RBI has various weapons of credit control. By using them it tries to maintain monetary stability.

1> Quantitative Control.

2> Qualitative (or) Selective Credit Control.

(a) (b) (c)

Bank Rate Open Market Operation Cash Reserve Ratio

It is the rate at which central bank discounts the securities of commercial banks or advance loans to commercial banks. This rate is the minimum and it affects both cost and availability of credit. Bank rate is different from market rate. Market rate is the rate of discount prevailing in the money market among other lending institutions. Generally bank rate is higher than the market rate. If the bank rate is changed all the other rates normally change at the same direction. A central bank control credit by manipulating the bank rate. If the central bank raise the bank rate to control credit, the market discount rate and other lending rates in the money will go up. The cost of credit goes up and demand for credit goes down. As a result, the volume of bank loans and advances is curtailed. Thus raise in bank rate will contract credit.

It refers to buying and selling of Government securities by the central bank in the open market. this method of credit control become very popular after the 1st World War. During inflation, the bank will securities and during depression, it will purchase securities from the public and financial institutions. The RBI is empowered to buy and sell government securities from the public and financial institutions. The RBI is empowered to buy and sell government securities, treasury bills and other approved securities. The central bank uses the weapon to overcome seasonal stringency in funds during the slack season. When the central bank sells securities, they are purchased by the commercial banks and private individuals. So money supply is reduced in the economy and there is contraction in credit. When the securities are purchased by the central bank, money goes to the commercial banks and the customers. SO money supply is increased in the economy and there is more demand for credit. Thus open market operation is one of the superior instrument of credit control. But for achieving an ideal result both Bank Rate and Open Market Operation must be used simultaneously.

-> CRR represents the percentage of deposit that every bank has to keep with the RBI. -> The RBI pays interest on CRR balances and increase or decrease the CRR when it wants to drain or ease liquidity in the economy. -> Present CRR is 8%.

a) b)

Selective Credit Control Moral persuasion and direct action

With the help of selective credit control methods the central bank can control and direct the flow of credit in the country. These control regulates the use of credit by discriminating between essential and non essential purposes.

Central bank may refuse to grant further loans or re discount of bill for the banks to control their credit creation ability. The central bank may request banks not to use the accommodation of obtained for financing speculative or non essential transactions.