What are the main functions of the central bank of an economy?

What are the main functions of the central bank of an economy? 

Ans. Issue of Currency: The central bank is the sole authority for the issue of currency in the country. All the currency issued by the central bank must be backed by assets of equal value. For this function RBI is also called ‘Bank of Issue’. 

Banker to the Government: Central bank acts as a banker to both Central as well as State governments. As a banker to the government RBI performs following functions:It transacts all the banking business. It accepts money, makes payment and also transfers the funds. It manages Public debt, advises government on the quantum, timing and terms of new loans. It also sells treasury bills to maintain liquidity in the economy. It also makes advances which are repayable within 90 days. 

Custodian of Foreign Exchange Reserves: All foreign exchange reserves of a country remain in the custody of RBI. This function helps the central bank to overcome the problems of foreign exchange fluctuations and BOP difficulties. In order to minimize the foreign exchange fluctuations, Central Bank buys or sells foreign currencies in the market when their value falls or rise. 

Banker’s Bank and Supervisor: The RBI has extensive powers to control and supervise commercial banking system under RBI Act, 1934 and Banking Regulations Act 1949. Banks need to keep a minimum proportion of their net total liabilities with the central bank, it is called cash reserve ratio. CRR is used as an instrument of credit control in the economy. 

Controller of Credit: It is the principal function of a central bank in the opinion of Raymond P Kent who has defined central bank ‘as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare’. By making use of various tools of monetary policy, it ensures that monetary system in the economy functions according to the national priorities. 

Lender of Last Resort: Central Bank comes to the rescue of other commercial banks in the times of crisis. The aim is that no sound and genuine transaction should be restricted or abandoned. 

Acts as a Clearing House: Central bank acts as a clearing house in Inter-Bank transactions. Central Bank also gives facility of transfer of funds at zero cost.