🏦Module 3 · Level 2
Central Banks
The RBI, Federal Reserve, and ECB — how central banks control money supply and stabilize economies.
What Central Banks Do
Central banks have three main tools: setting interest rates (repo rate), controlling money supply (open market operations), and setting reserve requirements. The RBI's primary mandate is to maintain price stability (4% inflation target).
Monetary Policy in Action
When inflation is high, the RBI raises interest rates. This makes borrowing expensive, reduces spending, and cools the economy. When the economy slows, it lowers rates to encourage borrowing and spending. It's a constant balancing act.
- •The RBI targets 4% CPI inflation with a ±2% band
- •Repo rate is the rate at which RBI lends to commercial banks
- •Open market operations involve buying/selling government bonds
- •Central bank independence is crucial — political interference undermines credibility
💡 Did You Know?
The RBI was established on April 1, 1935 — not as an April Fool's joke! It was originally headquartered in Calcutta before moving to Mumbai in 1937.