuations in trade do not affect the exchange rate.

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6} Promotional and Developmental Functions:Incase of less-developed economies, the central bank acts not as a controller and regulator of credit but also as a promoter. It`s task in such a framework is to develop the money and capital markets. It has to strengthen the banking system in the country and meet the genuine financial needs of agriculture and industry. It has also to curb the harmful activities of money lenders. It corrects the inefficiencies and defects of the country`s monetary cum financial system. These activities are called as promotional activities. Thus, the pattern of economic development in low income countries is largely determined by the central banks.

7} Regulator of Domestic Financial Institutions:Central banks ensure that commercial banks and other financial institutions conduct their business prudently and in accordance with the relevant laws and regulations. They also monitor reserve ratio requirements and supervise the conduct of local and regional banks.

8} Lender of the Last Resort:The central bank operates as a bank of discount and lender of the last resort. The bank accepts this responsibility as it has a moral duty to strengthen the banking structure and to avoid bank failures. The central bank provides timely financial help to the commercial banks. This financial help is generally through the rediscounting facility or through direct advances against Government securities. The central bank imposes certain terms and conditions while granting such accommodation to commercial banks. Its main objective is to meet directly of indirectly all reasonable demands for accommodation by the commercial banks in times of difficulties and crises.

9} Miscellaneous Functions:In recent years, central banks not only perform the regulatory functions bit also the developmental or promotional functions particularly in under-developed countries. These functions include encouraging the banking habit among the people, establishment of special financial institutions and agencies, development of money and capital markets, publishing journals and reports etc. Central bank is thus a supreme banking authority which controls the behavior of money and encourages economic development by acting as a guardian of the money market. It enjoys a unique position in the country`s economy whether it is developed, under-developed or developing.

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FUNCTIONS OF RESERVE BANK OF INDIA

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India.

1} Monopoly power of Note-Issue:Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than twofifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

2} Banker to Government:The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

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3} Bankers Bank and Lender of Last Resort:The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.

4} Controller of Credit:The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. Every bank has to get a license from the Reserve Bank of India to do banking business within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.

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As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: It holds the cash reserves of all the scheduled banks. It controls the credit operations of banks through quantitative and qualitative controls. It controls the banking system through the system of licensing, inspection and calling for information. It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

5} Custodian of Foreign Reserves:The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.

6} Supervisory Functions:The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

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7} Promotional Functions:With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

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CONCLUSION

From this project we can say that as we need an elder person who is experienced to guide the younger person in our family in the same way we need a CENTRAL BANK (RBI) to regulate other subordinate banks for the successful and the growth of the economy of any country. At the apex of banking and monetary structure is the central bank of the economy. The central bank performs the main function of note issue, banker for the government, credit control, custodian of cash reserve, lender of the last resort etc.The instrument which it uses for controlling credit in the economy are both general (in the form of the bank rate, open market operations, reserve rates) and selective (in the form of margin requirements variable interest rates regulation of consumer credit and so on.)Credit policy is amended from time to time to suit the needs of the economy. Hence, we can conclude that functions of central bank should be performing efficiently for the benefit of the economy of the country.

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