Explain the role of Central Bank as Governments' agent and advisor. Define Reverse Repo Rate. Discuss briefly, how this instrument helps in controlling credit creation by commercial banks.

Question

Accepted Answer

Central Bank as Government's Agent and Advisor:

Agent Functions:
1. Accepts government deposits
2. Makes payments on behalf of government
3. Manages government securities
4. Implements government's financial policies

Advisor Functions:
1. Advises on monetary policy
2. Recommends on fiscal matters
3. Provides economic data and analysis
4. Suggests on debt management

Reverse Repo Rate:
Definition: Rate at which commercial banks deposit surplus funds with the central bank for short period.

How it controls credit creation:
1. When Reverse Repo Rate is increased
2. Banks earn more by depositing with RBI
3. Banks prefer to park funds with RBI
4. Less funds available for lending
5. Credit creation capacity reduces
6. Money supply decreases