FUNCTION OF A CENTRAL BANK
Central Bank is an integral part of the finance and economic system. The functions of the central bank of India are as follows:
ISSUE OF MONEY
They have responsibility for issuing notes and coins. The central bank ensures people have faith in notes which are printed, e.g., protect the interest of people, and save them forgery, etc. The central bank prints money. As it is an important responsibility because printing too much causes inflation.
MONETARY POLICY
the central bank plays an important role in maintaining economic growth and target low inflation interest rates. Every month the Municipal Policy Committee will meet the evaluate whether inflationary pressure in the economy, increases the rate.
ENSURE STABILITY OF BANKING SYSTEM
For example, helps in regulating financial derivatives, bank lending.
LENDER OF LAST RESORT TO COMMERCIAL BANKS
If banks into liquidity shortages, then the financial institution is able to lend the full-service bank sufficient funds to avoid the bank running short. This is often an important function because it helps maintain confidence within the banking industry. If a bank ran out of cash, people would lose confidence and need to withdraw their money from the bank. Having a lender of last resort means that we do not accept a credit crunch with our banks. Therefore, people have high confidence in keeping their money in the banks.
LENDER OF LAST RESORT TO GOVERNMENT
Government borrowing is financed by selling bonds on the open market. There could also be some months where the government fails to sell sufficient bonds and so has a shortfall. This can cause panic amongst bond investors. They would be more likely to sell their government bonds and demand higher interest rates.
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