Question

Elaborate any two instruments of Credit Control, as exercised by the Reserve Bank of India.

Accepted Answer

The following are the two instruments of credit control exercised by the Reserve Bank of India:

(i) Open Market Operations (OMO) refer to the buying and selling of government securities by the Central Bank from/to either the public or the commercial banks in an open market, in order to influence the money supply in the economy. RBI is authorized to sell or purchase treasury bills and government securities. OMO influences the money supply in an economy in the following two ways: Case $01$ - The sale of securities by the Central Bank reduces the reserves of commercial banks. It adversely affects the bank's ability to create credit and therefore decreases the money supply in the economy.

Case $02$ - Purchase of securities by the Central Bank increases the reserves and raises the bank's ability to give credit.

(ii) Bank rate is the rate at which the central bank of a country (RBI in the case of India) lends money to the Commercial Banks to meet their long-term needs. These loans are part of RBI's, "lender of last resort" function. It is also known as Discount Rate and its modus operandi is the same as that of Repo Rate and is being actively used by RBI as a tool for credit control. In order to control inflationary trends in the economy, the supply of money or credit needs to be squeezed out for which the bank rate is increased. This in turn discourages commercial banks from borrowing from the central bank thereby leading to an overall decline in their reserves and finally curbing down their lending capacity or credit creation. In order to control deflationary trends, an exact opposite move is taken.

Elaborate any two instruments of Credit Control, as exercised by the Reserve Bank of India.

Statutory Liquidity Ratio: The minimum percentage of deposits that banks are required to reserve in the form of&nbsp;liquid assets like cash, gold, and securities before offering credit facilities to customers. This percentage is decided by the central bank.
Repo Rate: The rate at which commercial banks borrow money from the Central bank of the country by keeping securities with it, in order to maintain liquidity.

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