Commercial Banking: RBI Act 1935 gave birth to scheduled banks in India, and some of these banks

had already been established around 1881. The prominent among the scheduled banks is the Allahabad
Bank, which was set up in 1865 with European management. The first bank which was established with
Indian ownership and management was the Oudh Commercial Bank, formed in 1881, followed by the
Ayodhya Bank in 1884, the Punjab National Bank in 1894 and Nedungadi Bank in 1899. Thus, there
were five Banks in existence in the 19th century. During the period 1901-1914, twelve more banks were
established, prominent among which were the Bank of Baroda (1906), the Canara Bank (1906), the Indian
Bank (1907), the Bank of India (1908) and the Central Bank of India (1911). Thus, the five big banks of
today had come into being prior to the commencement of the First World War. In 1913, and also in 1929,
the Indian Banks faced serious crises. Several banks succumbed to these crises. Public confidence in
banks received a jolt. There was a heavy rush on banks. An important point to be noted here is that no
commercial bank was established during the First World War, while as many as twenty scheduled banks
came into existence after independence - two in the public sector and one in the private sector. The United
Bank of India was formed in 1950 by the merger of four existing commercial banks. Certain non-
scheduled banks were included in the second schedule of the Reserve Bank. In view of these facts, the
number of scheduled banks rose to 81. Out of 81 Indian scheduled banks, as many as 23 were either
liquidated or merged into or amalgamated with other scheduled banks in 1968, leaving 58 Indian schedule
banks. It may be emphasized at this stage that banking system in India came to be recognized in the
beginning of 20th century as powerful instrument to influence the pace and pattern of economic
development of the country. In 1921 need was felt to have a State Bank endowed with all support and
resources of the Government with a view to helping industries and banking facilities to grow in all parts
of the country. It is towards the accomplishment of this objective that the three Presidency Banks were
amalgamated to form the Imperial Bank of India. The role of the Imperial Bank was envisaged as "to
extend banking facilities, and to render the money resources of India more accessible to the trade and
industry of this country, thereby promoting financial system which is an indisputable condition of the
social and economic advancement of India." Until 1935 when RBI came into existence to play the role of
Central Bank of the county and regulatory authority for the banks, Imperial Bank of India played the role
of a quasi-central bank. It functioned as a commercial bank but at times the Government used it for
regulating the money supply by influencing its policies. Thus, the role of commercial banks in India
remained confined to providing vehicle for the community's savings and attending to the credit needs of
only certain selected and limited segments of the economy.

Analysis of Assets & Liabilities of Commercial Banks: The balance sheet is a statement of banks'
liabilities and assets at particular time. Banks in India have to prepare their balance sheet and profit and
loss account in form set out in the III Schedule of the Banking Regulation Act, 1949.' The Banking
Regulation Act and the Companies Act requires that the balance sheet of a bank should give a true and
fair view of its state of affairs and should be drawn within the prescribed form.

Liabilities of a Commercial Bank Of the total liabilities, 3-7 per cent are internal to the system, liabilities
to the banking system and borrowings from the Reserve Bank. The rest of total liabilities, i.e., 93-97%
constitute the net: or external liabilities to others. Liabilities to the banking system consist mainly of
demand and time deposits from banks-60-80%. Borrowings from banks - 20-40%. There is a residual
term generally below 4% but in the interval 1992-96, it was high at 12.4 - 18.5%.)

In the Liabilities to Others component, aggregate deposits constitute 92-94%, borrowings are negligible
being less than half a percent, and the remainder is a residual term. Within aggregate deposits, 80-82%
are time deposits and 18-20% are demand deposits. Since aggregate deposits account for close to 90% of
the total liabilities of the banking system, and this 90% is uniformly following the 80:20 rule, it appears
that 70% of the liabilities of the banking system are contracted with time covenants and only 20% without
time covenants.

The liabilities of a bank are grouped under the following heads: 1. Capital. 2. Reserve fund and other
reserves. 3. Deposits: from the public (FD) Recurring deposits, Misc. types of deposits, Cash certificates
4. Borrowings from other Banking Companies, Agents etc. 5. Bills payable. 6. Other liabilities. 7. Profit
& Loss. 8. Contingent liabilities.

Reserves: Reserves of a bank also indicate the health of the institution. It is obligatory on the part of
banks to transfer 20 per cent of profit to reserves to strengthen the capital base of the bank. Capital and
reserves together constitute the network of a bank. The reserve fund is built to meet unforeseen and
unexpected contingencies. It is a source of strength for the bank as it can withstand heavy losses. The
reserve fund is invested in first class securities. This apart, banks are also permit1ed to build secret
reserves too. Deposits from Banks Deposits from banks and from the public are the life blood of
commercial banks. They are the chief sources of bank and account for approximately 83 per cent of bank
liabilities.

Banks deposits are classified into (a) Fixed deposits (b) Savings bank deposits and (c) Current deposits,
contingency accounts etc. Contingency accounts include head office funds and other inter-bank and inter-
branch adjustments classified as deposit.

Borrowing from other Banking Companies, Agents With a view to replenish their funds, banks borrow
from the Reserve Bank of India (presently refinance is given for food credit and export credit), bills
rediscounted with the Reserve Bank. -In addition, banks borrow from other refinance bodies like IDBI,
SIDBI, NABARD, EXIMBANK, IFC, IRBI and other financial institutions.

Bills Payable: Outstanding bills constitute the liability of a bank. Other Liabilities: Generally include
provision of dividend, unclaimed dividends, interest provision accounts and inter-office adjustments.

Assets of a Commercial Bank: The assets of the commercial bank are given on the right hand side of the
balance sheet. These are grouped under following heads: 1. Cash - in hand and with Reserve Bank of
India (including foreign currency notes.) 2. Balances with other banks - on current account and on deposit
accounts. 3. Money at call and short notice. 4. Investments - (a) Central and State Government securities
and Treasury Bills (b) other Trustee securities (including shares which are Trustee securities). 5.
Advances (i) Loans, cash credits, overdrafts etc. (ii) Bills discounted and purchased. 6. Premises less
depreciation. 7. Furniture & Fixtures less depreciation. 8. Other assets

Requirement as to capital adequacy: Capital Adequacy Ratio of NBFCs is based on Tier-I and Tier-II
Capitals. Tier-I Capital means owned fund as reduced by investment in shares of other NBFCs and in
shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance
made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten per
cent of the owned fund. Tier-II Capital includes preference shares other than those which are
compulsorily convertible into equity, revaluation reserves at discounted rate of fifty five percent, general
provisions and loss reserves to the extent these are not attributable to actual diminution in value or
identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent
of one and one fourth percent of risk weighted assets, hybrid debt capital instruments, and subordinated
debt. NBFC shall maintain a minimum capital ratio, consisting of Tier I and Tier II capital, not less than
12% of its aggregate risk weighted assets and of risk adjusted value of off-balance sheet items. Degrees of
credit risk exposure attached to off-balance sheet items have been expressed as percentage of credit
conversion factor. The relevant conversion factor has to be used to arrive risk adjusted value of off-
balance sheet item. The risk adjusted value of the off-balance sheet items will be calculated as detailed
below: The total of Tier II capital, at any point of time, shall not exceed one hundred per cent of Tier I
capital.

Components of Capital Tier I Capital: The elements of Tier I capital includes paid-up capital (ordinary
shares), statutory reserves, disclosed free reserves, Perpetual Non-cumulative Preference Shares (PNCPS)
subject to laws in force from time to time, Innovative Perpetual Debt Instruments (IPDI) and capital
reserves representing surplus arising out of sale proceeds of asset. It is generally referred as the core
capital which absorbs losses without a bank required to cease trading and thus provides more of
protection to its depositors. Tier II Capital: The elements of Tier II capital include undisclosed reserves,
revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt
and investment reserve account. It is the supplementary capital which absorbs losses in the event of
winding up and thus provides lesser degree of protection to its depositors. Tier II items qualify as
regulatory capital to the extent that they absorb losses arising from bank’s activities. Tier III Capital: This
is arranged to meet part of market risk, viz. changes in interest rate, exchange rate, equity prices,
commodity prices, etc. To quantify as Tier III capital, assets must be limited to 250% of a bank’s Tier I
capital, be unsecured subordinated and have a minimum maturity of 2 years.

Capital Adequacy Ratio (Car) Capital adequacy ratio is the ratio which protects banks against excess
leverage, insolvency and keeps them out of difficulty. It is defined as the ratio of banks capital in relation
to its current liabilities and risk weighted assets. Risk weighted assets is a measure of amount of banks
assets, adjusted for risks. An appropriate level of capital adequacy ensures that the bank has sufficient
capital to expand its business, while at the same time its net worth is enough to absorb any financial
downturns without becoming insolvent. It is the ratio which determines banks capacity to meet the time
liabilities and other risks such as credit risk, market risk, operational risk etc. As per RBI norms, Indian
SCBs should have a CAR of 9% i.e., 1% more than stipulated Basel norms while public sector banks are
emphasized to keep this ratio at 12%.

Capital adequacy ratio is defined as: CAR= Tier I + Tier II + Tier III capital (capital funds)/ Risk
Weighted Assets (RWA)

Functions of Commercial Banks:

The two most distinctive features of a commercial bank are borrowing and lending, i.e., acceptance of
deposits and lending of money to projects to earn Interest (profit). In short, banks borrow to lend. The rate
of interest offered by the banks to depositors is called the borrowing rate while the rate at which banks
lend out is called lending rate.

The difference between the rates is called ‘spread’ which is appropriated by the banks. Mind, all financial
institutions are not commercial banks because only those which perform dual functions of (i) accepting
deposits and (ii) giving loans are termed as commercial banks. For example post offices are not bank
because they do not give loans. Functions of commercial banks are classified in to two main categories—
(A) Primary functions and (B) Secondary functions.
(A) Primary Functions:

1. It accepts deposits:
A commercial bank accepts deposits in the form of current, savings and fixed deposits. It collects the
surplus balances of the Individuals, firms and finances the temporary needs of commercial transactions.
The first task is, therefore, the collection of the savings of the public. The bank does this by accepting
deposits from its customers. Deposits are the lifeline of banks.

Deposits are of three types as under:

(i) Current account deposits:
Such deposits are payable on demand and are, therefore, called demand deposits. These can be withdrawn
by the depositors any number of times depending upon the balance in the account. The bank does not pay
any Interest on these deposits but provides cheque facilities. These accounts are generally maintained by
businessmen and Industrialists who receive and make business payments of large amounts through
cheques.

(ii) Fixed deposits (Time deposits):

Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are deposits for
a fixed term, i.e., period of time ranging from a few days to a few years. These are neither payable on
demand nor they enjoy cheque facilities.

They can be withdrawn only after the maturity of the specified fixed period. They carry higher rate of
interest. They are not treated as a part of money supply Recurring deposit in which a regular deposit of an
agreed sum is made is also a variant of fixed deposits.

(iii) Savings account deposits:

These are deposits whose main objective is to save. Savings account is most suitable for individual
households. They combine the features of both current account and fixed deposits. They are payable on
demand and also withdraw able by cheque. But bank gives this facility with some restrictions, e.g., a bank
may allow four or five cheques in a month. Interest paid on savings account deposits in lesser than that of
fixed deposit.

Difference between demand deposits and time (term) deposits:

Two traditional forms of deposits are demand deposit and term (or time) deposit:

(i) Deposits which can be withdrawn on demand by depositors are called demand deposits, e.g., current
account deposits are called demand deposits because they are payable on demand but saving account
deposits do not qualify because of certain conditions on withdrawal. No interest is paid on them. Term
deposits, also called time deposits, are deposits which are payable only after the expiry of the specified
period.
(ii) Demand deposits do not carry interest whereas time deposits carry a fixed rate of interest.
(iii) Demand deposits are highly liquid whereas time deposits are less liquid,
(iv) Demand deposits are chequable deposits whereas time deposits are not.

2. It gives loans and advances:

The second major function of a commercial bank is to give loans and advances particularly to
businessmen and entrepreneurs and thereby earn interest. This is, in fact, the main source of income of the
bank. A bank keeps a certain portion of the deposits with itself as reserve and gives (lends) the balance to
the borrowers as loans and advances in the form of cash credit, demand loans, short-run loans, overdraft
as explained under.

(i) Cash Credit:

An eligible borrower is first sanctioned a credit limit and within that limit he is allowed to withdraw a
certain amount on a given security. The withdrawing power depends upon the borrower’s current assets,
the stock statement of which is submitted by him to the bank as the basis of security. Interest is charged
by the bank on the drawn or utilised portion of credit (loan).

(ii) Demand Loans:

A loan which can be recalled on demand is called demand loan. There is no stated maturity. The entire
loan amount is paid in lump sum by crediting it to the loan account of the borrower. Those like security
brokers whose credit needs fluctuate generally, take such loans on personal security and financial assets.

(iii) Short-term Loans:

Short-term loans are given against some security as personal loans to finance working capital or as
priority sector advances. The entire amount is repaid either in one instalment or in a number of
instalments over the period of loan.

Investment:
Commercial banks invest their surplus fund in 3 types of securities:
(i) Government securities, (ii) Other approved securities and (iii) Other securities. Banks earn interest on
these securities.

(B) Secondary Functions:

Apart from the above-mentioned two primary (major) functions, commercial banks perform the following
secondary functions also.

3. Discounting bills of exchange or bundles:

A bill of exchange represents a promise to pay a fixed amount of money at a specific point of time in
future. It can also be encashed earlier through discounting process of a commercial bank. Alternatively, a
bill of exchange is a document acknowledging an amount of money owed in consideration of goods
received. It is a paper asset signed by the debtor and the creditor for a fixed amount payable on a fixed
date. It works like this.

Suppose, A buys goods from B, he may not pay B immediately but instead give B a bill of exchange
stating the amount of money owed and the time when A will settle the debt. Suppose, B wants the money
immediately, he will present the bill of exchange (Hundi) to the bank for discounting. The bank will
deduct the commission and pay to B the present value of the bill. When the bill matures after specified
period, the bank will get payment from A.

4. Overdraft facility:
An overdraft is an advance given by allowing a customer keeping current account to overdraw his current
account up to an agreed limit. It is a facility to a depositor for overdrawing the amount than the balance
amount in his account.
In other words, depositors of current account make arrangement with the banks that in case a cheque has
been drawn by them which are not covered by the deposit, then the bank should grant overdraft and
honour the cheque. The security for overdraft is generally financial assets like shares, debentures, life
insurance policies of the account holder, etc.

Difference between Overdraft facility and Loan:

(i) Overdraft is made without security in current account but loans are given against security.
(ii) In the case of loan, the borrower has to pay interest on full amount sanctioned but in the case of
overdraft, the borrower is given the facility of borrowing only as much as he requires.
(iii) Whereas the borrower of loan pays Interest on amount outstanding against him but customer of
overdraft pays interest on the daily balance.

5. Agency functions of the bank:

The bank acts as an agent of its customers and gets commission for performing agency functions as
under:
(i) Transfer of funds:
It provides facility for cheap and easy remittance of funds from place-to-place through demand drafts,
mail transfers, telegraphic transfers, etc.

(ii) Collection of funds:

It collects funds through cheques, bills, bundles and demand drafts on behalf of its customers.

(iii) Payments of various items:

It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its customers.

(iv) Purchase and sale of shares and securities:

It buys sells and keeps in safe custody securities and shares on behalf of its customers.

(v) Collection of dividends, interest on shares and debentures is made on behalf of its customers.

(iv) Acts as Trustee and Executor of property of its customers on advice of its customers.
(vii) Letters of References:
It gives information about economic position of its customers to traders and provides similar information
about other traders to its customers.

6. Performing general utility services:

The banks provide many general utility services, some of which are as under:
(i) Traveller’s cheques .The banks issue traveler’s cheques and gift cheques.
(ii) Locker facility. The customers can keep their ornaments and important documents in lockers for safe
custody.
(iii) Underwriting securities issued by government, public or private bodies.
(iv) Purchase and sale of foreign exchange (currency).

Central Bank and Its Functions:

In 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
banks of a country.

The central bank of India is called the Reverse Bank of India which was set up in 1935. The commercial
banks keep only a fraction of their deposits in cash and the rest they lend out to the traders and investors.

Therefore, the commercial banking is often known as fractional reserve system. In view of the fact that
commercial banks keep only a fraction of their deposits in cash, they will run into difficulties if at a time
there is rush of depositors to withdraw their money. This indicates the need for an institution which
should come to the rescue of the commercial banks and provide them the money required to meet the
excessive demand of the depositors.

The central bank fulfills this need. However, in the modern times, the central bank not only provides
monetary aid to the commercial banks in time of crisis but performs many other functions. Indeed, the
control over cost and availability of credit in the economy and regulation of the growth of money supply
are special responsibilities of the central bank.

The Principles of Central Banking:

The central bank of a country enjoys a special status in the banking structure of-the country. The
principles 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. 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. In fact, it is a monetary
authority of the country and has to function in a manner so as to promote economic stability and
development.

The functions of the central bank especially the Reserve Bank of India have increased enormously in
recent years. Not only does the Reserve Bank of India regulate credit and money supply in the country but
it promotes economic development and price stability. Guiding principles of the Reserve Bank 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 Central Bank:

The following are the main functions of a central bank:

1. It acts as a note issuing agency.
2. It acts as the banker to the state.
3. It acts as the banker’s bank.
4. It controls credit.
5. It acts as the lender of the last resort.
6. It manages exchange rate.
The central bank of the country has the monopoly of issuing notes or paper currency to the public.
Therefore, the central bank of the country exercises control over the supply of currency in the country. In
India with the exception of one rupee notes which are issued by the Ministry of Finance of the
Government of India, the entire note issue is done by the Reserve Bank of India. In the past the central
bank of various countries used to keep as reserves some gold and foreign exchange securities against the
notes issued. The percentage of the reserves to be kept against the total amount of notes issued was fixed
by law and is subject to change by the Government.

Theoretically, there is no need of the backing of gold reserves against the notes issued. It may be pointed
out that paper notes these days cannot be converted into gold or some other precious metals; they are
inconvertible. This is called proportional reserve system. Before 1956 in India also, there was
proportional reserve system of issuing currency or notes. According to this, the Reserve Bank was
required to keep as reserves 40 per cent of the total notes issued in the form of gold and foreign exchange
securities.

Since 1956 this system has been given up and instead minimum reserve system has been adopted
according to which the Reserve Bank is required to keep only a minimum amount of reserves in the form
of gold and foreign exchange securities and given this minimum reserve it can issue notes as much as it
thinks desirable in view of the needs and conditions of the economy.

There is even no need for backing of gold for the currency issued by the Government or the central bank.
From the economic point of view what matters is the production of real goods and services and not the
amount of gold supporting a currency. The real value of a currency depends on how much it can buy
goods and services and not how much gold or silver is kept as reserve against it.

Thus, ultimately the credibility of the currency of a country depends not upon whether it is convertible
into gold or silver but upon to what extent it is possible to maintain the stability of its value by suitable
monetary control.

Banker to the Government:

Another important function of the central bank is to act as the banker to the Government. All the balances
of the Government are kept with the central bank. On these balances the central bank pays no interest.
The central bank receives and makes all payments on behalf of the Government. Further, the central bank
has to manage the public debt and also to arrange for the issue of new loans on behalf of the Government.
The central bank also provides short-term loans to the Government. This is usually done through the
central bank discounting the Government treasury bills either directly or when presented by other banks.
Thus the central bank performs a number of services to the Government. In fact, the central bank is the
fiscal agent of the Government and advises the latter in matters relating to currency and exchange as well
as finance.
Bakers’ Bank:

Broadly speaking, the central bank acts as a bankers’ bank in three capacities:

(i) As the custodian of the cash reserves of the commercial banks;

(ii) as the lender of the last resort; and

(iii) as bank of central clearance, settlement and transfers.

All other banks in the country are found by law to keep a fixed portion of their total deposits as reserves
with the central bank. These reserves help the central bank to control the issue of credit by commercial
banks.
They in return can depend upon the central bank for support at the time of emergency. This help may of
in the form of a loan on the strength of approved securities or through rediscounting of bills of exchange.
Thus the central bank is the lender of the last resort for other banks in difficult times because on such
occasions there is no hope of getting help from any competing institution.
In India, scheduled banks have to keep deposits with the Reserve Bank not less than 5% of their current
demand deposits and 2% of their fixed deposits as reserves. In return they enjoy the privilege of
rediscounting their bills with the Reserve Bank as well as securing loans against approved securities when
in need.
Clearing function is also performed by the central bank for the banks. Since banks keep cash reserves
with the central bank, settlement between them may be easily effected by means of debts and credits in
the books of the central bank. If clearing go heavily against some bank, its cash reserves with the central
bank will fall below the prescribed limit and therefore the bank concerned will have to make up the
deficiency.
Control of Credit:
The chief objective of the central bank is to maintain price and economic stability. Price instability—both
inflation and deflation—has harmful effects. Moreover, fluctuations in overall economic activity, that is,
trade cycles entail a lot of human sufferings.
Main reason for the fluctuations in prices as well as in overall economic activity is the changes in
aggregate demand. Aggregate demand, especially the investment demand, depends upon the supply of
money. And credit these days is the important constituent of the money supply. Thus the supply of credit
greatly affects the prices, national income and employment through changes in investment demand.
Now it is the responsibility of the central bank of a country to guide the money market, i.e., the
commercial banks regarding supply of credit so as to maintain stability in prices as well as in overall
economic activity. To overcome inflation it has to restrict the supply of credit and to prevent or get rid of
depression and deflation it has to expand the credit. There are various methods by which the central bank
can control the supply of credit in the economy.

These methods are:

(a) Varying the bank rate;
(b) Engaging in open market operations; and
(c) Changing the reserve ratio, and
(d) Exercising selective credit controls.

It is through controlling the supply of credit and cost of credit (i.e., rate of interest on it) that the central
bank of a country tries to bring about stability in prices as well as in overall level of economic activity.
The central bank is the monetary authority of the country and monetary policy is one of the important
measures which are taken to avoid and cure both depression and inflation.

To remedy inflation central bank tries to restrict the supply of credit by raising the bank rate and using
other weapons of credit control. To overcome depression it tries to expand credit by lowering the bank
rate and cash reserve ratio and also by buying securities from the open market.

In India Reserve Bank which is the central bank of the country has been making important contribution to
the achievement of the objective of price stability. To achieve price stability Reserve Bank has been
setting forgets of expansion in money supply which are consistent with the growth of output. Control of
inflation by checking excessive expansion in credit supply has been the major concern of monetary policy
imposed by Reserve Bank of India.
Leader of the Last Resort:
As mentioned above, the commercial banks operate on the basis of fractional reserve system. Therefore,
even a well-managed commercial bank can run into difficulty if there is a great rush of demand for cash
by the depositors, because with a fraction of its deposits in cash, it will not be able to meet a sudden and
large demand for cash. The central bank must therefore come to their rescue at such times. Thus, central
bank is the last source of supply of credit.
It is the duty of the central bank to meet demand for cash by a bank at the time of emergency when panic
prevails among the public and people’s confidence has been shaken and when other banks have refused to
supply credit. The central bank boldly steps forward to supply cash and allay panic. The central bank
must meet situation of high liquidity preference.
To Promote Economic Development:
A very important function of central bank these days in developing countries like India is to promote
economic development. It can help in both agricultural and industrial development in the country. The
central bank can promote agricultural and industrial growth by providing finance or credit to agriculture
and industry.
Central bank adopts such a monetary policy as is conducive to economic growth. In order to accelerate
the rate of investment or capital formation, the central bank takes steps to make more credit available for
investment at lower lending rates of interest. In the developing countries, the role of central bank as
promoter of economic development is very important.
Thus, in India apart from regulatory function, Reserve Bank of India has been playing a promotional role.
RBI has been making important contribution for building up appropriate financial institutions such as
Industrial Finance Corporation of India, State Finance Corporations to promote saving and investment.
By ensuring adequate supply of agricultural credit, term finance to industries, credit for exports, RBI has
performed a useful promotional role in encouraging economic growth.
Managing Exchange Rate of the National Currency:

An important function of a central bank is to maintain the exchange rate of the national currency. For
example, the Reserve Bank of India has the responsibility of maintaining the exchange value of the rupee.
When a country has adopted flexible exchange rate system under which value of a currency is determined
by demand for and supply of a currency, the value of a currency, that is, its exchange rate with other
currencies is subject to large fluctuations which are harmful for the economy.
Under these circumstances, it is the duty the central bank to prevent undue depreciation or appreciation of
the national currency. Since 1991 when the rupee has been floated, the value of Indian rupee, that is, its
exchange rate with US dollar and other foreign- currencies has been left to be determined by market
forces.