Question

Explain briefly the quantitative methods adopted by the Reserve Bank of India to control credit.

Answer 1

The quantitative methods adopted by the Reserve Bank of India to control credit are:

1. Bank Rate Policy: The RBI changes the bank rate to make borrowing cheaper or more expensive. A higher bank rate lowers credit, whereas a lower bank rate raises credit.
2. Open Market Operations: The RBI buys and sells government securities. Purchasing securities raises the money supply, whilst selling them diminishes it.
3. Cash Reserve Ratio: The RBI changes the percentage of deposits that banks must hold as reserves. A higher CRR decreases lending, whereas a lower CRR enhances lending.
4. Statutory Liquidity Ratio: The RBI adjusts the percentage of deposits that banks must keep in liquid assets. A higher SLR reduces credit, whereas a lower SLR increases it.