Describe the main functions of central bank.

The central bank, also known as the monetary authority, is the apex financial institution of a country. It performs various crucial functions to maintain economic stability, regulate the financial system, and promote sustainable economic growth. The main functions of the central bank are as follows:

1. Issuance of Currency

The central bank has the sole authority to issue currency notes and coins in a country. It controls the money supply by regulating the circulation of currency to prevent inflation or deflation. For example, in Nepal, the Nepal Rastra Bank (NRB) is responsible for issuing currency notes and coins.

2. Banker to the Government

The central bank acts as the banker to the government by managing its accounts, providing loans, and facilitating financial transactions. It also advises the government on economic policies and helps in raising funds through the sale of government securities (bonds and treasury bills).

3. Banker’s Bank and Supervisor of Commercial Banks

The central bank regulates and supervises commercial banks and financial institutions. It ensures their stability by enforcing banking laws, maintaining reserve requirements, and acting as a lender of last resort during financial crises. For instance, the NRB monitors banks to prevent fraud and insolvency.

4. Controller of Credit

The central bank controls the volume of credit in the economy through monetary policy tools such as:

• Bank Rate Policy: Adjusting the interest rate at which it lends to commercial banks.
• Open Market Operations (OMO): Buying or selling government securities to influence money supply.
• Cash Reserve Ratio (CRR): Setting the minimum reserves banks must keep with the central bank.
• Statutory Liquidity Ratio (SLR): Requiring banks to hold a certain percentage of liquid assets.

5. Custodian of Foreign Exchange Reserves

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

6. Clearing House

The central bank acts as a clearinghouse for financial transactions between banks. It settles interbank debts and ensures smooth functioning of the payment system.

7. Economic Advisor to the Government

The central bank provides expert advice on economic policies, inflation control, fiscal measures, and overall economic development. It conducts research and publishes economic reports to guide policymakers.

8. Promoter of Economic Development

The central bank implements policies to encourage savings, investment, and industrial growth. It also promotes financial inclusion by regulating microfinance institutions and encouraging digital banking.

In summary, the central bank plays a pivotal role in maintaining monetary stability, regulating the financial system, and fostering economic growth. Its functions ensure a balanced and stable economy.