Q. 19

How RBI controls

Answer :

The central bank of a country has complete control over the money supply and the credit in the best interest of the economy. The Central Bank of India is the Reserve Bank of India. It controls the money supply and credit circulation in the economy. It can also control the inflationary and deflationary situations whenever they arise. The central bank uses two different types of instruments to perform this function which is mentioned below:

a. Qualitative instrument: Qualitative instruments aim at influencing the usage of credit and its direction. These are the instruments such as margin requirement, moral suasion, rationing of credit, differentiated rate of interest, consumer credit and direct action.


b. Quantitative instruments: Quantitative Instruments focus on controlling the cost of credit and the availability of credit. These are the instruments such as bank rate, open market operation, cash reserve ratio and statutory liquidity ratio.


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