Central Bank

 We know that a county has so many banks, be it a government or a private bank that are spread in all parts of the nation. A country has only one Central Bank which is the identity of the country, governments transactions with foreign countries are made with the help of the Central Bank. A Central Bank is a government-run entity that maintains a country’s or a set of countries’ currency and regulates the money supply or the amount of money in circulation. Price stability is a primary goal of many central banks. A central bank is an autonomous national institution that regulates banks, administers monetary policy, and offers financial services such as economic research.

What is the Reserve Bank of India?

The Reserve Bank of India (RBI) is India’s central bank, which was created under the Reserve Bank of India Act on April 1, 1935. The Reserve Bank of India is the country’s central bank and is responsible for the supply of money in India and also the oversight of the Indian banking sector. It also takes care of the payment of the nation and works for the country’s better economic growth.  The Governor sits at the Central Office, which is also where policies are made. The Reserve Bank of India has been wholly owned by the Government of India since 1949 when it was nationalized.

What is the Role of a Central Bank? 

Currency Regulator- The central bank’s major role is to issue currency notes, and the Reserve Bank of India has sole authority in the country to do so. Except for the 1 rupee note, the Reserve Bank of India prints money in all denominations. The finance ministry is in charge of issuing a 1 rupee note.

Banker and Government Advisor- The central bank serves as a fiscal agent for the government, holding the deposits of both the federal and state governments. It also buys and sells foreign currency and pays on account of the state. A reserve bank’s varied functions as an advisor include making meaningful recommendations to the government on financial authorities and other economic troubles.

Commercial Bank Custodian- Commercial banks are required by law to maintain a reserve equal to a specified amount of the  (net demand and liabilities). The minimum proportion of deposits of cash that banks have to keep is known as the Cash Reserve Ratio or the CRR. Whereas the SLR or the Statutory Liquidity Ratio refers to the minimum percentage of the total deposits that banks have to keep in form of cash, gold, or other securities. By processing payments from one banking to another, these reserves assist commercial banks in clearing checks. As a curator and borrower of currency reserves to commercial banks, the  bank enables these transactions

Manages Foreign Exchange Reserves- The Reserve bank of India trades foreign currency at international prices to keep foreign exchange rates constant. If the quantity of foreign currency in the economy falls, the RBI sells it at forex markets, and if there is an excess supply, it buys it. The Reserve Bank of India also serves as a central bank for foreign exchange.

What is the Monetary Policy of the Reserve Bank of India? 

Central banks adjust the supply of money, usually through open market operations, to implement monetary policy. They fix the REPO and Reverse REPO rates, as the former is the interest rate for banks to take loans from RBI and the latter is the interest rate for RBI to take loans from the bank. The RBI acts as a banker’s bank by providing funds as well as regulations for its functioning. For example, a central bank could cut its money supply by trading government securities under a “sale and repurchase” deal and receiving funds from commercial banks. The goal of open market activities like these is to impact quick interest rates, which affect longer-term rates and total economic activity. The transmission mechanism in many nations, particularly low-income countries, is not as efficient as it is in rich economies. Countries should build a framework that enables the central bank to regulate quick interest rates before transitioning from financial to inflation targeting. 

The Reserve Bank of India Act, 1934  establishes the legal framework for the Bank’s operations, which began on April 1, 1935. The Reserve Bank of India Act, 1934 is the law that established the Reserve Bank of India. This statute allows the Reserve Bank of India to lend to banks and state-owned enterprises. It can help the federal government and the state governments get ahead. It can buy and sell government securities. It can trade derivatives, repo, and reverse repo.     

The Bank Rate is defined as “the standard price at which the Reserve Bank is willing to buy or re-discount bills of exchange or other securities” under Section 49 of the Reserve Bank of India Act, 1934.

What is Central Bank’s Reverse Repo? 

The reverse repo is indeed a relatively brief agreement to buy securities with the intention of selling them back at a better price. Short-term lending and borrowing, often overnight, is done through repos and reverse repos. Reverse repos are a type of open market operation that allows central banks to inject money into the supply of money. 

Why Central Bank can be called a Banker’s Bank? 

Commercial banks’ cash balances are held by the Central Bank, which offers credit to them on-demand in the same way that financial institutions do for their customers. As a result, it is also known as a bankers’ bank. In a variety of ways, the Central Bank operates as a banker or supervises commercial banks: It assists banks financially by discounting their payments and providing credit facilities against recognised securities. It gives commercial banks access to capital.

Conclusion

The Reserve Bank of India (RBI) is India’s central bank, with the primary responsibility of managing and governing the country’s financial system. The Reserve Bank of India Act, 1934, established it as a legislative body in 1935. The Indian rupee’s issue and supply are regulated by the central bank. It also manages the funds of the federal government. The central bank oversees the banking sector and acts as a bankers’ bank. It also contributes significantly to India’s development by assisting the government with development projects and policies.