Meaning and Definition of Central Bank? Economics

central bank
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Since the RBI holds reserves of commercial banks, it facilitates the clearing of cheques by transferring funds between banks. The principle of bookkeeping is followed in this procedure to make transfer entries into their accounts. There is a separate department operated by the central bank in big cities and trade centers to transfer and settle the claims of one bank on the other. Balanced development of banking system- A good banking system is one in which there is balanced development of banks in all sectors of the economy. If we look at India, earlier the banking system developed only in urban areas and the development in rural areas remained negligible. After the nationalization of banks, efforts for balanced development have started rapidly.

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Merchant bankers in England do the work of accepting commercial bills. They raise their financial resources for these activities from share capital and short term loans or deposits. Andy Haldane from the Bank of England said “central bankers may have to simply accept that their good old days – of adjusting rates of interest to spice up employment or contain inflation – may be gone for good”. The European Central Bank and the Bank of Japan whose economies are in or close to deflation, continue quantitative easing – shopping for securities to encourage extra lending.

The interest rate at which the RBI lends to commercial banks in return for government assets is known as the repo rate. Banks can receive a payment at a lesser cost when the repo rate falls, but banks are deterred from doing so when the repo rate rises since it becomes more burdensome. The interest rate at which the RBI borrows money from commercial bank is known as the reverse repo rate. Banks’ cost of borrowing and lending increases in response to an increase in the reverse repo rate.

The regulator has also asked HDFC Bank to comply with liquidity and reserves requirements without exception from the merger date. HDFC Bank’s CFO said there are no guidelines on whether the stake increase has to be through funds infusion or share purchases from the market. HDFC Bank has been ramping up its investment book, which expanded 13.4% on-year to INR5.17tn ($68.84bn) as of 31 March 2022. A public sector bank is a nationalized bank, and it accounts for more than 75% of the total banking sector in the country. They are banks with a majority of the stakes held by the government. Bagehot’s goal was to plot central bank coverage in order that industrial banks would behave in ordinary occasions as if there were no central bank.

Commercial Banks

Such accounts are suitable for salaried people and small businessmen. Savings bank is different in western countries but in India only commercial banks do this work. The European Central Bank remits its interest revenue to the central banks of the member countries of the European Union. This revenue, derived from the ability to issue foreign money, is referred to as seigniorage, and often belongs to the nationwide authorities. The state-sanctioned power to create foreign money is called the Right of Issuance.

They can also promote financial stability, inclusion, and efficiency. Additionally, because they are issued and backed by a central bank, they are subject to the same level of oversight and regulation as other forms of central bank money. HDFC or HDFC Bank can raise stake in Life, ERGO beyond 50%India’s central bank has allowed either of HDFC or HDFC Bank to increase their ownership to more than 50% in HDFC Life and HDFC ERGO before their merger.

Commercial and industrial banks should be developed in a commercial and industrial country and if the country’s economy is dependent on foreign trade, there should be adequate development of foreign banks. International Bank – Development of means of transport and communication has given emphasis to foreign trade, monetary and economic cooperation and cultural harmony. They give loans in foreign currency, buy debentures or promote loans by giving guarantees.

Practical Insights For Wealth Creation

SLR refer to the minimum percentage of deposits with the commercial bank which these are legally required to keep in the form of specified liquid assets as reserves with themselves. Bank rate is the interest rate at which a commercial bank can borrow from central bank to meet its long term needs. Following are the main instruments a central bank opts to control credit creation. Are you looking for, what is central bank its definition and its functions as per the syllabus of economics class 12 CBSE Board.

  • Furthermore, it is responsible for issuing the local currency, overseeing the monetary policies, and maintaining the level of liquidity and inflation.
  • The central bank acts as a “clearinghouse” by providing free services to commercial banks in transferring and settling their mutual claims.
  • Its main purpose is to control credit system and money market.

The credit flow in the country is regulated by means of two methods; quantitative method and qualitative method. RBI applies tight monetary policies when it observes that there is enough supply of money which may cause an inflationary situation. This role of the central bank is of a fiscal agent to the government where the RBI keeps the deposits of both central and state governments.

Types of Indian Banks / Types / Forms of Modern Banks

The banking system of a country can work systematically in coordinated manner, only if there is an apex institution to direct the activities of the banks. The central bank of the country is an autonomous institution, entrusted with powers of control and supervision. After World War II, the International Monetary conference held at Brussels in 1929 recommended the setting up of a central bank in every country. The central bank of our country, known as Reserve Bank of India was set up in 1935. The central bank of England called Bank of England was established in 1694.

The RBI aims to stimulate the provision of facilities for providing credit for overseas commerce, particularly exports from India. EXIM Bank India and the Export Credit Guarantee Corporation of India are aided by refinancing their export lending. The RBI has always attempted to offer critical training to banking industry personnel.

Established in 1935, RBI is India’s central banking organisation and manages the country’s monetary policy. The traditional duties of the RBI include currency issuance, financing to banks and the government, managing exchange rates, regulating credit, and performing supervisory duties. The central bank acts as a ‘clearing house’ for other banks and mutual obligations are settled through the clearing system. Since it holds cash reserves of commercial banks, it is easier for the central bank to act as a ‘clearing house’. By giving accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and their financial institutions, the central bank acts as the lender of the last resort.

Advantages and Disadvantages of Central Bank Digital Currency

Using any of these instruments will lead to changes in the interest central bank definition, or the money supply in the economy. Monetary policy can be expansionary and contractionary in nature. Increasing money supply and reducing interest rates indicate an expansionary policy. Australia established its first central financial institution in 1920, Peru in 1922, Colombia in 1923, Mexico and Chile in 1925 and Canada, India and New Zealand in the aftermath of the Great Depression in 1934.

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A central bank serves as an emergency lender to struggling commercial banks and other entities. When a government needs to raise more money, the central bank can offer a politically appealing alternative to taxation by buying government debt obligations, for instance. They control member banks via capital and reserve requirements. There are certain limitations in the case of central banking as well, monetary policies play a minimal role in the economic growth of a country. For example, The Reserve Bank, which is the national central bank of India, just like other developing countries, has not been able to manage inflationary pressure.

They would typically operate at a regional level in different states of the country and have branches in selected urban areas. The central bank of India is known as the Reserve Bank of India. The R.B.I. is a financial institution that is mandated to regulate and oversee all of the other banks in the country.

Disadvantages of Central Bank Digital Currency:

These are those letters of credit which are payable within a specified period in the form of a promise or order to pay for the goods sold on credit. The seller wants payment in cash immediately while the buyer wants payment after a fixed period. The seller gets the bill or hundi deducted from the bank or encashes it.


The central bank performs open market transactions that either inject the market with liquidity or absorb additional funds, immediately affecting the extent of inflation. To improve the sum of money in circulation and reduce the rate of interest for borrowing, the central financial institution can purchase government bonds, payments, or other government-issued notes. When it wants to soak up cash to reduce inflation, the central financial institution will sell authorities bonds on the open market, which will increase the rate of interest and discourages borrowing. Open market operations are the important thing means by which a central financial institution controls inflation, money provide, and costs. However, the first goal of central banks is to offer their countries’ currencies with worth stability by controlling inflation. A central financial institution also acts as a lender of last resort to the banking sector during instances of economic disaster.

Since 1978 the Government Accountability Office has carried out common audits of the banks’ operations. The GAO audits are reported to the general public, however they may not evaluation a bank’s financial coverage choices or disclose them to the general public. Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly ‘Swadeshi Bank’. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the ‘property of the nation and the country’s asset’.

It also has potential disadvantages, such as loss of control and increased cyber security risks. The benefits and drawbacks of CBDC may vary depending on implementation and use cases. The Federal Reserve Banks opened for enterprise in November 1914. Along with the measures mentioned above, central banks have other actions at their disposal. The Federal Reserve Board , the governing body of the Fed, can affect the national money supply by changing reserve requirements.

Before, all banks were permitted to print their currency, which led to an unorganized economy. Governments all around the world gave central banks the authority to issue money to avoid this predicament, which led to uniform currency circulation and a steady flow of cash into the economy. The central bank regulates how commercial banks create credit by engaging in open market operations or by altering the CRR to regulate the process. It was incorporated as a joint stock bank in 1668 and granted a charter to lend money to the government and serve as a clearing house for trade. The bank has gone through several challenges, including war, as well.

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