Central Banks Features

Central banks have many features, including:
 Monetary policy: Central banks manage the money supply and interest
rates in an economy to ensure price stability, growth, and trust in the
currency.
 Inflation control: Central banks control inflation and maintain a low

inflation rate.
 Banking for the government: Central banks act as bankers to the

government, keeping their cash balances and making payments on their
behalf.
 Credit control: Central banks manage the demand for and supply of
money, and the circulation of credit. They also oversee the credit
generated by commercial banks.
 Foreign reserves: Central banks buy and sell foreign currencies to keep
foreign exchange rates stable. They also maintain a minimum balance of
foreign currency to manage sudden requirements for foreign reserves.
 Adviser to the government: Central banks advise the government on

economic policies, money market, government loans, and capital
markets.
 The functions of a central bank can be discussed as follows:

 1. Currency regulator or bank of issue
 2. Bank to the government
 3. Custodian of Cash reserves
 4. Custodian of International currency
 5. Lender of last resort
 6. Clearing house for transfer and settlement
 7. Controller of credit
 8. Protecting depositors interests
 The above mentioned functions will be discussed in detail in the
following lines.
 Currency regulator or bank of issue: Central banks possess the
exclusive right to manufacture notes in an economy. All the central
banks across the world are involved in issuing notes to the
economy.
 This is one of the most important functions of the central bank in an
economy and due to this the central bank is also known as the bank
of issue.
 Earlier all the banks were allowed to publish their own notes which
resulted in a disorganised economy. To avoid this situation the
government around the world authorised the central banks to
function as the issuer of currency, which resulted in uniformity in
circulation and balanced supply of money in the economy.
 Bank to the government: One of the important functions of the
central bank is to act as the bank to the government. The central
bank accepts deposits and issues funds to the government. It is also
involved in making and receiving payments for the government.
Central banks also offer short term loans to the government in order
to recover from bad phases in the economy.
 In addition to being the bank to the government, it acts as an
advisor and agent of the government by providing advice to the
government in areas of economic policy, capital market, money
market and loans from the government.
 In addition to that, the central bank is instrumental in formulation of
monetary and fiscal policies that help in regulation of money in the
market and controlling inflation.
 Custodian of Cash reserves: It is a practice of the commercial
banks of a country to keep a part of their cash balances in the form
of deposits with the central bank. The commercial banks can draw
that balance when the requirement for cash is high and pay back
the same when there is less requirement of cash.
 It is for this reason that the central bank is regarded as the banker’s
bank. Central bank also plays an important role in the credit
creation policy of commercial banks.
 Custodian of International currency: An important function of
the central bank is to maintain a minimum balance of foreign
currency. The purpose of maintaining such a balance is to manage
sudden or emergency requirements of foreign reserves and also to
overcome any adverse deficits of balance of payments.
 Lender of last resort: The central bank acts as a lender of last
resort by providing money to its member banks in times of cash
crunch. It performs this function by providing loans against
securities, treasury bills and also by rediscounting bills.
 This is regarded as one of the most crucial functions of the central
bank wherein it helps in protecting the financial structure of the
economy from collapsing.
 Clearing house for transfer and settlement: Central bank acts
as a clearing house of the commercial banks and helps in settling of
mutual indebtedness of the commercial banks. In a clearing house,
the representatives of different banks meet and settle the inter
bank payments.
 Controller of credit: Central banks also function as the controller
of credit in the economy. It happens that commercial banks create a
lot of credit in the economy that increases the inflation.
 The central bank controls the way credit creation by commercial
banks is done by engaging in open market operations or bringing
about a change in the CRR to control the process of credit creation
by commercial banks.
 Protecting depositors interests: Central bank also needs to keep
an eye on the functioning of the commercial banks in order to
protect the interests of depositors.

Central Banks Features

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Central Banks Features

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Central banks have many features, including:

 Inflation control: Central banks control inflation and maintain a low

 Banking for the government: Central banks act as bankers to the

 Adviser to the government: Central banks advise the government on

 The functions of a central bank can be discussed as follows:

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