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CENTRAL BANK
BY: - RAMESH KUMAR,
K V NO.1, BATHINDA CANTT.
THOMAS MALTHUS GROUP
23-May-17
Ramesh kumar, P.G.T. (Eco.)
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HILTON YOUNG COMMISSION
Hilton Young commission recommended
to established RBI, under RBI Act.1934.
Central bank start its operation on 1st April
1935.
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Central Bank:-Central bank is the principal banking and monetary
institution of a country which has the monopoly to issue note.
Functions of the Central Banks
(i) Issuing of Notes
(ii) Bankers of the Government
(iii) Banker’s Bank
(iv) Supervision of Banks
(v) Custodian of Foreign Exchange
(vi) Lender to the Last Resort
(vii) Clearing House Function
(viii)Control of Credit
(ix) Collection of Statistics
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 (i) Issuing of Notes:-Central bank of a country has the exclusive right of
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issuing notes . The notes issued by the central bank are an unlimited
legal tender.
(ii) Banker to the Government :- Central Bank is a banker, agent
and financial advisor to the government. As a banker to the
government ,it manages accounts of the government banks across
all in the country. As an agent to the government ,it buys and sells
securities, treasury bills on behalf of the government. As an
advisor to the government, it helps the government in
framing policies to regulate the money market.
(iii) Banker’s Bank:-It is an apex bank of all banks in the country. The
central has almost the same relation with other banks in the country
as a commercial bank has with its customers.
(iv) Supervision of the Banks:- As a banker’s bank, the central bank
also supervises the commercial banks. The supervision of
commercial banks relates to:
Licensing of the commercial banks,
expansion of the commercial banks in terms of their branches across
different parts of the Country and abroad,
merger of different banks,
Liquidation of the banks
(V) Control of Credit:-The most important function of the central bank is
to control the supply of credit in the economy .The government needs
to control the supply of money of cope with the situations of inflation
and deflation. During inflation, the supply of money is liberalised.
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How does the Central Bank Control Flow of Credit in the
Economy?
(A) Quantitative Instrument
(B) Qualitative Instrument
(A) Quantitative Instruments of Monetary Policy
(i) Bank Rate
(ii) Open Market Operations
(iii) Cash Reserve Ratio (CRR)
(iv) Statutory Liquidity Ratio (SLR)
(i)
Bank Rate:- The bank rate is the rate at which the central bank gives
credit to the commercial banks. During inflation, the cost of capital is
increased by increasing the bank rate. This reduces the flow of credit, as
desired. On the
other hand, during deflation the cost of capital is
reduced By reducing the bank rate.
(ii) Open Market Operations:-Open market operations refer to sale and
purchase of securities in the open market by the central bank. By selling
the securities (like, NSCs), the central bank withdraws cash balances from
the economy. And , by buying the securities, the central bank adds to cash
balances in the economy.
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(iii) Cash Reserve Ratio (CRR):- It refers to the minimum percentage of
a bank’s total deposits required to be kept with the central bank.
Commercial
banks have To keep with the central bank a
percentage of their deposits in form of cash reserves as a matter of law
(iv) Statutory Liquidity Ratio (SLR):- Every bank is required to maintain
a fixed percentage of its assets in the form of cash or other liquid assets,
called SLR. For reducing the flow of credit, the central bank increases this
liquidity ratio. For increasing the flow of credit, the liquidity ratio is reduced.
(B) Qualitative Instruments of Monetary Policy
i.
Margin Requirement
ii.
Rationing of Credit
iii.
Direct Action
iv.
Moral Suasion
(i)
Rationing of Credit :- Rationing of credit is introduced when the flow of
credit is
to be checked particularly for speculative activities in the
economy. The central bank fixes credit quota for different business
activities.
(ii)
Direct Action :- The central bank may initiate direct action against the
member banks in case these do not comply with its directives.
(iii) Moral Suasion :- Some times, the central bank makes the member banks
agree through persuasion or pressure to follow its directives on the flow of
credit .The member banks generally do not ignore the advice of central
bank.
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STATUTORY LIQUIDITY RATIO
(SLR)
Refers to the amount that the
commercial banks require to
maintain in the form of cash,
or gold or govt. approved
securities before providing
credit to the customers.
SLR is determined and
maintained by the Reserve
Bank of India in order to
control the expansion of
bank credit.
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SLR is maintained in order to control the expansion
of Bank Credit. By changing the level of SLR,
Reserve bank of India can increase or decrease
bank credit expansion.
SLR in a way ensures the solvency of commercial
banks.
By determining SLR,RBI, in a way, compels the
commercial banks to invest in government
securities like government bonds.
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CASH RESERVE RATIO (CRR)
Cash Reserve Ratio is a bank
regulation that sets the minimum
reserves each bank must hold to
customer deposits and notes. These
reserves are designed to satisfy
withdrawal demands, and would
normally be in the form of fiat
currency stored in a bank vault (vault
cash), or with a central bank.
The Reserve Bank of
India raised Cash
Reserve Ratio (CRR) by
75 basic points, while
the market expectation
had been 50 bps. The
central bank has left the
interest rates
untouched. With this
raise, banks need to
keep 5.75% of their
deposits with the RBI,
as against the previous
Recaptulation: 1. In which year RBI recommended?
2. Define Repo rate.
3. Name the commission recommended RBI?
4. What is bank rate?
5. What is meant by CRR?
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HOME WORK
1. Define repo rate?
2. How RBI is banker’s bank?
3. Explain, how RBI control credit?
4. What are the differenced between CRR
and SLR.
5. What is meant by reverse repo rate?
23-May-17
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