Definitions [4]
Definitions: Reserve Bank of India (RBI)
- Dr. M. H. de Kock: “Central bank is one which constitutes the apex of the monetary and banking structure of the country.”
- Prof. W. A. Shaw: “Central bank is a bank which controls credit.”
Definition: Concept of Bank
- “A bank Collects money from those who have it to spare or who are saving it out of their incomes, and it lends this money to those who require it.” — Crowther
- According to the Indian Companies (Amendment) Act, 2000, banking means:
“Accepting for the purpose of lending or depositing money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise.”
Define the following concept.
Open Market Operation
Open market operations refer to the sale and purchase of government and other approved securities by central bank in the money and capital markets.
Open Market Operations (OMOs) are employed by Central Banks, such as the RBI, to control the money supply. Buying and selling government bonds on the open market changes liquidity, interest rates, and the economy. Central Bank purchases of securities increase market liquidity and lower interest rates. Selling assets reduces market liquidity and raises interest rates.
Definitions: Central Bank
- "A bank which constitutes the apex of the monetary and banking structure of the country." — De Kock
- "A central bank is "The bank in any country is one which has been entrusted the duty of regulating the volume of currency and credit in that country." — Bank for International Settlements
Key Points
Key Points: Concept of Bank
- Modern money = Currency (by RBI) + Deposit Money (by Commercial Banks)
- A bank must perform all three functions: accept deposits + lend + create money
- Credit/money creation is the unique characteristic that separates commercial banks from all other financial institutions
- Banks use fractional reserve banking — keeping a small % as reserves (CRR) and lending the rest
- Money Multiplier = 1/CRR — an initial deposit multiplies through the banking system
- Post Office Savings Bank, LIC, and UTI are non-banking financial institutions — they cannot create money
- Modern banking evolved from goldsmiths, who first issued paper receipts for gold deposits.
Key Points: Central Bank
- The central bank is the highest authority in the banking system. It controls, regulates and supervises all banks and manages the country’s monetary system.
- It formulates and implements monetary policy to control inflation, deflation, and overall credit in the economy.
- It acts as a banker, adviser and agent to the government, and also works as a “banker’s bank” by guiding and supporting commercial banks.
- The central bank has the sole authority to issue currency (except small coins/notes in some cases), ensuring a uniform and reliable money supply.
- It supports economic growth by promoting banking, developing financial institutions, managing foreign exchange, and helping priority sectors.
