Functions of central bank – Custodian of foreign exchange reserves of the country and maintenance of exchange rate stability

The central bank acts as a custodian of the country’s gold and foreign exchange reserves like the U S Dollars, Japanese Yen, British Pound etc, obtained by the government and in the international trade.

A country maintains foreign exchange reserves in the form of gold and special drawing rights [SDR’s of IMF] and foreign currency.

The central bank performs this function in order to

a] To maintain stability in the rate of exchange

Foreign exchange reserves help to determine and maintain thr rate of exchange

The foreign exchange reserves indicate a sound balance of payments position. A good amount of foreign exchange reserves helps to maintain exchange rate stability.

b] To maintain international liquidity

It helps to maintain the international liquidity of the country [ie meeting any foreign obligation such as payment of the principal amount and interest of foreign loans in appropriate currencies].

c] To correct adverseness in the balance of payments.

The central bank exercises effective control over foreign exchange to meet the deficit in the balance of payments and to maintain the international liquidity of the country.

d] To manage exchange control international operations

It also manages exchange control operations by supplying foreign currencies to importers, businessmen and students going abroad. In India,

e] The central bank acts as the agent of the international institutions like the IMF, World Bank etc.

In India the RBI has the responsibility of maintaining the exchange value of the rupee.

Since 1991, RBI has been taking several steps from time to time to establish the exchange rate of the rupee especially in terms of dollars.

Posted in General Economics