Question

Answer the following question:

What are the various measures of quantitative credit control?

Answer 1

The following are the various measures of quantitative credit control:

i. Bank Rate - Bank rate refers to the rate at which the central bank provides loans to the commercial banks. This instrument is a key at the hands of RBI to control the money supply. Changes in the bank rate change the cost of borrowings, thereby affect the money supply. An increase in the bank rate decreases the money supply and vice-versa.

ii. Open Market Operations (OMOs) - OMOs refer to the buying and selling of securities either to the public or to the commercial banks in an open market to affect the money supply in the economy. The selling of securities by RBI will wipe out the extra cash balance from the economy, thereby limiting the money supply, whereas in the case of buying securities by RBI, additional money is pumped into the economy stimulating the money supply.

iii. Cash reserve ratio (CRR) - It refers to the minimum proportion of the total deposits that the commercial banks has to maintain with the central bank in form of reserves. An increase in the CRR, would mean that banks are required to keep a greater portion in form of deposits with the central bank and the commercial banks are left with lesser amount of funds to lend out. Hence, the lending capacity of the banks is reduced, leading to fall in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply.