Question

What is Money? Explain its functions. Discuss the credit control measures of monetary policy in India.

Answer 1

Answer:

Monetary policy refers to the credit control measures adopted by the central bank of the country. In case of Indian economy, RBI is the sole monetary authority which decides the supply of money in the economy.

Explanation:

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Answer 2

Money is an economic unit which functions as a generally "recognised medium of exchange" for "transactional purposes" in an economy

Explanation:

Primary functions of Money.

1. Medium of Exchange & Measure of Value :If money is used to "intermediate"  the sale of goods and services, it serves as an exchange medium. That is, A buyer can purchase goods through money & a seller can sell goods for money. Money serves as a "measure of value", and the value of all goods & services is expressed in "terms of money".
2. Unit of Account: This is a standard numeric unit for "market value measurement" of commodities, services & other transactions. This is a "relative worth" & "deferred  payment" standard (‘standard’ for making future payments) & as such is a necessary requirement for the drawing up of commercial agreements involving debt. Example, When we borrow money from someone/somebody, we must return both the "principal & interest amount" in the future. Money is a crucial mode of calculating and paying future interest rates.This has made borrowing & lending" easier. It has culminated into the establishment of financial institutions..
3. Store of Value: To act this way, money should be reliably saved, stored, and retrieved. It must be predictably usable as a medium of exchange when it is "retrieved". That is, money must be easily stored for "future use".
4. Transfer Value: Money is also used for value transfers. It allows not only in the home nation but also several other  parts of the world to buy goods.

Credit Control Measures of Monetary Policy of India

• Credit control is a vital  tool used by Reserve Bank of India  (RBI), A significant tool used to regulate demand & supply of money (liquidity) in the economy,
• One of the RBI's important functions is the "controlled expansion" of bank credit and money supplied without affecting output with special attention to seasonal credit demand.
• Monetary authority is in charge of decisions on credit allocation to the priority sector as well as small borrowers. RBI is a crucial tool for controlling money (liquidity) demand as well as supply in the economy.
• RBI focuses on its goal of "Economic stability growth." It means that banks not only monitor inflationary movements but also fuel economic growth, ultimately leading to real steady income.
• Credit management is one of India's main monetary policy priorities. Controlling credit means, in compliance with the requirement, increasing or reducing the credit flow in the economy.
• All these credit management steps the Reserve Bank of India adopts with  central banks in other countries. Instruments for Credit Control under monetary policy can be categorised as: Quantitative Credit Control 2. Qualitative Credit Control

Quantitative:

1. Bank Rate:  RBI is ready to buy, or rediscount, bills, or other commercial paper available for payment at the standard rate. Bank rate changes to control the price level and business activity is done by RBI by altering the demand for credit
2. Open Market Operations: Involve buying & selling of government securities from/to the public & bank. RBI sells govt securities to "contract the credit flow " & purchases govt securities to raise the credit flow
3. Statutory Liquidity Ratio: This is the ratio of the "liquid assets to time and demand liabilities", depending on the liquidity need and can be lowered or increased by the RBI
4. Cash Reserve Ratio: Commercial bank maintains certain percentage of bank deposit with RBI in the form of balances/reserve. Depending on the liquidity need, it can be lowered or increased by the RBI
5. Multiple Interest Rates: To different commercial banks, RBI sets the credit limit. When commercial banks "borrow RBI funds" within their limit, interest will be paid at repo, however if commercial banks borrow far more their fixed quota, then higher interest rates will be paid, i.e. higher than the "bank rate". RBI may "extend or contract credit" by adjusting trade "bank quotas & changing interest-rate" for credit above the quota cap.
6. Repo Rate & Reverse Repo Rate: Repo is the "interest rate" at which RBI can commercial banks' borrow funds. Reverse repo rate applies to the RBI interest rate on "deposits made" with it by commercial banks. The repo rate will "increase" with credit, as RBI funds will now be available for commercial banks with higher interest rates

Qualitative

1. Marginal Requirement: difference between loan value and market value of security which RBI fixes
2. Moral Suasion: Being apex bank, RBI persuades the commercial banks to follow its orders/directions on the credit flow. That is,it can be  put a "ceiling on credit flow" at times of "inflation" and be "liberal lending" at the time of  "deflation".
3. Rationing Credit: RBI fixes ceilings on "maximum limit" to loans & advances that which commercial banks must not exceed.
4. Publicity: RBI uses media for its views on the present market condition & its directions which must be implemented by commercial banks  so as to "control the unrest"