banking unit 5

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Blanking unite 5
The central bank
1)Evolution of Central Bank
2) characteristics and functions
3) economic and social objective
4) the central and the state -as bankers Bank
5) reserve Bank of India as the Central Bank
1)Evolution of the Central Bank
The evolution of the central bank reflects the changing

needs of economies and their monetary systems. The role
of central banks has shifted over time from facilitating
trade to managing national monetary policy and
stabilizing the economy.
Early Development of Central Banks:
17th Century: The concept of a central bank began in

Sweden and England. In 1668, the Stockholm Banco (now
Sveriges Riksbank) became one of the earliest institutions
to offer public deposit and lend to the government.
The Bank of England was established in 1694, primarily to

raise funds for the government to finance wars. Its
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functions later expanded to controlling the money supply

and acting as a lender of last resort.
19th Century:
By the 1800s, more countries recognized the need for a

central institution to manage national money supplies,
regulate currency, and facilitate trade. Countries like the
United States, France, and Germany began establishing
central banks.
The Gold Standard system also emerged during this

period, where central banks were responsible for
managing the gold reserves that backed national
currencies.
20th Century to Present:
The role of central banks expanded during the Great

Depression (1929) when financial crises highlighted the
need for central institutions to stabilize financial systems.
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Central banks became more involved in controlling

inflation, managing interest rates, and overseeing the
financial system.
Post-World War II, many countries adopted Keynesian

economics, which saw central banks using monetary
policy tools to control inflation and stabilize economic
growth.
Central banks became more integrated into global

financial markets, particularly after the end of the Bretton
Woods system in the 1970s, which ended the fixed
exchange rate regime and transitioned to floating
exchange rates.
Functions and Powers of Modern Central Banks:
Central banks today regulate the banking sector, manage

monetary policy, control inflation, and stabilize national
economies.
They also supervise national payment systems and act as

lenders of last resort during crises.
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2)Characteristics and Functions of a Central Bank
Characteristics:
Public Institution: The central bank is typically owned by

the government or operates as an independent entity to
ensure financial stability, but its primary goal is public
welfare.
Monetary Authority: It has control over the nation’s

money supply, interest rates, and other monetary tools to
regulate the economy.
Lender of Last Resort: In times of financial crisis, it is

responsible for providing liquidity to the banking system.
Currency Issuer: It has the sole authority to issue legal

tender currency (banknotes and coins).
Independence: While it works in conjunction with the

government, a central bank is often designed to operate
independently to maintain objective and long-term
economic stability.
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Key Functions:
1. Monetary Policy:
Central banks control the supply of money and manage

interest rates to influence inflation and economic growth.
This can be done using tools like open market operations,
reserve requirements, and discount rates.
2. Currency Issuance:
They have the exclusive right to issue banknotes and

coins, which forms the basis of the nation’s monetary
system.
3. Lender of Last Resort:
In times of crisis, central banks provide emergency

funding to commercial banks and financial institutions to
prevent systemic collapse. This helps maintain liquidity in
the financial system.
4. Regulation and Supervision:
Central banks regulate commercial banks, ensuring they

comply with national regulations and standards to protect
depositors and the broader financial system.
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5. Government’s Banker:
They manage the government’s accounts, conduct

government transactions, and help in managing the
national debt. They may also manage the country’s
foreign exchange reserves.
6. Management of Foreign Exchange and Gold
Reserves:
Central banks manage the country’s foreign exchange

reserves, controlling exchange rates and intervening in
the currency markets to stabilize the national currency.
3)Economic and Social Objectives of a Central Bank
A central bank’s goals often extend beyond merely

controlling inflation or managing the money supply. It also
plays an essential role in achieving broader economic and
social objectives:
Economic Objectives:
1. Price Stability:
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One of the primary objectives of a central bank is to

ensure price stability by controlling inflation. This is done
through tools like interest rate management, reserve
requirements, and open market operations.
2. Economic Growth:
By managing monetary policy, central banks can

stimulate or slow down the economy. A central bank aims
to support sustainable economic growth by adjusting
interest rates to either encourage investment (low rates)
or curb excessive spending (high rates).
3. Full Employment:
Central banks often work to maintain employment levels

by adjusting their monetary policies to ensure that
economic conditions are conducive to job creation.
4. Interest Rate Management:
Central banks manage short-term interest rates to control

inflation and stimulate or control economic activity. Lower
rates encourage borrowing and investment, while higher
rates discourage excessive borrowing and curb inflation.
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5. Stability of the Financial System:
Central banks work to prevent financial instability by

supervising banks, intervening during crises, and
maintaining a robust banking infrastructure.
Social Objectives:
1. Financial Inclusion:
Central banks play a crucial role in ensuring that banking

services are accessible to all sections of society, including
rural and marginalized populations. They regulate and
support policies that promote financial inclusion.
2. Reducing Inequality:
By regulating interest rates and ensuring price stability,

central banks contribute indirectly to reducing economic
disparities and ensuring that lower-income groups aren’t
disproportionately affected by inflation.
3. Ensuring Economic Stability:

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Central banks act to mitigate the effects of economic

volatility on the broader population, especially through
crises or periods of inflation. Their actions protect the
purchasing power of individuals.
4)The Central Bank and the State as Bankers’ Bank
A central bank has a vital role in acting as a bankers’

bank and in supporting the government’s financial
activities. Here’s how:
As a Bankers’ Bank:
1. Clearing and Settlement:
Central banks facilitate interbank clearing and settlement

systems, ensuring that payments between banks are
processed efficiently and securely.
2. Supervision of Commercial Banks:
Central banks regulate and supervise commercial banks,

ensuring they maintain adequate capital, liquidity, and
operational standards.
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When commercial banks face liquidity crises, central

banks can provide emergency loans to ensure the
stability of the financial system.
4. Centralized Reserve System:
The central bank holds the reserve requirements of

commercial banks and manages the overall liquidity in
the banking system.
As the Government’s Banker:
1. Treasury Management:
The central bank acts as the government’s fiscal agent,

managing its accounts, facilitating tax collection, and
making payments on behalf of the government.
2. Managing National Debt:

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Central banks manage the issuance of government

securities and manage national debt, both internally and
externally.
3. Foreign Exchange Operations:
Central banks hold and manage foreign exchange

reserves, helping the government maintain exchange rate
stability and facilitate international trade and finance.
5)Reserve Bank of India (RBI) as the Central Bank
The Reserve Bank of India (RBI) was established in 1935

as the central bank of India, following the Reserve Bank
of India Act, 1934. It serves as the cornerstone of India’s
monetary and financial system.
Key Functions of the RBI:
1. Monetary Authority:
The RBI formulates and implements India’s monetary

policy to control inflation, manage money supply, and
ensure economic stability. It does this by adjusting repo
rates, reverse repo rates, and managing the Cash
Reserve Ratio (CRR).
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2. Issuer of Currency:
The RBI is the sole issuer of banknotes (except for one-
rupee coins and notes issued by the Ministry of Finance).
It manages the currency supply to maintain price stability.
3. Regulator of the Financial System:
It oversees the functioning of commercial banks, financial

institutions, and non-banking financial companies
(NBFCs) in India to ensure financial stability and protect
depositors.

In times of financial crisis or liquidity problems faced by
commercial banks, the RBI provides financial assistance
to restore stability.
5. Custodian of Foreign Exchange:

The RBI manages India’s foreign exchange reserves,
formulates exchange rate policy, and intervenes in the
foreign exchange market to stabilize the rupee.
6. Developmental Role:
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The RBI also plays a developmental role by promoting

financial inclusion, digital banking, and economic growth
through various schemes and initiatives like Pradhan
Mantri Jan Dhan Yojana and MUDRA scheme for
microfinance.
RBI’s Role in Indian Economy:

The RBI plays a critical role in shaping India’s economic
growth and stabilizing its financial system. It is central to
monetary policy implementation and ensures the smooth
functioning of the banking system through regulatory
frameworks and liquidity support.
Conclusion
The central bank, as demonstrated through the Reserve
Bank of India,

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1

The evolution of the central bank reflects the changing

Early Development of Central Banks:

17th Century: The concept of a central bank began in

The Bank of England was established in 1694, primarily to

functions later expanded to controlling the money supply

By the 1800s, more countries recognized the need for a

The Gold Standard system also emerged during this

20th Century to Present:

The role of central banks expanded during the Great

Central banks became more involved in controlling

Post-World War II, many countries adopted Keynesian

Central banks became more integrated into global

Functions and Powers of Modern Central Banks:

Central banks today regulate the banking sector, manage

They also supervise national payment systems and act as

2)Characteristics and Functions of a Central Bank

Public Institution: The central bank is typically owned by

Monetary Authority: It has control over the nation’s

Lender of Last Resort: In times of financial crisis, it is

Currency Issuer: It has the sole authority to issue legal

Independence: While it works in conjunction with the

Central banks control the supply of money and manage

They have the exclusive right to issue banknotes and

3. Lender of Last Resort:

In times of crisis, central banks provide emergency

Central banks regulate commercial banks, ensuring they

They manage the government’s accounts, conduct

Central banks manage the country’s foreign exchange

3)Economic and Social Objectives of a Central Bank

A central bank’s goals often extend beyond merely

One of the primary objectives of a central bank is to

By managing monetary policy, central banks can

Central banks often work to maintain employment levels

Central banks manage short-term interest rates to control

5. Stability of the Financial System:

Central banks work to prevent financial instability by

Central banks play a crucial role in ensuring that banking

By regulating interest rates and ensuring price stability,

3. Ensuring Economic Stability:

Central banks act to mitigate the effects of economic

4)The Central Bank and the State as Bankers’ Bank

A central bank has a vital role in acting as a bankers’

1. Clearing and Settlement:

Central banks facilitate interbank clearing and settlement

2. Supervision of Commercial Banks:

Central banks regulate and supervise commercial banks,

3. Lender of Last Resort:

When commercial banks face liquidity crises, central

4. Centralized Reserve System:

The central bank holds the reserve requirements of

As the Government’s Banker:

The central bank acts as the government’s fiscal agent,

2. Managing National Debt:

Central banks manage the issuance of government

3. Foreign Exchange Operations:

Central banks hold and manage foreign exchange

The Reserve Bank of India (RBI) was established in 1935

Key Functions of the RBI:

The RBI formulates and implements India’s monetary