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For instance, in India, the Reserve Bank of India takes steps to ensure external value of a rupee. Cash Reserve Ratio is the ratio which affect the bank credit creation capacity. An increase in the cash-reserve ratio reduces the excess reserves of the bank and a decrease in the cash reserve ratio increases their excess reserves.
Therefore, they concentrate especially on issuing new notes. It is merely a unit in the banking structure of the country and operates under the control of the central bank. It increases CRR which leads to rise in resorts and hence commercial banks can lend less money. The deposits keep on increasing in each round by 90% of last deposits, similarly, cash reserves also go on increasing its time by 90% of last cash reserve.
Explain the ‘unit of account/measure of value’ function. The shoemaker wants a loaf in exchange of his shoes but exchange value of a piece of loaf is but a fraction of a pair of shoes. Shoes cannot be sub-divided without destroying their values. Similarly, if a person wants to purchase cloth equal to the value of the half his cow, he cannot do so Without killing his cow. Thus lack of divisibility makes barter exchange impossible. Q.33. Discuss the role of Reserve Bank of India in economic development of India.
- The principle of bookkeeping is followed in this procedure to make transfer entries into their accounts.
- The RBI shall set up offices in Delhi, Kolkata, Madras, and Mumbai and may establish offices or branches at any other place in the country with the prior approval of the central government.
- To keep the rates of foreign exchange stable, the reserve bank buys and sells foreign currencies at international prices.
- In 1921, the Imperial Bank of India was set up to proceed as the national bank of India by the British Government.
On the other hand, Central Bank, by providing temporary financial accommodation, saves the financial structure of the country from collapse. Every commercial bank under law has to deposit with Central Bank a minimum percentage of its demand deposit and time deposit. Higher the CRR, lesser is the banks capacity to create credit. By changing CRR, Central bank controls the lending capacity and credit availability of banks. Statutory Liquidity Ratio is another instrument adopted by RBI to control credit.
Describe alternative measures of money supply as used by RBI in India. It has also been entrusted with the tasks of collection and compilation of statistical information relating to banking and other financial sectors of economy. Banks receive cheque drawn on the other banks from their customers which they have to realise from drawee banks. Similarly, cheques on a particular bank are drawn and pass into the hands of other banks which have to realise them from the drawee banks. Independent and separate realization to each cheque would take a lot of time; and. Therefore, Central Bank provides clearing facilities, i.e., facilities for banks to come together everyday and set off their chequing claims.
An asset is highly liquid if it can be exchanged promptly and without loss. Modern economists are laying stress on liquidity of money. Since by definition, money is the most generally accepted commodity, it is also the most liquid of all resources. Possession of money enables one to get hold of almost any commodity in any place and money never locks a buyer. It is this peculiarity which distinguishes money from all other commodities.
Money is the link which connects the values of today with those of the future. It has become possible because value of money is stable and it has general acceptability and durability. Banker to the Government–The second important function of the Reserve Bank is to act as the Banker, Agent and Adviser to the https://1investing.in/ Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. A major objective of the RBI is to support the planned advancement of the country’s economy.
Another objective of the RBI is to keep itself free from any political impact and engage in effective activities to maintain financial stability or credit. Consequently, the RBI was set up with the point of being a banker’s bank and functions of rbi class 12 similarly the bank for the government. It aimed to expand the economic progress of the nation through different structures and economic policies of the government. British banker Osborn Smith was the first Governor of RBI, but C.D.
CENTRAL BANK
The directors of the central board include both official and non-official directors. The official director will be the governor, recruited for a period of four years, along with four additional deputy directors. Further, in the non-official directorship, ten directors are selected from distinct fields in addition to two government officials.
The use of money facilitates exchange, exchange promotes specialisation, specialisation increases productivity and efficiency. A good monetary system is, therefore, of immense utility to human society. Money is also called a bearer of options or generalised purchasing power because it provides freedom of choice to buy things he wants most from those who offer best bargain. Central Bank, as the Banker’s bank, accepts deposits from the commercial banks and offers them loans as and when required. In the banking system, the central bank is recognized as the most powerful financial institution.
It carries out all banking business of the government. Governments keep their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of the governments. Also central bank carries out exchange, remittance and other banking operations on behalf of the government. Central bank gives loans and advances to governments for temporary periods, as and when necessary, and it also manages the public debt of the country. This role of the central bank is of a fiscal agent to the government where the RBI keeps the deposits of both central and state governments.
CBSE Class 12 Economics – Banking: Commercial and Central banks
Give the central bank power to influence money supply because currency with the public is part of the money supply. Underwriting Securities- commercial banks also do the task of underwriting securities. Sister creditworthiness of banks is high the people by the securities underwritten by banks easily without hesitation. Traveler’s cheques to their customers to avoid the risk of taking cash during their journey. They hold up money balance thinking that income from non-monetary assets like bond will be low and so the cost of money holding will also be low.
Q.29. Explain the methods used by Reserve Bank of India to control money and credit. To maintain balance between demand and supply of currency. For balanced and systematic development of banking in the country. As the agent and advisor to the government, it manages public debt on behalf of the government and also advices on policy matters.
The resee bank facilitates these transactions as it acts as a custodian and lender of cash reserves to the commercial banks. RBI functions to protect the Interest of depositors through an effective regulatory framework. Keeping a keen eye over the conduct of banking operations and solvency of the banks along with maintaining the overall financial stability through various policy measures. Custodian of Foreign Reserve- The Reserve bank must balance out the outer estimation of the public cash.
Key Features Related to the Functions of RBI
Again without a measure of value, there can be no pricing process. Without a pricing process, organised marketing and production is not possible. Thus, the use of money as a measure of value is the basis of specialised production. The measuring rod of money is also indispensable to all forms of economic planning.
It keeps a close watch on external value of its currency and undertakes exchange management control. All the foreign currency received by the citizen has to be deposited with the Central Bank; and if citizens want to make payment in foreign currency, they have to apply to the Central Bank. For Centralisation of cash reserves of commercial banks.
Functions of RBI
The Reserve Bank keeps gold and foreign currencies as reserves against note issues and also meets the unfavourable offset of instalments with different regions. Also, it oversees foreign currencies by the controls forced by the administration. Bankers’ Bank- The Reserve Bank of India acts as the banker’s bank and it lends money to all the commercial banks of the country. In simple words, we can say that RBI fulfils the same functions for the other commercial banks as the other banks fulfil their clients.
M1and M2are known as narrow money whereas M3and M4are known as broad money. In practice, M3is widely used as measure of money supply which is also called aggregate monetary resources of the society. All the above four measures represent different degrees of liquidity, with M1being the most liquid and M4being the least liquid of all.