Question

What is meant by quantitative credit control?

Answer 1

Quantitative credit control is a measure used by the central bank to influence the total volume of credit in the banking system. The quantitative credit controls are as follows:

1) Bank rate policy:
Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by bank credit.

2) Cash reserve ratio (CRR):
When controlling inflation, the central bank raises the CRR which reduces the lending capacity of commercial banks; consequently, the flow of money from commercial banks to the public decreases. In this process, it halts the rise in prices to the extent it is caused by bank credits to the public.

3) Open market operations:
Open market operations refer to the sale and purchase of government securities and bonds by the central bank. When controlling inflation, the central bank sells government securities to the public through the banks. This results in the transfer of a part of bank deposits to the central bank account and reduces credit creation capacity of commercial banks.