Monetary and Fiscal Policy

I

n the monetary system of all countries, the central bank occupies an important place. The central bank is an apex institution of the monetary system which seeks to regulate the functioning of the commercial banking of a country. The central bank of India is called the Reserve Bank of India which was set up in 1935. The central bank of a country enjoys a special status in banking structure of the country. The principal on which a central bank is run differ from the ordinary banking principles. An ordinary bank is run for profits. A central bank, on the other hand, is primarily meant to promote the financial and economic stability of the country. “the guiding principle of a central bank”, says Dekock, “is that it should act only in the public interest and for and welfare of the country and without regard to profit as primary consideration”. Earning of profit for a central bank is thus a secondary consideration.

The central bank is thus not a profit hunting institution. It does not act as rival of other banks. It is monetary authority of the country and has to function in a manner so as to promote economic stability and development. The functions of the RBI have increased enormously in recent years. Guiding principle of the RBI are to operate its most instruments in a way that serves the objectives of economic policy laid down by the Government and Planning Commission.

Functions of Reserve Bank of India

The following are the main functions of RBI:

* Monetary Authority:

* Formulates, implements and monitors the monetary policy.

* Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

* Regulator and supervisor of the financial system:

* Prescribes broad parameters of banking operations within which the country's banking and financial system functions.

* Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public....