Explain the structure and role of central bank in the financial stability of the country. Also give your opinion, whether central bank should be independent or not?
A central bank is an independent national authority that conducts monetary policy like contraction and expansion monetary policy, regulates banks, and provides financial services including economic research. Central bank's goals are to stabilize the nation's currency, keep unemployment reduced, and prevent inflation rate.
Functions of central banks are :
Trading function and development Function
Trading function Includes : -
1)Bank of issue: in this central bank have the right to issue the currency in every country of the world
2) Government’s banker, agent, and advisor: in this function central bank play a different function for the government as a banker, in this central bank perform the banking function for the government same as the commercial bank plays that role for the .general public
as an advisor, it gave the guidance related to money market capital market, etc
3) Custodian of cash reserves of commercial banks: in this function central bank keep some reserve of deposit amount by people as cash reserve because if any things happen then tey provide that money to banks as a part of loans
4) Custodian of international currency: as similar to above central bank also keep some reserve of international currency for the purpose, if any emergency happens he used that reserve
5) Lender of last resort: it refers to the most main function of central bank that it also lends money to commercial banks. Instead of rediscounting of bills, the central bank gives loans against treasury bills, government securities, and bills of exchange.
Developmental Functions includes:
1) Developing specialized financial institutions: Refer to the primary and main functions of the reserve bank for the economic development of a nation. The central bank establishes institutions that serve credit requirements of the agriculture sector like NABARD ( In India ) and other rural businesses. like IDBI( also in India )
2) Influencing money market and capital market: this Implies that reserve bank helps in controlling the financial markets, short term credit deals in Money market and long term credit deals in the capital market. The reserve bank maintains the country’s economic growth by controlling all the activities in money and capital markets.
Central Bank should always be independent because The idea is that Central Banks will be independent of political considerations and willing to keep inflation lower even if there are political costs to raising interest rates
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