Q:Why Credit control is treated as most important function of Reserve Bank of India.
A:Credit control in the economy is required for the smooth functioning of the economy.
By using credit control methods RBI tries to maintain monetary stability.
Q;Name types of methods.
A:There are two types of methods:
1. Quantitative control to regulates the volume of total credit.
2. Qualitative Control to regulates the flow of credit.
Q: List type of Quantitative methods.
A:
1. Management of Bank Rate :By increasing or reducing Bank rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund.
2. Open market operations :
The term open market operation refers to purchase or sale of government securities by the central bank.Purchase of securities by the central bank in open market provides money to market/banks whereas sale of securities sucks money from market/banks .OMO is now very frequently used by RBI.
3. Management of Cash reserve ratio : Increase in CRR means Banks to keep more money with RBI , hence they will left with lower funds for lending.this affect supply of money in market,adversely.
4. Repo & Reverse Repo :By increasing or reducing REPO rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund. It also affects the pricing of credit in market.
5. Altering Statutory Liquidity Ratio:Increase in SLR means Banks to invest more money SLR securities , hence they will left with lower funds for lending.this affect supply of money in market,adversely.
6. MSF:By increasing or reducing MSF rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund. It also affects the pricing of credit in market.
Q: List Qualitative Methods:
A:
1. Selective Qualitative Credit controls
By making changes in margin and rate of interest, RBI regulates credit in specific areas. normally this is used for sensitive items.
2. Moral persuasion and direct action :
RBI uses this technique to regulate flow of credit to specific sectors of economy. by imposing ban or by allowing higher flow of funds this is achieved.
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