Contraction of Money:
Unlimited supply of money results inhyper-inflation, which hits allsections of economy. Hence RBIuse ‘Credit Control Measures’ toreduce the money supply.
Credit Control Measures are:1. General controls2. Selective controlsGeneral controls are:
Cash Reserve Requirement ,
Statutory Liquidity Ratio , and
Open market Operations
Special facility to somegroups
Liberalisation of Bill MarketSchemeSelective Controls are:
Insisting minimum margin forlending against certainsecurities
Fixing ceiling on certaincredits
The rate at which RBI lendsmoney to other banks .
During Inflation time RBI willincrease the bank rate . Thiswill affect the borrowers.During the period of fallingprices this rate will bereduced.
Cash ReserveRequirement ( CRR ):
All commercial banks haveto keep certainpercentage of demand &time deposits with RBI. This is called CRR.
During Inflation time RBIwill increase the CRR . This will reduce the fundavailable for issuingcredit. During the period
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