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प्रश्न
Explain the role of legal reserve ratio and Bank rate in correcting inflationary gap in an economy.
उत्तर
Role of Legal Reserve Ratios to Correct Inflationary Gap:
Legal Reserve Ratio (LRR) comprises of CRR and SLR.
CRR refers to the minimum proportion of the total deposits that the commercial banks have to maintain with the central bank in form of reserves. When there is inflationary gap in an economy, the central bank raises the CRR. Increase in CRR implies that the commercial banks are left with lesser amount of funds to lend out to the public. This implies that the lending capacity of the banks reduces, leading to a fall in the money supply in the economy. The fall in money supply reduces the level of aggregate demand. Thus, the inflationary gap is corrected.
SLR refers to the minimum percentage of assets to be maintained by the commercial banks with themselves in the form of either fixed or liquid assets. Similar to CRR, in order to correct the situation of inflationary gap, the central bank raises the SLR. A rise in the SLR restricts the commercial banks to pump additional money into the economy. This results in a fall in the money supply which subsequently leads to a reduction in inflationary gap.
Role of Bank rate to Correct Inflationary Gap:
The bank rate, also known as the rediscount rate, is the interest rate at which the central bank lends to commercial banks or rediscounts commercial bills brought by commercial banks in times of financial need.
When it comes to LRR, the loanable capacity of a commercial bank is reduced by the amount of LRR. By increasing the LRR, the commercial bank's excess reserve is reduced, limiting the commercial bank's credit-granting capacity. Similarly, when the bank rate rises, the loan becomes more expensive for commercial banks, which raise interest rates on loans to general customers. Both of these increases reduce aggregate demand and the inflationary gap.
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संबंधित प्रश्न
Do you consider a commercial bank ‘creator of money’ in the economy’?
Answer the following question.
What role does it play in determining the credit creation power of the banking system? Use a numerical illustration to explain.
______ is the main source of money supply in an economy.
The creation of ______ is called credit creation.
Banks are able to create credit many times more than initial deposits through ______.
The ______ creation is called credit creation.
The process of money creation or credit creation is done by ______.
What do you mean by credit creation by commercial banks?
Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India's best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges.
The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected. Inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap.
In this context, the SHG-Bank Linkage programme, formalised by the National Bank for Agriculture and Rural Development (NABARD) in 1995, synthesizes 'formal financial systems' (in terms of a formal institution providing credit) with the 'informal sector' (comprising of rural poor with no formal credit history), has emerged as a preferred vehicle for providing financial services to the hitherto unbanked poor.
Community Based Repayment Mechanisms (CBRMs) have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women.
What could be the main reason for the institutionalization of Community Based Repayment Mechanisms (CBRMs)?
Identify which of the following Statement is true?
The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called ______.
Suppose in an economy, the initial deposit of ₹ 400 crores lead to the creation of total deposits worth ₹ 4000 crore. Then the value of reserve requirements would be ______.
Match the following and select the correct option.
| Column A | Column B | ||
| (i) | A deposit created by a customer | A. | Term deposit |
| (ii) | A deposit created by bank when loan is granted | B. | Demand deposits |
| (iii) | Deposits payable by bank on demand | C. | Initial deposit |
| (iv) | Deposits the amount of which can be withdrawn only after a fixed period of time | D. | Secondary deposit |
Which of these banks formulates the credit control tools?
Match the following:
| Column I | Column II | ||
| A. | Formula of Money Multiplier | (i) | Inverse |
| B. | Money multiplier = 4 | (ii) | Money multiplier = 10 |
| C. | Relationship between LRR and money multiplier | (iii) | LRR = 0.25 |
| D. | LRR = 0.1 | (iv) | `1/"LRR"` |
State the advantage of a credit card over currency notes.
What is meant by primary deposits?
What is money multiplier?
