CENTRAL BANK A BACKBONE OF ECONOMY

Monetary derives from the the word Money, In every economy the monetary policies is controlled by the central bank of the country. As in US there is Federal Bank, In India we have RBI (Reserve bank of India).

All the monetary policies is directly controlled by the RBI, The common monetary policy is OPEN MARKET OPERATIONS, In open market operations RBI or any central bank buys or sell s the government bonds to control Money Supply.

When there is a need to decrease Money Supply, central banks sell the government bonds in open market, Where as if Central bank want to increase the money supply in the economy it buys the government bonds by printing the currency notes.

In this way RBI or any other central bank regulates the money supply in the economy. In economics, We study this money supply under the concept of LM.

We lastly explored that RBI is doing operation in order to make the foreign exchange rate stagnant, It is by this policy it is making it. When central bank prints money it depreciate the value of home currency as compared to the foreign currency.

Not only to increase money supply central bank prints currency even to finance the government for its deficit or to finance the fiscal deficit, central bank use to print currency notes. As central bank is the countries biggest financial institution therefore any transaction that occurs in other currency than the countries own currency, central banks always have it’s eye on it. All the payments made in foreign currency is looked after by the central bank. Central bank is the custodian of foreign reserves. Moreover Central bank also have the gold reserve in its custody to support the economy in the extreme conditions as we had observed in 1991.

In Short, Central bank acts as the backbone to any economy.

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