Question

How does RBI control credits

Answer 1

Credit control is one of the most important function of Reserve bank of India. Demand and supply of money in the economy is controlled by using this Credit control tool.

The two methods used by RBI to control the money supply is,

• Qualitative method and
• Quantitative method.

Money supply is restricted during inflation period whereas it allows the money supply in the economy during the period of deflation.

Answer 2

Answer:

RBI controls credit in the economy by two major methods. They are:

1. Quantitative Credit Control

2. Qualitative Credit Control

Under the Quantitative Credit Control, the RBI controls the flow of money across the country irrespective of states, sectors, etc. whereas, in the Qualitative Credit Control, the RBI controls the flow of money across a particular sector of the economy like the industrial sector (or) the agricultural sector, etc.

The different ways of controlling credit in a Quantitative Method are:

1. Regulating Bank Rate.

2. Maintenance of Cash Reserve and regulating it.

3. Maintaining the Statutory Liquid Ratio.

4. Providing Open Market Options like Auctioning or Buying of Government Bonds or coupons.

5. Regulating REPO and Reverse REPO rates.

The different ways of controlling credit in a Qualitative Method are:

1. Rationing of Credit

2. Regulating Marginal Requirements

3. Moral Suasion and Direct Action (in case of violations)

These are the different ways through which RBI can control flow of credit in an economy.