From the following, which is not a function of Central Bank?

Q: From the following, which is not a function of Central Bank?

From the following, which is not a function of Central Bank?

Question

Accepted Answer

The correct option is 4:
Credit Creation is the function that is emphatically not performed by the Central Bank. The power of Credit Creation is exclusively held by the commercial banking system, which is the primary mechanism through which an economy's money supply expands. Commercial banks create credit when they lend a portion of their deposits, and the recipient uses that money, which is then redeposited in another bank, leading to a multiplier effect on the original deposit. The Central Bank's role is not to engage in this process of money expansion itself but rather to meticulously oversee, regulate, and control it through its various monetary policy instruments to ensure financial stability and keep inflation in check. Therefore, as commercial banks perform the act of creation, it is the correct answer to the question asking for a non-function.

The incorrect option is 1:
Issuing Currency is one of the most fundamental and distinguishing functions of a Central Bank, often referred to as the 'Bank of Issue.' By holding the exclusive right to issue currency, the Central Bank gains complete control over the nation's money supply. This centralization is essential as it instills public faith in the currency and prevents the monetary chaos that would result if multiple commercial banks issued their own notes. This sole authority is a prerequisite for the Central Bank to execute its monetary policy effectively.

The incorrect option is 2:
The Central Bank acts as the Banker's Bank and supervisor to all commercial banks and financial institutions in the country. In this role, it manages their accounts, holds a portion of their statutory cash reserves, and facilitates the smooth clearing and settlement of inter-bank transactions. Most critically, it functions as the 'Lender of Last Resort,' providing emergency liquidity to commercial banks during times of financial distress. This support is vital for preventing bank runs and safeguarding the entire banking system.

The incorrect option is 3:
Credit Control is a core and indispensable function of a modern Central Bank. This function involves actively managing the volume and direction of credit in the economy to achieve critical macroeconomic goals such as controlling inflation, promoting economic growth, and stabilizing the exchange rate. The Central Bank employs both quantitative tools, like the Cash Reserve Ratio (CRR) and the Repo Rate, and qualitative tools, such as margin requirements, to regulate the commercial banks' capacity for and use of credit creation.