Policy of Credit Control of the RBI - Quantitative techniques

1. The Bank Rate - is the rate at which the RBI advances to the member banks against

approved securities or rediscounts bills of exchange of the commercial banks. changes in the bank rate influence the entire interest rate structure , that is short - term and long term interest rates. A rise in the bank rate leads to a rise in the other market interest rates, which implies a dear money policy increasing the cost of borrowing. Similarly, a fall in the bank rate results in a fall in the other market rates, which implies a cheap money policy reducing the cost of borrowing.

2.

Open Market Operations - Through this technique, the RBI seeks to influence the excess reserves position of the banks by purchasing and selling of govt securities. When the central bank purchases securities from the banks, it increases their cash reserve position and hence their credit creation capacity. On the other hand, when the central bank sells securities in the banks, it reduces their cash reserves and their credit creation capacity.

3. Cash Reserve Ratio

(a) Primary CRR - refers to the percentage of the total deposits that the commercial banks have to keep with the RBI - An increase in the primary CRR reduces the excess reserve of the bank and a decrease in the ratio increases their excess reserves. The amendment of the RBI act in 1962, authorized the RBI to change the primary CRR b/w 3% and 15%. (b) Secondary CRR or the Statutory Liquidity Ratio (SLR) - The percentage of the total deposits that every commercial bank has to maintain with itself. An increase in the SLR reduces the excess reserve of the bank and a decrease in the ratio increases their excess reserves. The RBI is authorised to change the ratio b/w 25% and 40%

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