Which of the following is a function of Central Bank ?

Question

UnlockIAS · Accepted Answer

Correct — D, All of the above. Each of the three items named is a textbook function of a central bank, and in India each is discharged by the Reserve Bank. Banking facilities to government: the RBI is banker to the Union and to the state governments, keeps their accounts, receives and pays money on their behalf, manages their market borrowing and public debt, and acts as the government's agent in its dealings with the International Monetary Fund. Managing the repo rate: as the monetary authority the RBI formulates and implements monetary policy, and the repo rate is its principal policy instrument, set by the Monetary Policy Committee. Lending to commercial banks: the repo rate is precisely the rate at which banks borrow short-term funds from the RBI, and beyond that the central bank stands as lender of last resort, the institution a solvent but illiquid bank can turn to when no one else will lend. Notice how tightly the second and third items are connected — the repo rate is the price of exactly the lending described in the third option, so a candidate who accepts either must accept both. With all three true, the only complete answer is (d). This is the positive form of the same test that governs 'more than one of the above': an 'all of the above' option is correct when you can defend every listed item, and here you can.

Why the other options are wrong — (a) True, and therefore wrong as a standalone answer on a question that offers 'All of the above'. Acting as banker to government is one of the oldest central-banking functions — keeping the government's accounts and managing its debt — but it is one function among several, and choosing it alone means overlooking two other statements that are equally true.  (b) Also true, and also incomplete. The repo rate is the policy rate at the centre of the monetary framework, decided by the Monetary Policy Committee. Picking it alone usually reflects a candidate whose reading is confined to news about rate decisions, which is the most visible but not the only thing a central bank does.  (c) True again — the central bank is banker to banks and lender of last resort, and repo lending is exactly this function in operation. Since this statement and the previous one are two descriptions of the same operation seen from different sides, a candidate who thinks either is correct has already established that at least two options are true, which by itself rules out any single-item answer.

Concept: A central bank is defined by the functions it performs rather than by its ownership. The standard list is: issuing currency, acting as banker to the government, acting as banker to banks and lender of last resort, conducting monetary policy, regulating and supervising the financial system, managing foreign exchange and the country's reserves, and performing developmental roles. The Reserve Bank of India does all of these. It was established on 1 April 1935 under the Reserve Bank of India Act, 1934, following the recommendation of the Hilton Young Commission, and was nationalised on 1 January 1949. Its policy instruments divide into quantitative and qualitative. The quantitative tools are the repo and reverse repo rates and the standing facilities, the Bank Rate, the Cash Reserve Ratio and the Statutory Liquidity Ratio, and open market operations. The qualitative tools are selective credit controls — margin requirements, credit ceilings, moral suasion and direct action. Note that all of these are monetary instruments, operated by the central bank; taxation and public spending are fiscal instruments, and they belong to the government, not to the RBI.

State PCS 2025 Q125 — Economy PYQ with Answer

State PCS 2025 Q125 — Economy PYQ with Answer