Describe the main functions of central bank.

The central bank is the apex financial institution of a country, responsible for regulating and supervising the monetary system. Its main functions can be categorized into three broad areas:

1. Issuance of Currency

• The central bank has the monopoly right to issue currency notes and coins in a country.
• It controls the money supply by regulating the quantity of currency in circulation.
• In Nepal, the Nepal Rastra Bank (NRB) is responsible for issuing currency notes and coins.

2. Banker, Agent, and Advisor to the Government

• Banker to the Government: The central bank maintains the government’s accounts, receives deposits, and makes payments on behalf of the government.
• Agent of the Government: It manages government loans, sells government securities, and advises on financial policies.
• Economic Advisor: It provides expert advice on economic policies, budgetary matters, and financial planning.

3. Controller of Credit

• Lender of Last Resort: It provides emergency loans to commercial banks to prevent financial crises.
• Regulator of Credit: It controls the volume of credit through monetary policy tools such as:
  • Bank Rate: The interest rate at which the central bank lends to commercial banks.
  • Repo Rate: The rate at which banks borrow short-term funds from the central bank.
  • Cash Reserve Ratio (CRR): The percentage of deposits that banks must keep with the central bank.
  • Statutory Liquidity Ratio (SLR): The percentage of net demand and time liabilities that banks must maintain in liquid assets.
• Supervision of Banks: It ensures the stability of the banking system by monitoring and regulating commercial banks.

4. Custodian of Foreign Exchange Reserves

• The central bank holds and manages the country’s foreign exchange reserves to maintain stability in the exchange rate.
• It intervenes in the foreign exchange market to prevent excessive fluctuations in currency value.

5. Promoter of Economic Development

• It formulates and implements monetary policies to achieve economic stability, full employment, and sustainable growth.
• It encourages financial inclusion by regulating and supervising financial institutions.

In summary, the central bank plays a crucial role in maintaining price stability, economic growth, and financial stability in a country.