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Indian Financial System
Notes cash ratios as prescribed from time to time. The effective functioning of the British model
depends on an active securities market where open market operations can be conducted at the
discount rate. The effectiveness of open market operations however depends on the member
banks' dependence on the central bank and the influence it wields on interest rates. Later models,
especially those in developing countries showed that central banks play an advisory role and
render technical services in the field of foreign exchange, foster the growth of a sound financial
system and act as a banker to government.
14.3.2 Reserve Bank Objectives
The objectives of Reserve Bank were set out earlier but can be summarized as follows:
1. To maintain the internal value of the nations currency;
2. To preserve the external value of the currency;
3. To secure reasonable price stability; and
4. To promote economic growth with rising levels of employment, output and real income.
These objectives are common to all countries, developed and developing. More relevant to the
developing countries like India are those of economic growth price stability in these countries.
14.3.3 Objectives of Credit Control
Modern economies are all based on money, which consists of both cash and credit. Cash can be
created by only the Reserve Bank, while banks can extend credit. Since such credit creation can
be both excessive and deficient as compared to the requirements of the economy, some control
on them is exercised by the Central Bank of the country, which is the monetary authority, the
apex bank and banker to banks. The need for credit control was explained by De Knock by
saying that credit has "come to play a predominant part in the settlement of monetary and
business transactions of all kinds and thus to represent a powerful force for good or evil."
The objectives of credit control are as follows:
1. Stabilisation of prices with out inflation and deflation by adjusting credit creation to the
needs of the economy.
2. Keeping the exchange rates stable through proper adjustments of credit creation to the
inflows and outflows of funds and sterilization of excess of inflows and outflows.
3. Stabilization of short-term money markets by the Central Bank through its influence on
cost and availability of credit.
4. Promotion of economic growth by making credit available for all productive activities
and controlling it for non-productive activities.
Self Assessment
Fill in the blanks:
7. The ………………is the controller of foreign exchange. It is the watchdog of the entire
financial system.
8. The main functions of the Bank are to act as the …………………….authority.
9. RBI is the Central Bank of India and controls the entire ………………….issue.
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