Q. 215.0( 1 Vote )

How the following

Answer :

The central bank is the apex bank which has the sole authority to control all the commercial banks and financial institution in the economy. When the central bank controls all the financial institutions in the economy, it is also vested with the function of credit control in the c-economy. It is one of the most important functions of the central bank in the economy. The central bank has many tools which are used to control the credit in the economy. They are

a. Reserve ratios such as Cash Reserve Ratio, Statutory liquidity ratio,

b. Bank rate

c. Open market operation

d. Margin requirements

e. Moral suasion etc.

Open market operation

The open market operation is the method of quantitative credit control method used by the central bank. This method refers to the sale and purchase of securities, bills and bonds of the government as well as private financial institution by the central bank. Credit control methods are being used to control the inflation and deflation that is occurred in the economy. When the economy faces the inflation then central bank sells the government securities. While the securities are being sold to the public, money supply in the economy can be reduced. The money supply is reduced by reducing the liquid money that is held with the public. The opposite will be in the case of deflation, the securities sold will be bought to increase the money flow in the economy.

Margin Requirements

This is one of the qualitative methods of credit control measures of the central bank. This method is adopted by central bank so as to prevent excessive use of credit to purchase or carry securities by the speculators. To control the money flow in the economy, the central bank fixes the minimum margin requirements on loans. This can be a percentage of loan sanctioned for the securities produced as collateral. In the case of inflation in the economy, the central bank would increase the margin requirements to reduce the flow of money in the economy. In case the central bank wants to increase the flow of money, they would increase the margin requirements.

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