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Central Bank
In every country, there is one bank which
acts as the leader of the money market supervising, controlling and regulating the
activities of Commercial Banks and other
financial institutions. It acts as a banker of
issue and is in close touch with the
government, as banker, agent and adviser to
the latter. Such a bank is known as the
Central Bank of the country.
i.
ii.
iii.
iv.
Bank of Issue
Central Bank has the exclusive monopoly of note issue
and the currency notes issued by the Central Bank are
declared unlimited legal tender throughout the country.
This monopoly brings about:
Uniformity of note issue which in turn facilitates trade
and exchange within the country
Enables the Central Bank to influence and control the
credit creation of Commercial Banks
Gives distinctive prestige to the currency notes
Enables govt. to appropriate partly or fully the profits of
note issue.
c.
e.
g.
Functions of RBI
Monetary Authority
Functions of RBI
Manager of Exchange Control
Functions of RBI
Developmental role
1.
2.
3.
4.
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6.
2.
4.
OMO - Advantages
Strategically, OMO as a method of
OMO - Limitations
Commercial Banks may prefer to operate with
1.
2.
3.
Limitations of CRR
De Kock While it (reserve ratio) is a very prompt and
a.
b.
c.
Moral suasion:
Moral suasion implies persuasion and request made by
the Central Bank to the Commercial Banks to follow the
general monetary policy of the former. The effectiveness
of moral suasion is debatable. As a method of credit
control, it may have restraining influence, but when real
forces in favour of credit expansion or contraction are
very strong, persuasive tactics may be ineffective. While
this method has a psychological advantage as it does not
carry any threat or legal sanction, it may not be very
effective in times of serious business boom or depression
especially in developing countries.
Rationing of credit
Credit rationing is a method of controlling and
regulating the purpose for which credit is granted by the
Commercial Banks. It may assume two forms. Firstly,
variable portfolio ceilings refer to the system by which
the Central Bank fixes a ceiling or maximum amount of
loans and advances for every Commercial Bank.
Secondly, variable capital assets ratio refers to the
system by which the Central Bank fixes the ratio which
the capital of the Commercial Bank should have to the
total assets of the bank. Rationing of credit may also be
in the form of the Central Bank allowing only a fixed
amount of accommodation to member banks by means
of rediscount.
Significance of Selective
Controls
Selective controls are flexible in nature and can
Limitations of Selective
Controls
a.
b.
c.
d.