Question

Describe two quantitative credit control measures of the Central Bank.

Briefly discuss any two quantitative measures adopted by the Reserve Bank of India to control credit.

Explain the 'open market operations' method of credit control used by a central bank. 

Briefly explain the quantitative credit control policy of the central bank.

Explain the following measures adopted by the central bank to control inflation.

1. Bank rate
2. Open market operations

Explain how bank rate and open market operations can be used by the central bank to control credit.

Answer 1

Quantitative credit control measures of the Central Bank are as follows:

1. Bank Rate: The Central Bank RBI controls through changes in its bank rate. An increase in bank rate increases the cost of borrowing from the central bank. It forces the commercial banks to increase their lending rates, which discourages people from taking loans from banks.
2. Open Market Operations: The Central Bank RBI controls credit through its open market operations. Under it, the central bank buys or sells the government securities in the open market. Sale of securities by central bank reduces the reserves of commercial banks, which adversely affects bank's ability to create credit. And purchase of securities from the open market increases the resources of banks and hence their lending capacity.