Central Bank and RBI
1 Quick Explanation 1–3 min
The central bank is the apex monetary authority that controls the entire banking system.
In India it is the RBI — 'banker to the banks and the government'.
2 Detailed Notes
Definition
Definition
A central bank is the apex institution which regulates the money supply and credit in the economy and supervises the banking system. In India: Reserve Bank of India (RBI), established 1 April 1935.
Key idea
Functions
- Bank of issue: sole right to issue currency notes.
- Banker to the government: manages govt accounts, public debt, acts as financial adviser.
- Banker's bank & lender of last resort: provides cash to banks in crisis, holds their reserves.
- Controller of credit / money supply: uses monetary policy tools (CRR, SLR, repo, OMO).
- Custodian of foreign exchange reserves & manages balance of payments.
- Clearing house: settles inter-bank transactions.
Comparison
Central vs Commercial bank
| Basis | Central Bank (RBI) | Commercial Bank |
|---|---|---|
| Objective | Public welfare & economic stability | Profit |
| Issue of currency | Sole authority | No |
| Deals with | Government & banks | Public & firms |
| Created by | Government / act of parliament | Owners / shareholders |
Example
Lender of last resort
If a commercial bank faces a cash crisis (runs out of liquidity), RBI provides it loans to prevent bank failure and protect depositors' confidence — this is the lender of last resort function.
In One Minute
RBI = central bank of India. Functions: issue currency, banker to government, banker's bank (lender of last resort), controller of credit, custodian of forex reserves.
Important for Exam
- ⭐ Functions of central bank (4 marks).
- ⭐ Lender of last resort — explain with situation.
- ⭐ Central vs commercial bank table (3 marks).
- ⭐ RBI established 1935; monetary authority.
Watch & Learn
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by Rajat Arora
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