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Questions
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.
- Bank rate
- Open market operations
Explain how bank rate and open market operations can be used by the central bank to control credit.
Describe the various methods employed by a central bank to control credit in an economy.
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Solution
Quantitative credit control measures of the central bank are as follows:
- 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.
- 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 a central bank reduces the reserves of commercial banks, which adversely affects a bank's ability to create credit. And purchase of securities from the open market increases the resources of banks and hence their lending capacity.
Notes
Students should refer to the answer according to their questions.
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RELATED QUESTIONS
Define bank rate.
Which of the following is a selective/qualitative method of credit control.
The rate of which commercial banks borrow from the Central Bank is the:
Explain how credit rationing helps to control credit in an economy.
During deflation, the Central Bank usually ______.
In order to encourage investment in the economy, the central bank may ______.
Match the following and select the correct option:
| Column A | Column B | ||
| (i) | A rate of interest at which the central bank (RBI) lends money to member commercial banks to meet they long term needs. | A. | Cash Reserve Ratio |
| (ii) | A rate of interest at which RBI lends money to commercial banks to meet their short term needs. | B. | Statutory liquidity ratio |
| (iii) | A minimum percentage of total deposits kept by banks with the Central Bank. | C. | Repo rate |
| (iv) | A minimum percentage of total deposits to be kept by banks inform of liquid assets with themselves. | D. | Bank rate |
During inflation, the central bank usually:
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit.
Reason (R): An increase in cash reserve ratio reduces the excess reserves of commercial banks and hence limits their credit creating power.
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Bank rate is a quantitative instrument of monetary policy.
Reason (R): During inflation, RBI reduces the bank rate.
Define the following term:
Cash Reserve Ratio.
Briefly explain the following credit control methods adopted by the Central Bank.
Moral persuasion
The Central Bank is the apex monetary institution of the country. Explain its role of a custodian of foreign exchange reserves.
Which of the following statements are correct and which are incorrect? Give reasons.
- Central bank is a currency authority.
- Bank rate is a qualitative method of credit control.
- Quantitative methods regulate direction of credit.
- Bank rate is the rate at which commercial banks give loans to the public.
- Central bank should sell government securities when credit is to be expanded.
Who controls the credit supply in an economy?
Identify the following Credit Control measures undertaken by the Central Bank during inflation.
The Central Bank increases the rate at which it lends to the Commercial Bank.
What do you mean by credit control?
Which are qualitative methods of credit control?
Define moral persuasion.
Give an example of margin requirements.
