Introduction:
The central bank aims at providing financial and economic stability in the country. It supervises controls and regulates the activities of all the commercial banks and other financial institutions of the country. Thus central bank is the monetary institution whose main function is to control regulates and stabilizes the monetary system of the country in the national interests. The credit control measure of R.B.I are called as quantitative and qualitative measures.
Instruments of monetary policy of RBI:
Various methods adopted by the RBI to regulate and control money circulation or supply of money in the country are known as the instruments of monetary policy or methods of credit control. The methods adopted by RBI are grouped under two heads.
Credit Control:
- Quantitative methods
- Qualitative methods
Quantitative methods:
These are non-discriminating in character as they tend to expand or contract the flow of money in all the channels.
- Bank rate: bank rate is the rate of interest charged by the RBI for providing funds or loans to the banking system. This is also known as discount rate. Increase in bank rate is symbols of lightening of RBI monetary policy the reverse will happen when the bank rate is reduce to overcome depreciation in the economy. Injecting and absorbing the liquidity from bank system is called bank rate policy.
- Open market operations: it is an instrument of monetary policy which involves buying and selling of government securities in the open market. The RBI sells government securities to contact the flow of credit and buys Government security to increase credit flow. When the RBI purchase a security from the banks and the public it increases the volume of credit in circulation, while their sale by it. it decreases the volume of credit thus purchases expand the credit and sales contract it. In this way the RBI sells government security during inflation purchasing during deflations.
- Cash reserve ratio: it is a certain percentage of Bank deposit which commercial banks are required to keep with the RBI in the form of reserves or balance. An increase in the CRR with the RBI leads to a contraction of credit and vice versa, the RBI can very CRR between 3% to 15%.
- Statutory liquidity ratio: in addition to CRR the RBI direct to commercial banks have to maintain a certain percentage of the total demand and time deposit with themselves in the form of liquid assets. These assets can be cash, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liquidity is term as the SLR there was a reduction of SLR.
also read: explain the objectives of monetary policy of R.B. I.