The central bank is an apex bank. It controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as a banker to the government and manages forex reserves of the country. There is no standard definition of a central bank. The definition depends on the functions it discharges. The common function is that it controls and manages the flow of credit and supply of money in the economy.
Important definitions of Central bank are :
- According to S. C. L. Day, “Central bank is that bank which helps in controlling and stabilizing the monetary and Banking system.”
- According to Sameuelson,”Every central bank has one function. It operates to control economy, supply of money and credit.”
- According to Hartrey, “Central bank works as a centre of last resort to the other banks”.
- According to Shaw, “Central bank is the bank which has its control on country’s credit”.
Functions of central bank :
(i) Bank of issuing notes : Central bank of a country has the exclusive right of issuing notes. This is called currency authority function of the central bank. The notes issued by central bank have 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. As an agent to the government, it buys and sells securities on behalf of the government. It also manages loans of the government.
(iii) Banker’s bank and supervisory role : As a banker’s bank, it has almost the same relation with other banks in the country as a commercial bank has with its customers. It accepts deposits from the commercial banks and offers them loans.
The rate at which the central bank offers loan to the commercial bank is called ‘Repo rate’.
(iv) Custodian to foreign exchange : Central bank is the custodian of the nation’s foreign exchange reserves. It manages floating to ensure stability of exchange rate in the international money market. It also maintains a stability in the financial rate.
(v) Clearing house function : As a custodian of cash reserves of the commercial banks, the central bank acts as a clearing house for these banks. It means settling the claims of various banks against one another with minimum use of cash.
(vi) Control of credit: Another important function of the central bank is to control the supply of credit in the economy. It implies increase or decrease in the supply of money in the economy by regulating the ‘creation of credit’
