Central bank means the bank which regulates the entire banking system in a country and carries out its monetary policy. Central bank is the apex bank, and every country has a central bank. Reserve Bank of India is the central bank of our country. It was set up in 1935 under the Reserve Bank of India Act, 1934. As the central bank,
the Reserve Bank of India performs the following functions :
(i) Monopoly of Note Issue: Generally the central bank of a country has the monopoly , to issue currency notes. Government grants the exclusive right to the central bank to issue notes on its behalf. In India, one rupee notes are issued by the Ministry of Finance. All other currency notes are issued by the Reserve Bank of India. In order to inspire public confidence in paper currency, the central bank keeps reserves of gold and silver against the issue of notes.
(ii) Controller of Credit : Commercial banks create credit by lending money. They may create too much or too little credit. The level of credit in the country causes fluctuations in the price level. It becomes necessary to exercise control over credit so as to ensure stability in the economy. The central bank exercises strict control on the credit granting capacity of commercial banks. This is the most important function of a central bank. Credit control is both qualitative and quantitative in nature.
(iii) Lender of the Last Resort: Whenever a commercial bank needs financial assistance, it may borrow from other commercial banks. But other commercial banks may not be in a position to provide funds to the bank in need. In such a case the central bank provides funds to a commercial bank either by granting loans or by purchasing its securities. In this way the central bank acts as the lender of the last resort.
