RBI restricts money supply do to inflationary pressure. How will RBI use its following instruments -
1) Open market operation.
2) CRR.
3) SLR.
4) Bank rate.
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RBI controls money supply in the market through various tools and measures.
CRR - Cash Reserve Ratio is the proportion of total deposits that the banks are required to maintain with the RBI has reserves. By changing this ratio RBI can influence the amount of cash that is available for the banks to lend. A high CRR implies less money to lend, thus contraction in money supply. A low CRR enables banks to hold more cash with them, whih is then available to lend. Thus, expanding the money supply.
Open Market Operation - It is the sale/purchase of the government bonds and securities in the market to adjust the rupee liquidity. For example, when RBI sells government bonds/securities, people buy them against money (say cash) this leads to a contraction in money supply as money moves from public to RBI. In case of purchases, money supply expands.
Repo Rate - It is the rate at which the central bank (RBI) lends money to commercial banks. If RBI increases this repo rate, it becomes costlier for the commercial banks to borrow money from RBI. They are left with lesser amount of money to lend to the general public. Thus the money supply contracts. A low repo rate helps commercial bank avail loans at cheaper prices, thus expanding the money supply.
CRR - Cash Reserve Ratio is the proportion of total deposits that the banks are required to maintain with the RBI has reserves. By changing this ratio RBI can influence the amount of cash that is available for the banks to lend. A high CRR implies less money to lend, thus contraction in money supply. A low CRR enables banks to hold more cash with them, whih is then available to lend. Thus, expanding the money supply.
Open Market Operation - It is the sale/purchase of the government bonds and securities in the market to adjust the rupee liquidity. For example, when RBI sells government bonds/securities, people buy them against money (say cash) this leads to a contraction in money supply as money moves from public to RBI. In case of purchases, money supply expands.
Repo Rate - It is the rate at which the central bank (RBI) lends money to commercial banks. If RBI increases this repo rate, it becomes costlier for the commercial banks to borrow money from RBI. They are left with lesser amount of money to lend to the general public. Thus the money supply contracts. A low repo rate helps commercial bank avail loans at cheaper prices, thus expanding the money supply.
Anonymous:
well answered..... :)
u deserves....
Answered by
3
Heya....
RBI increase all the above rates during inflation and crubed inflation by reducing the capacity of credit creation by banks...
In case of deflation RBI decreased all that measures to increase money supply....
RBI increase all the above rates during inflation and crubed inflation by reducing the capacity of credit creation by banks...
In case of deflation RBI decreased all that measures to increase money supply....
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