Which of the following is NOT a function of the central bank?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → It earns its profit from the spread between the rate it charges borrowers and the rate it pays depositors.

Earning a spread is how a commercial bank makes its profit. It takes deposits at a low rate and lends at a higher rate.

Option (1) It is the custodian of the foreign exchange reserves of the economy. — True. The RBI holds the country’s foreign exchange reserves.

Option (2) It acts as a banker to the government. — True. The RBI does the banking work of the government.

Option (3) It is ready to lend to commercial banks at all times as the lender of last resort. — True. Banks that need funds can always turn to the RBI.

Option (4) It earns its profit from the spread between the rate it charges borrowers and the rate it pays depositors. — False. The spread is the profit of a commercial bank, not of the central bank.

NCERT (2026-27): “Central bank Central Bank is a very important institution in a modern economy. Almost every country has one central bank. India got its central bank in 1935. Its name is the ‘Reserve Bank of India’. Central bank has several important functions. It issues the currency of the country. It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios. It acts as a banker to the government. It is the custodian of the foreign exchange reserves of the economy. …”

“Commercial Banks … They accept deposits from the public and lend out part of these funds to those who want to borrow. The interest rate paid by the banks to depositors is lower than the rate charged from the borrowers. This difference between these two types of interest rates, called the ‘spread’ is the profit appropriated by the bank. …”

“3.4 Policy Tools to Control Money Supply Reserve Bank is the only institution which can issue currency. When commercial banks need more funds in order to be able to create more credit, they may go to market for such funds or go to the Central Bank. Central bank provides them funds through various instruments. This role of RBI, that of being ready to lend to banks at all times is another important function of the central bank, and due to this central bank is said to be the lender of last resort. …”