20. Explain any two credit control techniques adopted by the RBI.
Ans: The principle methods or instruments of Credit Control used by the Central Bank are:
(1) Quantitative or General Methods: These methods regulate the total volume of credit in the economy without considering the purpose for which it is used.
(2) Qualitative or Selective methods: These methods control the direction of credit flow by influencing specific sectors of the economy.
1. Bank Rate Policy (Quantitative Method)
The bank rate is the interest rate at which the RBI lends money to commercial banks against approved securities.
(i) Increase in Bank Rate: Commercial banks increase their lending rates, making loans expensive. This reduces credit supply and controls inflation.
(ii) Decrease in Bank Rate: Commercial banks lower their lending rates, making borrowing cheaper. This increases credit supply and promotes economic growth.
2. Open Market Operations (Quantitative Method)
Open Market Operations (OMO) refer to the buying and selling of government securities in the open market by the RBI to regulate liquidity.
(i) When RBI buys securities: Money is injected into the economy, increasing liquidity and credit supply.
(ii) When RBI sells securities: Money is absorbed from the economy, reducing liquidity and controlling inflation.