A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. The main function of a central bank is to act as governor of the machinery of credit in order to secure stability of prices.

It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit.

Two main function of central bank are :

• Issue of Currency : The central bank is given the sole monopoly of issuing currency in order to secure control
• over volume of currency and credit: These notes circulate throughout the country as legal tender money. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it.
• Custodian of Foreign Exchange or Balances : It has been mentioned above that a central bank is the custodian of foreign exchange reserves and nation’s gold. It keeps a close watch on external value of its currency and undertakes exchange management control. All the foreign currency received by the citizens has to be deposited with the central bank; and if citizens want to make payment in foreign currency, they have to apply to the central bank. Central bank also keeps gold and bullion reserves.