Question

Answer the following questions.
How does a Central Bank transfer funds from one place to another?

Answer 1

Commercial banks must deposit a certain percentage of their deposits with the central bank. Central banks utilise their funds to settle the claims of one bank by the other. In other words, the central banks undertake the transfer of funds from one bank to the other to settle inter-bank claims. In addition to this, the central bank also buys and sells securities on behalf of the government. By buying securities, transfers money from the government account to the account of the security holder, similarly, when it sells securities it transfers money into the government account. Thus, in these ways, the central bank (RBI) transfers money from one place to another.